"Loan Fraud" Forfeiture ÄJudy Osburn, F.E.A.R. Chronicles, Vol. 2 No. 2 (July 1994) Jack Whitaker was confident he would get his client's seized home back from the government. Though the Constitution clearly states that no ex post facto law shall be passed, the Department of Justice was asking the district court in Los Angeles to retroactively apply a civil forfeiture law against the home. At each hearing in the forfeiture proceeding Judge Tevrizian looked incredulously at the government attorney. Early on, the judge asked the Assistant U.S. Attorney if this seizure was based upon a drug offense. "No," replied the prosecutor. This forfeiture action was based upon the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).1 The defendant home stood accused of having been financed by way of a loan application that contained false information. The judge asked the prosecutor if there had been any default on the loan. "No," the government attorney replied straightforwardly, the applicant had never fallen behind on his payments. The judge remained perplexed. Under FIRREA, any false information on an application for a loan from a FDIC insured institution can trigger civil forfeiture of all property traceable to the loan. The 1989 statute was originally intended to target the type of fraudulent loans that led to the Savings and Loan crisis. In this case it was being used for an entirely different purpose. At the time of the forfeiture proceeding, Whitaker's client, Anthony Feher, was serving a state prison sentence for a drug conviction. The government had not claimed Feher's home was subject to forfeiture under any drug law. Instead, the government claimed that in 1986 Feher lied about his employment status on an application for the loan used to finance his home. But at the time, such misrepresentation was not a crime that incurred forfeiture. Whitaker said, "We were in good shape until, at the last minute in the proceeding, the government filed a large stack of documents describing my client as a drug dealer." Then Judge Tevrizian's attitude changed. He summarily forfeited Feher's home, ruling that FIRREA's civil forfeiture provisions may be applied retroactively.2 Clerks from courtrooms down the hall worriedly asked Whitaker, "Are they going through everyone's bank records?" Whitaker offered to appeal the outrageous ruling at no charge to his client. However, Feher, frustrated and discouraged by the court's contemptuous decision, chose not to obligate himself to further filing fees and the potential financial liability of another decision against his home. The hearsay statements submitted by the government during the final hour of the proceeding would have been sufficient grounds to forfeit Feher's home in a typical drug proceeds case, had the government filed such a claim. However, the Department of Justice chose this case to establish a new avenue of forfeiture. While Judge Tevrizian felt justified in ordering forfeiture of a house he believed was proceeds of a drug trafficking career, Skyline Drive set a horrendous precedent that places the majority of American property owners at risk. The government successfully advanced this "unique" case, establishing that "the FIRREA statute does allow for forfeiture solely on violation of 18 U.S.C. $ 1014."3 Any false information, written or oral, given for the purpose of obtaining or extending credit (a violation of 18 USC $ 1014) can trigger civil forfeiture of any property that can be traced to the loan. As in all in rem proceedings, property is presumed guilty, therefore mistakes on complicated loan forms are presumed to be intentional fraud. Owners must prove the innocence of a statement on a loan application they may have made many years earlier. The countdown for the five year statute of limitation begins only after the government discovers a false statement4Äthere is no limit whatsoever to the age of records that agencies may search to make such a discovery. As in other in rem forfeiture proceedings, property may be forfeited with no more information than it takes to obtain a search warrant. Owners must provide factual evidence to prove their case, while the government need only show probable cause, a much lower standard that makes hearsay and innuendo sufficient grounds for forfeiture. And like the drug forfeiture laws FIRREA is modeled after, paid informants stand to gain up to 25 percent of the forfeited assets, with the major portion of forfeiture proceeds going directly to the seizing agencies. It is entirely possible for the government to steal a family's inheritance through FIRREA. All the Justice Department need do is show probable cause to believe a deceased applicant knowingly made a false statement in the process of obtaining a loan.5 Without the dead applicant present to explain an apparent misrepresentation, it is highly unlikely the heirs could provide enough factual evidence to even bring their case to trial. Some courts hold that a drug trafficker's illegal income "taints" any other assets it comes in contact with, like "an infectious disease" or "a drop of ink falling into a glass of water."6 In these districts an entire business can be forfeited if, for instance, a portion of one partner's investment can be traced to the proceeds from a loan application violation. Since Skyline Drive was published Whitaker has received many calls from political activists who, based upon previous experiences of govern- ment harassment, worry this sweeping weapon may be used against members of "dissident" organizations. A short while after Skyline Drive, an owner who had never been accused of involvement in any illegal activity other than the alleged misrepresentation on a loan application had his entire apartment building seized by way of FIRREA. And in another case, the home belonging to a Hispanic woman who did not speak English was seized. This forfeiture action is based upon a mistake made by the broker who filled out the application for her. Whitaker states, "It's weird how the federal government punishes individuals for mistakes made by the loan broker. Most loan applications are filled out by the broker, who often has no qualms about fudging a little on the application in order to increase the chances of the loan being approved." Maybe it's not strange at all. FIRREA has the potential of becoming law enforcement's most lucrative forfeiture device yet. And as the October issue of Asset Forfeiture News, a publication of the Department of Justice Asset Forfeiture Office, points out, civil forfeiture is "an increasingly significant source of resources for enforcement efforts."7 1. Public Law 101-73, Stat. 183, codified as 18 U.S.C. $ 981(a)(1)(c). 2. United States v. 4031/2 Skyline Dr., La Habra Heights, CA, 797 F. Supp. 796 (C.D. Cal. 1992). 3. Plaintiff's Reply Memorandum in support of Its Summary Judgment Motion, page 1 (emphasis added). 4. 19 U.S. C. $1621. See: United States v. 92 Buena Vista Ave., Rumson, N.J., 113 S,.Ct, 1126, 1140 at note 1 (1993), citing United States v. $8,850, 461 U.S. 555, 663, n. 113 (forfeiture statute not specifying procedures to be used held to incorporate statute of limitations in $ 1621). See also: United States v. James Daniel Good Real Property, 114 S.Ct.. 492, 505-506 (1993). 5. See United States v. One 1977 Cherokee Jeep, 639 F.2d 212 (5th cir. 1981) (per curium) (though forfeiture action commenced after the death of the violator, forfeiture of vehicle from widow and children upheld). 6. See United States v. One Single Family Residence, 933 F.2d 976, 981 (11th Cir. 1991) (forfeiture of entire home owned by two brothers based upon one brother's investment of illegal proceeds). But, see United States v. Pole No. 3172, Hopkinton, 852 F.2d 636, 639 (1st Cir. 1988) (court rejected government's "contagious" theory that one tainted mortgage payment infected an entire home that was purchased with clean money); United States v. $448,342.85, 969 F.2d 474, 476 (7th Cir. 1992) (court rejected government's ink drop theory); and United States v. One Rolls Royce, 905 F.2d 89, 90 (5th Cir. 1990). 7. Asset Forfeiture News, Vol. V, No. V, October, 1993, page 4.