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UNITED STATES v. PROPERTY IDENTIFIED AS LOT NUMBER

July 29, 1998

UNITED STATES OF AMERICA, Plaintiff,
v.
PROPERTY IDENTIFIED AS LOT NUMBERED 718, et al., Defendants.



The opinion of the court was delivered by: OBERDORFER

MEMORANDUM

 This case poses a novel legal question about the limits of the federal government's power of civil forfeiture when waging its war on drugs. Claimant Kimberly Honesty contends that the United States violated her due process rights when, without notice or an adversarial hearing, it secured an in rem arrest warrant on her home and allegedly used the threat of eviction as leverage in settlement negotiations over its claim on a second parcel of property. The contours of the issue here are provided by the Supreme Court's decision in United States v. James Daniel Good Real Property, 510 U.S. 43, 126 L. Ed. 2d 490, 114 S. Ct. 492 (1993), which held that a government seizure of real property during a civil forfeiture case implicates the Due Process clause. Because the United States acted outside those constitutional contours in this case, claimant's Motion to Dismiss--treated as a motion for summary judgment pursuant to Fed. R. Civ. P. 12(c)--will be granted.

 I.

 On September 10, 1996, the United States filed a civil forfeiture complaint against Lot 718 of the Burleigh Manor land development, an unoccupied parcel of property in Howard County, Maryland ("Burleigh Manor"). The deed for the property lists Kimberly Honesty and her husband Kevin as the owners. The United States amended its complaint three days later, adding as defendants two other properties that are deeded to the Honestys but located in Prince George's County. One, identified as 14509 Jones Bridge Road in the town of Bowie, is Kimberly Honesty's residence ("Jones Bridge Road" or "residence"). The other, 7127 Cross Street in Forestville, has not been at issue in this case since May 16, 1997, when an Order granted the government's unopposed motion to strike Kimberly Honesty's claim for it.

 The government's forfeiture case derives from its suspicions that Kevin Honesty is a major cocaine distributor with little legitimate income. The nine-count amended complaint alleges that there is probable cause to believe Kevin Honesty purchased the three properties with illegally laundered drug proceeds, in violation of 18 U.S.C. § 1956(a)(1)(B)(i). Attached to the complaint is the affidavit of Special Agent Joseph Gabor of the Drug Enforcement Administration, which discusses an extensive criminal investigation of Honesty's activities. The government asserts that, consistent with the practice of money launders, Kevin Honesty co-titled the properties in his and his wife's name. The amended complaint seeks civil forfeiture pursuant to 21 U.S.C. § 881(a)(6) and 18 U.S.C. § 981(a)(1)(A), provisions enacted by Congress to assist law enforcement efforts to combat the drug crisis.

 A.

 The filing of this suit set in motion several events prescribed by the federal procedures that govern civil forfeiture actions. Pursuant to Rule C(3) of the Federal Supplemental Rules for Certain Admiralty and Maritime Claims, the Clerk of this Court issued an in rem arrest warrant for each property at the time it was named a defendant. On the afternoon of September 13--the same day the amended complaint was filed and the warrants were issued--the U.S. Marshal's Service served copies of each on the three defendant properties. See Pl.'s Mot. for Summ. J., Ex. 1. (Apparently, it accomplished this by "posting [the warrant and complaint] in a conspicuous place on the property." Pl.'s Opp. to Claimant's Mot. Dismiss, at 3; see also Tr. of 10/6/97, at 8.) Also, according to a notice of service in the record, on that same afternoon the Marshal's Service personally served Kimberly Honesty at her place of employment at the General Services Administration. See Pl.'s Mot. for Summ. J., Ex. 1.

 In late September 1996, the government took two additional steps to further its forfeiture efforts. As required by Rule C(4) of the Federal Supplemental Rules for Certain Admiralty and Maritime Claims, the government "caused public notice of the action and arrest to be given in a newspaper of general circulation"--specifically, the Washington Law Reporter, the Howard County Times, and the Prince George Journal. See Pl.'s Mot. for Summ. J., Exs. 3-5. At around the same time--the precise moment is not evident--the government filed notices of lis pendens in the Maryland land records for the three properties. Under both federal and state law, see 28 U.S.C. § 1964; Md. St. Spec. P., subtit. BD, these notices place all prospective transferees on constructive notice that a lawsuit is pending against them. See generally DeShields v. Broadwater, 338 Md. 422, 659 A.2d 300, 305-07 (Md. 1995).

 Despite the posting of her residence, personal service at her workplace, and three public announcements, Kimberly Honesty contends that she only learned of the lawsuit after the notices of lis pendens were filed. At the time this lawsuit commenced, the Jones Bridge Road residence and Burleigh Manor lot were both on the market for sale. During a routine title search, prospective buyers of Burleigh Manor discovered the lis pendens and notified the Honestys of it in late September. At approximately the same time, Chuck Ottley, the real estate agent listing Jones Bridge Road, received a telephone call from someone identifying him or herself as a federal agent. The individual told him, "Well, you might as well forget about that commission because it's--you know, that's probably never going to sell. We are involved in that. It's not going to sell." Tr. of 12/8/97, at 30. Kimberly Honesty responded a few days later by telling Ottley to "take it [Jones Bridge Road] off the market. Nothing else I can do with it." Id.

 On October 1, 1996, Kimberly Honesty filed a verified claim on all three properties. On October 21, she answered the amended complaint. Meanwhile, her lawyers negotiated with the government to facilitate the transfer of Burleigh Manor. The sale went forward on December 30, 1996, but only after an agreement was reached. The government withdrew its lis pendens on Burleigh Manor, allowing the transfer of marketable title, in exchange for Honesty's consent to substitute the $ 56,907.42 in net proceeds as the defendant-res. The Marshal's Service continues to hold this money in escrow, pending the outcome of this suit.

 B.

 The series of events that transpired in the summer of 1997 frame the central issue in Honesty's motion to dismiss. The following facts are undisputed. Unable to draw upon the proceeds from the Burleigh Manor sale, Honesty soon fell steadily behind in her monthly payments to the First National Bank Association, the mortgagee for Jones Bridge Road. Sometime during the mid-summer, the bank decided to foreclose on the residence and scheduled a foreclosure sale for September 24, 1997. An attorney from Covahey & Boozer, a law firm in Towson, Maryland that represents the bank, contacted Assistant U.S. Attorney William Cowden to inquire, in Cowden's words, "whether the lis pendens was going to get in the way of their foreclosure." Tr. of 12/8/97, at 8. (At the time and until recently, Cowden was lead counsel for the United States in this case.) The telephone call concluded after the Covahey & Boozer attorney told Cowden that "they were intent on foreclosing . . . ." Id. at 9.

 Following this conversation, Cowden placed a call to Marvin Miller, Honesty's attorney. According to Cowden, he told Miller that "he might want to know that [First National Bank Association] were intent on foreclosing because [Honesty] had not paid the mortgage for some significant period of time." Id. at 10. Thus, Honesty's residence "was about to disappear from this picture because the equity was disappearing . . . ." Id. at 10-11. Miller expressed disappointment with the news--apparently the first he had heard of the foreclosure. He volunteered that Honesty believed she could sell Jones Bridge Road herself for a higher price than the bank. At this point, Cowden made a proposal:

 
I told Mr. Miller that if that were the case I might consider the following settlement proposal, and that settlement proposal was that she walk away from the equity in the Burleigh Manor property, which is on deposit with the court, and I would contact -- recontact the mortgagee and ask the mortgagee if the mortgagee would let Kim Honesty try to sell the [Jones Bridge Road] property without foreclosing.

 Id. at 11. Cowden insinuated to Miller that he had some leverage to prevent the foreclosure: "I told Mr. Miller . . . that I believed that the mortgagee would allow that to happen if I made that call . . . [,] knowing that the mortgagee is going to be fully satisfied and protected . . . ." Id. at 11-12. In contrast, "the mortgagee might not do it with Kim Honesty because she hadn't paid anything in a year . . . ." Id. Miller's recollection confirms this account. See Tr. of 10/29/97, at 12-13. *fn1"

 It is also undisputed that Miller, once he learned of the impending foreclosure on the Jones Bridge Road residence, contacted Covahey & Boozer in early September in an attempt to prevent the sale. He communicated "with counsel for the mortgage company, about the existence of the forfeiture suit, that the lis had been filed, that they could not pass clear title." Id. at 10. In a September 16 letter to Miller, Thomas Dore of Covahey & Boozer responded that "your assertions that we are unable to foreclose at this time are incorrect." Claimant's Supp. Mem. Mot. Dismiss, Attach. D. Dore explained, "Regarding your assertions with respect to the forfeiture case, please be advised that we have been in contact with the U.S. Attorney's Office, and they have agreed to release their claim to this property so that we may proceed with the foreclosure sale." Id. (emphasis added).

 Either before or after the exchange with Dore, meanwhile, Miller rejected Cowden's settlement offer. Accordingly, Cowden made no attempt to intercede with Covahey & Boozer. See Tr. of 12/8/97, at 7 ("There was no conversation with me and Mr. Dore about this settlement agreement because Mr. Miller rejected it."). Facing the prospect of an impending eviction from her home, Honesty ultimately filed for bankruptcy to prevent the foreclosure sale. See Honesty Aff. in Supp. Mot. Dismiss, P 16.

 C.

 The only matter in dispute is the substance of Cowden's remarks in his initial conversation with the unidentified attorney from Covahey & Boozer. To review, three facts about that conversation are uncontested. First, the attorney initiated the telephone conversation, after the bank had decided to foreclose on Jones Bridge Road, to inquire about the government's lis pendens. Second, the conversation concluded when the attorney indicated the bank would proceed with the sale. Third, Thomas Dore from the law firm later advised Miller that "the U.S. Attorney's Office . . . [has] agreed to release their claim on this property so that we may proceed with the foreclosure sale." Claimant's Supp. Mem. Mot. Dismiss, Attach. D.

 Cowden denies ever suggesting to Dore or anyone else at Covahey & Boozer that the United States would release its claim on Jones Bridge Road. When confronted with Dore's letter, he flatly replied, "The letter is inaccurate." Tr. of 10/29/97, at 25. Instead, Cowden contends he informed the Covahey & Boozer attorney only that the bank held a lien on Honesty's residence superior to the lis pendens notice and the government therefore could not prevent the bank from selling it. In each of several accounts of their phone conversation, Cowden casts his reply in the same terms. See, e.g., Tr. of 10/29/97, at 24 ("We filed a civil forfeiture case against the property, you are standing in front of us with a $ 317,000 mortgage, so we are behind you in line with the mortgage. You're taking the 317,000 if you can get that out of the sale, I can't prevent you from selling that, you have an interest that is superior to our interest in it."); see also Tr. of 12/8/97, at 9; Tr. of 10/29/97, at 25; id. at 24.

 Nonetheless, several portions of the record suggest that Cowden did communicate to Covahey & Boozer a willingness to withdraw the government's claim on Jones Bridge Road. First, of course, there is the September 16 letter from Dore to Miller. Second, Cowden on other occasions indicated that the government would be satisfied with a judgment against Burleigh Manor alone. See, e.g., Tr. of 10/6/97, at 14 ("If the Court rules [Honesty] has no standing on [Burleigh Manor], I believe that the third part of the case, . . . the house in bankruptcy proceedings right now we will have to walk away from that, and we would do that."). Indeed, when Cowden presented his settlement offer, it is undisputed that the quid pro quo was Honesty's withdrawal of her claim on Burleigh Manor in exchange for the government's assistance in selling her home, to which the bank had a superior lien.

 Third, and most compellingly, a subsequent narrative from Dore confirms that Cohavey & Boozer's business practice is not to proceed with a foreclosure sale unless the government has agreed to release its claim or otherwise negotiates a settlement. While Dore did not testify at the evidentiary hearing on December 8, 1997, he wrote a December 4 letter "to clarify the substance" of "any testimony I would offer." Mot. Quash Subpoena, Ex. A, at 1. Notably, both parties stipulate to the substance of the letter. See id., at P 5; Tr. of 12/8/98, at 19. In it, Dore reaffirms Cowden's assertion that the bank did not need the government's authorization to conduct a foreclosure sale. See Mot. Quash Subpoena, Ex. A, at 2 ("It is my understanding under the law that because we are an innocent lien holder and have a perfected security interest that such interest is superior to the forfeiture case and that the forfeiture case cannot and does not affect our lien."); see generally DeShields v. Broadwater, 338 Md. 422, 659 A.2d 300, 306 (Md. 1995) ("A lis pendens is . . . not notice of an actual lien. Consequently lis pendens proceedings do not technically prevent alienation . . . .") (internal quotation marks and citation omitted). Understandably, Cowden emphasized this portion of the letter in arguments on Honesty's motion. See Tr. of 12/8/97, at 5.

 But despite this understanding, Dore's December 4 letter quite clearly explains that Covahey & Boozer does not proceed with a foreclosure sale so long as a notice of lis pendens remains in the land records. He writes:

 
Since the docketing of any action which constitutes a Lis Pendens could be considered a could on title, we address same. Were we not to address a Lis Pendens action, there could be a potential to chill the sale or limit the possibility of a sale to a third party.

 Mot. Quash Subpoena, Ex. A, at 2. Even if the bank's lien on the Jones Bridge Road residence is secure, any subsequent purchaser would acquire a property interest "subject to the results of that pending litigation." DeShields, 659 A.2d at 306. Thus, "as a practical matter, it may be impossible to find a buyer . . . for property . . . to which the United States asserts a legal claim." In re Newport Savings & Loan Ass'n, 928 F.2d 472, 479 (1st Cir. 1991); see also Tr. of 12/8/97, at 31-32 (testimony of Chuck Ottley). Even Cowden confirmed this much. See Tr. of 12/8/97, at 5 ("Mr. Dore is correct in his letter when he indicates that having this civil case filed against the property clouds the title . . . ."). *fn2"

 Dore's December 4 letter demonstrates it would have been inconsistent with Covahey & Boozer's normal course of business to proceed to foreclosure without assurances from Cowden that the United States would disavow its legal claim or otherwise settle. The firm's practice, "upon reviewing a title examination of a property prior to foreclosure when a forfeiture action has been filed and a Notice of Lis Pendens recorded," is to pursue one of three avenues. Mot. Quash Subpoena, Ex. A, at 1.

 
(1) "to contact the U.S. Attorney's Office and ask them to release their Lis Pendens as to the property such that we may sell the property free and clear of such Lis Pendens provided, of course, that we notify the U.S. Attorney's Office of the results of our sale and advise them if there are any surplus ...

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