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U.S. v. $2

December 20, 2005.

UNITED STATES OF AMERICA, Plaintiff,
v.
TWO MILLION SEVEN HUNDRED SIXTY-SEVEN THOUSAND TWO HUNDRED AND TWO DOLLARS AND TWENTY-SEVEN CENTS ($2,767,202.27 IN U.S. CURRENCY Respondent.



The opinion of the court was delivered by: MICHAEL MIHM, District Judge

ORDER

Before the Court is Claimant James Thomas Kemp's ("Kemp") Motion to Bifurcate Cross-Claims and Determine the Distribution of the Forfeited Funds [#126]. For the reasons set forth below, the Motion is GRANTED in part and DENIED in part.

BACKGROUND

  This is a civil forfeiture action in rem pursuant to Title 18 U.S.C. § 981, for the forfeiture of $2,767,202.27, which the Government alleges represents money obtained by Leslie Strong ("Strong") from investors as a result of a fraudulent investment scheme. Strong has not been charged with a criminal offense as a result of the fraud and no restitution order has been entered against him. Numerous parties, including Strong, filed claims asserting an interest in the $2,767,202.27; however, this Court struck Strong's Claim and Answer for failure to prosecute on June 6, 2005. In addition to the numerous claims filed in this case against the $2,767,202.26, many claimants also filed cross-claims for damages against Strong. Strong did not answer the cross-claims and, by Order of this Court dated December 9, 2005, Strong was found to be in default on all of the cross-claims filed against him. DISCUSSION

  In the current Motion, Kemp argues that this Court should (1) bifurcate the cross-claims filed against Strong from the underlying in rem action, and (2) determine how the $2,767,202.27 should be distributed among the claimants. The Court will address each issue separately.

  1. Motion to Bifurcate

  Kemp argues that this Court should bifurcate the cross-claims from the underlying in rem action so that the Court can proceed with distributing the $2,767,202.26. Kemp claims that bifurcation is proper because this Court struck Strong's Claim and Answer against the $2,767,202.27 for failure to prosecute on June 6, 2005, and therefore, no remaining issues remain affecting the distribution of the $2,767,202.26.

  The Government responded to Kemp's Motion and does not object to bifurcating the cross-claims from the underlying action. Additionally, Howard Jachter, as Trustee of Triunity, S.A. and Triunity, S.A. (Collectively "Triunity") filed a response to Kemp's Motion and agrees that the cross-claims may be bifurcated because "the amount of any Cross-Claim will be determined by the difference between the amount of the seized funds distributed to a Cross-Claimant and the amount of such Cross-Claimant's valid claim." (Triunity's Response to Kemp's Motion, July 29, 2005, at 1.)

  In contrast, Claimants Success Concepts, Inc., William H. Blackwell, Jr.; Robert and Jane Meherg Family Partnership; Arthur F. Mueller, Trustee of the Pauline K. Rucker Trust; Metropolitan Seventh Day Adventist Church and Pastor John Glenn Roberts; and Robert Allman (collectively "Additional Claimants") filed a Response objecting to Kemp's Motion. The Additional Claimants do not agree that the cross-claims need to be bifurcated. Rather, the Additional Claimants argue that this Court should proceed with determining how to distribute the $2,767,202.26 and should not bifurcate the cross-claims because the distribution of the $2,767,202.26 will affect the amount of the cross-claims.

  The Court finds that bifurcation of the cross-claims is the appropriate action at this point in the litigation. Even if the distribution of the $2,767,202.26 affects the amount of the cross-claims and even if some cross-claimants receive a portion of the $2,767,202.26, this does not prevent the Court from bifurcating the claims because any recovery that a cross-claimant receives from the $2,767,202.26 would offset the amount that the cross-claimant could potentially recover from Strong. Accordingly, the Court finds that bifurcation is proper and orders that all of the cross-claims be bifurcated from the underlying in rem action.

  2. The Distribution of Funds

  The final issue in this case is how the seized $2,767,202.26 should be distributed amongst the claimants. Essentially, there are two groups of claimants to the funds. The first group is comprised of individuals such as Kemp. These individuals were allegedly defrauded by Strong; however, they cannot trace their losses directly to the $2,767,202.26. The second group is a group of claimants who are able to trace their losses directly to the $2,767,202.26.

  Kemp argues that this Court should distribute the $2,767,202.26 on a pro rata basis to all of the claimants who were defrauded by Strong and not limit the distribution to those individuals whose losses can be traced to the seized funds. The Government disagrees and argues that the seized funds should only be distributed to those individuals who have an ownership interest in the specific property (i.e., those individuals who can trace their losses to the $2,767,202.26). The Government refers to 18 U.S.C. § 983, which provides the general rules for civil forfeiture proceedings and outlines a defense to forfeiture for "innocent owners". Specifically, § 983(d)(1) states that an "innocent owner's interest in property shall not be forfeited under any civil forfeiture statute." 18 U.S.C. § 983(d)(1). Additionally, § 983(d)(6) states:
(6) In this subsection, the term "owner" —
(A) means a person with an ownership interest in the specific property sought to be forfeited, including a leasehold, lien, mortgage, recorded security interest, or valid assignment of an ownership interest; and
(B) does not include —
(i) a person with only a general unsecured interest in, or claim against the property or estate of another;
(ii) a bailee unless the bailor is identified and the bailee shoes a colorable legitimate interest in the property seized; or
(iii) a nominee who exercises no dominion or control over the property.
18 U.S.C. § 983(d)(6). Therefore, the Government argues that only those individuals who can show a specific interest in the $2,767,202.26 are "owners" as defined by the statute and are the only people who should be able to recover.

  In addition to the Government's Response to Kemp's Motion, the Additional Claimants filed a Response to Kemp's Motion stating "they join in the request that the Court determine that distributions of the Defendant funds should be made to all victims who have asserted valid claims in this action on a pro rata basis which is fair ...


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