The Eleventh Circuit reversed a district court decision rejecting a title insurance company’s claim that it had a legal interest in mortgage fraud proceeds which the federal government sought to forfeit from a criminal defendant. The Court of Appeals ruled that the insurance company held a constructive trust in funds fraudulently obtained from the mortgage company it had insured and its interest superseded the government’s claim.
When a buyer agreed to purchase real estate in Georgia, he obtained two loans totaling $800,000 from Long Beach Mortgage Company (“Long Beach”). A title insurance company (“the Insurer”) issued title insurance protecting Long Beach’s security interest in the new loans. At the time, a second mortgage company, GreenPoint Mortgage Funding, Inc. (“GreenPoint”), already had two mortgages on the property which would have to be satisfied at the closing. However, before the closing, the seller of the property falsely informed the closing attorney that GreenPoint had sold and assigned its mortgages on the property to a third mortgage company, Wilshire Mortgage Company (“Wilshire”). The seller gave the attorney documents purportedly from Wilshire showing the amounts due to Wilshire to pay off the outstanding mortgages. At the closing, checks totaling $726,000 were issued to Wilshire from the Long Beach loan proceeds and mailed to the address provided in the Wilshire loan payoff statements.
Months later, Long Beach discovered that the GreenPoint mortgages had never been assigned, remained outstanding and in default. The address to which the payoff checks were sent was unused office space leased by Stacey Shefton, who was affiliated with both Wilshire and the seller of the real estate. Shefton received the payoff check drawn on the Long Beach loan proceeds and diverted those funds to his own personal use. Since the Long Beach security deeds were subordinate to GreenPoint’s mortgage interest, Long Beach was left with little or no security for its loans. Accordingly, it made claims on the two title policies issued by the Insurer, which paid GreenPoint $742,000 to clear the encumbrances on Long Beach’s title.
Shefton was indicted, pled guilty to wire fraud and agreed to forfeit to the United States a car, a motorcycle, funds in six bank accounts, approximately $300,000 in cash and other personal property. He admitted in his plea agreement that the cash and all the funds in the bank accounts were derived from his fraudulent interception of the Long Beach loan proceeds. Once the district court entered a preliminary order of forfeiture transferring Shefton’s interest in these assets to the government, the Insurer asserted a legal interest in the property forfeited from Shefton and petitioned the district court for an ancillary hearing to adjudicate the validity of the Insurer’s alleged interest in the property. The government acknowledged that the property in question constituted either proceeds or had been purchased with proceeds from the mortgage fraud and, specifically, the Long Beach loan funds. Nevertheless, it argued that the title insurance company was an unsecured victim of Shefton’s fraud scheme; that it lacked standing to contest the government’s forfeiture; and that the Insurer had other recourse insofar as it could, post-forfeiture, petition the Attorney General pursuant to 21 U.S.C. § 853(i)(1) to remit the forfeited property to it “in the interest of justice.” The district court granted the government’s motion to dismiss the Insurer’s claim to the property forfeited from Shefton and the Insurer appealed.
The Eleventh Circuit applied Georgia state law to determine if the title insurance company had any legal interest in the forfeited property and applied federal law to determine if any such legal interest was superior to Shefton’s interest at the time the fraud occurred. The Court of Appeals concluded that the Insurer was entitled under Georgia law to imposition of a constructive trust on the forfeited property. Its imposition was not precluded by the availability of a petition for remission since that non-judicial remedy was left entirely to the discretion of the Attorney General and, therefore, offered relief not as complete or effectual as a constructive trust. The Eleventh Circuit also agreed with the large majority of other circuits (including the Second, Third, Sixth, Seventh and Ninth) that have determined that a constructive trust qualifies as a “legal interest” within the meaning of federal forfeiture statutes that can render invalid a forfeiture order in the government’s favor. It reasoned that a constructive trust arose when Shefton committed the fraud and misappropriated the Long Beach loan proceeds and rejected the district court’s conclusion that a constructive trust could not exist before it was recognized by a court as an applicable remedy in a particular case. Therefore, the Court of Appeals reinstated the title insurance company’s claim to the forfeited property and remanded the case to the district court for further proceedings. The full text of the decision can be found at United Sates v. Shefton, 548 F.3d 1360 (11th Cir. 2008) (per curiam).