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United States v. Harrold

United States District Court, D. Minnesota

June 12, 2017

United States of America, Plaintiff,
David William Harrold, Defendant.



         This matter is before the Court on the Third-Party Petition of Michelle Harrold (Doc. No. 506), who asserts an interest in certain real property-specifically, 712 Northeast 71st Street, Boca Raton, Florida (the “Boca Raton Property”)-that the Court previously ordered forfeited. The Government now moves to dismiss her Petition and for a Final Order of Forfeiture. For the reasons that follow, the Court will grant the Government's Motions.


         On April 20, 2011, Defendant David Harrold was indicted on securities-fraud charges in connection with investments his companies made in the Thomas Petters Ponzi scheme. Defendant pleaded guilty the following day and, as part of his plea, acknowledged that he earned more than $58 million from 2003 through 2008 as a result of the investments. (See Plea Agreement ¶ 2.) On November 19, 2013, the Court entered an Order forfeiting to the Government “all property, real or personal, which constitutes or is derived from proceeds traceable to the violations charged” in the Indictment and ordering Defendant to pay a $58 million personal money judgment. (Doc. No. 320.)

         On January 16, 2015, the Government filed a Motion for a Preliminary Order of Forfeiture seeking to forfeit the Boca Raton Property (Doc. No. 401) and, on August 31, 2016, it filed a Motion for a Preliminary Order of Forfeiture seeking to forfeit $523, 323.61 held in SunTrust bank account number 1000169512000 (the “SunTrust Account”) (Doc. No. 480). In support, it submitted the Declaration of FBI Special Agent Jared Kary, who traced the fees Defendant earned from his fraud to the purchase of a home in Delray Beach, Florida (the “Delray Beach Property”). After pleading guilty, Defendant transferred his interest in the Delray Beach Property to his wife, Petitioner Michelle Harrold, who subsequently sold it. She used a portion of the sale proceeds to purchase the Boca Raton Property and deposited the remainder in the SunTrust Account. (Doc. No. 402, ¶¶ 18-21; Doc. No. 481, ¶ 17.)

         Having determined there existed a nexus between Defendant's crimes and the property the Government sought to forfeit, on January 20, 2015, and September 1, 2016, the Court entered Preliminary Orders of Forfeiture as to the Boca Raton Property and the SunTrust Account, respectively. (Doc. Nos. 403, 482.) Then, on February 27, 2017, Harrold filed the instant Third-Party Petition, asserting an interest in the Boca Raton Property and arguing it is not subject to forfeiture.[1] (Doc. No. 506.) In response, the Government moved to dismiss the Petition and for a Final Order of Forfeiture. (Doc. No. 508.) The Motions are ripe for disposition.


         Federal law “articulates procedures by which third parties may assert their interest[s] in forfeited property.” United States v. Timley, 507 F.3d 1125, 1129 (8th Cir. 2007); accord, e.g., United States v. Puig, 419 F.3d 700, 703 (8th Cir. 2005). Specifically, 21 U.S.C. § 853(n)(2) provides, in pertinent part, that “any person, other than the defendant, asserting a legal interest in property which has been ordered forfeited to the United States may . . . petition the court . . . to adjudicate the validity of [her] alleged interest in the property.” Such an “ancillary proceeding” is governed by Federal Rule of Criminal Procedure 32.2(c), see Timley, 507 F.3d at 1129, and “closely resembles a civil action, ” Pacheco v. Serendensky, 393 F.3d 348, 352 (2d Cir. 2004); accord Fed. R. Crim. P. 32.2 advisory committee's note to subdivision (c).

         As in a civil action, the Government may move to dismiss a third-party petition “for lack of standing, for failure to state a claim, or for any other lawful reason.” Fed. R. Crim. P. 32.2(c)(1)(A). Such a motion is analyzed similar to a motion under Federal Rule of Civil Procedure 12(b). In particular, the Court must accept the allegations in the petition as true, see Fed. R. Crim. P. 32.2(c)(1)(A); United States v. White, 675 F.3d 1073, 1077 (8th Cir. 2012), and dismiss the petition if the Government shows that the claimant is not entitled to relief as a matter of law, that is, if the petition fails to “contain sufficient factual matter . . . to state a claim to relief that is plausible on its face, ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). See also United States v. Salti, 579 F.3d 656, 667 (6th Cir. 2009); United States v. Marion, 562 F.3d 1330, 1342 (11th Cir. 2009) (per curiam); Pacheco, 393 F.3d at 352.


         In this ancillary proceeding, Harrold may prevail in one of two ways: she may demonstrate that (i) she held an interest in the Boca Raton Property “superior to any . . .interest of the [D]efendant at the time of the” fraud giving rise to forfeiture (i.e., priority of ownership), or (ii) she was a “bona fide purchaser for value . . . and was at the time of purchase reasonably without cause to believe that the property was subject to forfeiture.” 21 U.S.C. § 853(n)(6)(A), (B). The Government contends she has shown neither. The Court agrees.

Section 853(n)(6)(A)-the priority-of-ownership ground-embodies the relation-back doctrine. Under the relation-back doctrine, title to the forfeited property vests in the United States at the time of the [D]efendant's criminal act. Nevertheless, [Harrold may] prevail in the ancillary proceeding on the ground that [she] had an interest in the property before the [G]overnment's interest vested.

Timley, 507 F.3d at 1131 (citing United States v. Nava, 404 F.3d 1119, 1129 (9th Cir. 2005)).

         Here, Harrold asserts that she held a prior vested interest in the Boca Raton Property. However, tracing the proceeds of Defendant's fraud shows this is simply not the case. The Court has already determined that Defendant used fraud proceeds to buy the Delray Beach Property and, hence, the Government's title to that property vested immediately. Id. (quoting United States v. Hooper, 229 F.3d 818, 821-22 (9th Cir. 2000) (“[T]he proceeds of an offense do not exist before the offense is committed, and when they come in to existence, the [G]overnment's interest under the relation-back doctrine immediately vests.”)). Defendant then transferred the property to Harrold, who sold it and used a portion of the proceeds to purchase the Boca Raton Property. When Harrold purchased the Boca Raton Property with the proceeds of Defendant's fraud, the Government's title to it vested immediately. She acquired no prior vested interest. E.g., Unit ...

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