Opinion
No. CR 00-40146 CW.
May 27, 2005
ORDER ON PENDING MOTIONS REGARDING WRIT OF EXECUTION AND DISCOVERY
On December 9, 2002, a criminal restitution judgment was entered in this Court against Defendant Lisa Chan, also known as Kwai Fong Chan, in the amount of $4,500,100. In order to satisfy the restitution judgment, the government sought a writ of execution authorizing the sale of Defendant's family residence located at 44715 Aguilar Terrace, Fremont, California (the property) which is valued at $1,800,000. Defendant opposed the issuance of the writ of execution. On November 4, 2004, the Court issued its Order Granting Plaintiff's Application for Writ of Execution. On December 1, 2004, Petitioner Lai Heung Chan, Defendant's mother, filed a pro se motion to quash the writ of execution and remove the lien (Docket # 118), Claimant Chris Yiu, Defendant's husband, filed a request for a hearing on a claim of exemption (Docket # 119) and Defendant filed a request for a hearing on a claim of exemption (Docket # 120). On December 3, 2004, Defendant filed a motion for reconsideration of the Court's November 4, 2004 Order (Docket # 122), and on February 4, 2005, Chris Yiu filed a request to set aside the writ of execution (Docket # 148).
Defendant, Chris Yiu and Lai Heung Chan will together be referred to as the Objectors.
On February 7, 2005, a hearing was held on all pending motions. Defendant was represented by counsel, Chris Yiu was present without counsel and Lai Heung Chan was not present in person or through counsel. Defendant and Chris Yiu asked the Court to stay ruling on the motions until each of the Objectors' counsel could submit briefing. The Court agreed to stay ruling until further briefing was filed and a further hearing was set for March 7, 2005.
On March 3, 2005, Lai Heung Chan filed a motion to quash the government's subpoena for her bank records. (Docket # 154). On March 11, 2005, she withdrew her motion. (Docket # 163). Therefore, the Court denies Lai Heung Chan's motion to quash subpoena for bank records.
All parties, through counsel, filed further briefing on the pending motions. On March 7, 2005, a hearing was held on all pending motions. Defendant and Chris Yiu were present with counsel and Lai Heung Chan appeared only through counsel. On March 25, 2005, Lai Heung Chan filed a motion to file a reply brief and for oral argument (Docket # 176). Chris Yiu joined in this motion.
On April 6, 2005, the government filed a motion to compel Defendant to respond to its discovery request and for discovery sanctions. (Docket # 178). Defendant has not responded to this motion.
Having considered oral argument on the motions and all the papers submitted, the Court DENIES Defendant's motion for reconsideration, DENIES Lai Heung Chan's motion to quash and her motion to file a reply and for oral argument, DENIES Defendant's claim of exemption, DENIES Chris Yiu's request to set aside the writ of execution, GRANTS Chris Yiu's claim of exemption and GRANTS the government's motion to compel discovery and for discovery sanctions.
RELEVANT EVIDENCE
On June 22, 2000, the government filed a complaint against Defendant, and a no-bail warrant was issued for her arrest. On June 23, 2000, Defendant appeared before the Magistrate Judge for a detention hearing. On June 27, 2000, she appeared before the Magistrate Judge for a further detention hearing and was released on a $650,000 property bond, secured by the property at issue. On July 13, 2000, a federal grand jury returned a sixteen-count indictment charging Defendant with conspiracy, copyright infringement, money laundering and trafficking in goods with a counterfeit mark in violation of 18 U.S.C. §§ 371, 2319, 1956 and 2320. The indictment alleged that Defendant conspired to infringe and did infringe the copyrights of Microsoft Corporation by selling illegally-reproduced Microsoft software and using counterfeit labeling in connection with these sales. Defendant was alleged to have laundered certain of the proceeds of her copyright infringement in order to conceal the nature, source, ownership and control of the proceeds.
On February 21, 2001, Defendant entered into a plea agreement in which she admitted that, prior to October, 1997 and continuing until June, 2000, she operated two businesses in Fremont, California which sold illegally replicated software programs without authorization from Microsoft, the copyright holder. On December 9, 2002, she was sentenced and was ordered to pay $4,500,100 in restitution to Microsoft. Defendant has paid or been credited with $1,975,114.57 toward the restitution judgment debt and there is a balance due of $2,524,985.43. The government's efforts to obtain a writ of execution against Defendant's property followed.
In regard to the pending motions, the following evidence has been submitted. The Objectors claim that, on August 31, 1998, in connection with the purchase of the property, Lai Heung Chan and Chris Yiu signed a document titled "Consent Agreement" that provides: (a) Lai Heung Chan will pay the deposit and down payment for the purchase of the property; (b) Chris Yiu will make the mortgage payments, pay the property taxes and pay for maintenance of the property; (c) Lai Heung Chan and Chris Yiu will equally own the residence; and (d) if the property is sold, the down payment and deposit will be returned to Lai Heung Chan along with fifty percent of the profit. A check dated July 26, 1998 made out to Old Republic Title in the amount of $10,000 had been signed by Lai Heung Chan. On August 31, 1998, a wire transfer in the amount of $578,278.49 was sent from an account in Lai Heung Chan's name at United Savings Bank to Old Republic Title, but the transfer was initiated by Defendant using her Chinese name, Kwai Fong Chan.
A title report of the property submitted by the government indicates that on September 1, 1998, when the property was purchased, title to the property was put in the names of Defendant and Chris Yiu, husband and wife, as community property. The title report also shows that on September 1, 1998, a deed of trust was signed by Defendant and Chris Yiu to secure their obligation under a Bank of America mortgage. The Deed of Trust remains on the property. A grant deed dated September 5, 1998 recites that Chris Yiu and Lai Heung Chan, as husband and wife, deeded the property to Chris Yiu and Lai Heung Chan as trustees of the Chris Ngai K. Yiu (Husband) and Kwai F. Chan (Defendant) Living Trust (1998 Grant Deed). The signature on the deed reads "Lai Heung Chan," but the typewritten words say "Lai Heung Chan AKA/Kwai F. Chan." As noted, Kwai F. Chan is Defendant's Chinese name. The title report shows that on November 6, 1998, a homestead declaration executed by Defendant and Chris Yiu was recorded against the property.
This is incorrect because Lai Heung Chan was not a record owner of the property and she was not Chris Yiu's wife. The government calls this a "wild deed."
A grant deed dated June 26, 2000 (2000 Grant Deed) recites that Chris Yiu, as trustee of the Living Trust, granted the deed to the property to himself and Defendant, husband and wife, as community property. The next day, June 27, 2000, Defendant's further detention hearing took place and she was released on a $650,000 bond, secured by the property.
A statement from Chris Yiu's Bank of America checking account for the period October 13 through November 9, 2004 shows that he made a mortgage payment in the amount of $3,397.90 to Bank of America on November 1, 2004. There is no other evidence as to the source of the funds for the other mortgage payments.
DISCUSSION
The Objectors argue that the property cannot be used to satisfy the restitution judgment because Defendant does not own the property; rather, Chris Yiu and Lai Heung Chan own it. However, record title is in the name of Defendant and Chris Yiu, husband and wife, as community property. An "owner of legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing evidence." Tannehill v. Finch, 188 Cal. App. 3d 224, 227 (1986). To overcome the presumption that Defendant owns the property with Chris Yiu as community property, the Objectors present several arguments, many of which overlap.
Citing Katz v. Enos, 68 Cal. App. 2d 266 (1945), Lai Heung Chan argues that she needs to present only a preponderance of evidence to overcome the presumption that the record title holder is the true owner of the property, not clear and convincing evidence as indicated the Court's November 4, 2004 Order. The Court need not decide this issue because Lai Heung Chan fails to provide even a preponderance of evidence to support her arguments.
I. Lai Heung Chan's Ownership Interest
A. Ownership of Record
Objectors argue that the 1998 Grant Deed or "wild deed" means that Lai Heung Chan is the record owner. The government argues that the "wild deed" never deeded Defendant's ownership interest in the property to anyone, because her name is not on the "wild deed," and thus she never relinquished her original ownership rights.
The "wild deed" did not grant Lai Heung Chan an ownership interest in the residence. The "wild deed" did not purport to transfer title to Lai Heung Chan as an individual, but only as trustee of the Living Trust for Chris Yiu and Kwai F. Chan (Defendant). Therefore, there is no recorded evidence that title to the residence was transferred to Lai Heung Chan in her own right.
Because title to the residence was never recorded in the name of Lai Heung Chan, her contention that she owns the property turns on her argument that the circumstances of this case warrant the imposition of a constructive trust or a resulting trust.
B. Constructive Trust
California Civil Code § 2224, governing constructive trusts, provides:
One who gains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act, is, unless he has some other and better right thereto, an involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it.
"Constructive trusts are implied by law to prevent fraud in the absence of an agreement for a trust. Constructive trusts are `fraud rectifying' trusts, and not `intent-enforcing' trusts."Johnson v. Clark, 7 Cal. 2d 529, 533 (1936); Sampson v. Bruder, 47 Cal. App. 2d 431, 435 (1941) (constructive trust imposed not because of intent of parties, but because person "holding title to property would profit by a wrong or would be unjustly enriched if he were permitted to keep the property").
With her original opposition to the writ of execution, Defendant submitted a declaration in which she stated that, at the time of her indictment in July, 2000, the residence was owned by her husband and her mother, as trustees of the Chris Ngai K. Yiu and Kwai Fong Chan Living Trust. She stated that she believed she was the beneficiary of the Living Trust. Defendant continued that when she was required to post security for an appearance bond of $600,000, her family agreed to use the property as security for her bond. An attorney advised her family and herself that, to use the property as security for her bond, her husband and mother would have to transfer the property out of the trust and into the names of herself and her husband. Defendant stated that she and her family followed the attorney's advice and that her husband and mother, as trustees of the Living Trust, transferred the residence to Defendant and her husband to be held as community property. Then they posted the residence as security for Defendant's appearance bond. Defendant stated that the transfer of the ownership of the residence was done only to accommodate her need to post security for her bond and the trustees of the Living Trust did not intend to make her a true co-owner.
In her March 7, 2005 Supplemental Pleading in Support of Motion for Reconsideration, Defendant indicates that her former counsel, Cornell Price, will be filing a declaration. However, no such declaration has been filed.
These facts do not warrant the imposition of a constructive trust because Defendant did not obtain title to the property by defrauding her mother. As Defendant indicates, her family was convinced that title to the property should be transferred from the Living Trust to herself and her husband for the purpose of securing her release on bond in her criminal case. The June 26, 2000 Grant Deed was executed to do so.
In her pro se reply to her motion to quash, Lai Heung Chan did posit that Defendant gained title to the property by fraud. Lai Heung Chan indicated that, even though she and Chris Yiu had an agreement, the Consent Agreement, each to own one-half of the residence, legal title was originally recorded in Defendant and Chris Yiu's name when the residence was purchased. Lai Heung Chan continues:
Defendant orally agreed to transfer claimant's (Lai Heung Chan) 50 percent title back to claimant after the closing of escrow. In Nov, 1998, claimant requested defendant and her husband to transfer the 50 percent title back to her but they only put claimant as one of the trustees of their living trust, and in fact, no legal title has ever been recorded in claimant's name. They cheated claimant and told claimant that the trustee was the same as the title owner. In 2000, defendant breached the agreement when she used the property to secure her appearance bond and recorded a grant deed to put the property under the names of her and her husband without claimant's knowledge and consent.
January 18, 2004 Lai Heung Chan Reply to Motion to Quash at 4-5.
Because Lai Heung Chan presented this scenario in her pro se reply, after the government pointed out that imposition of a constructive trust required wrongdoing on the part of the title owner, the Court infers that she presented it in an attempt to alter the facts to fit the requirements of the law. This version of events is not repeated in the later brief filed by Lai Heung Chan's attorney who indicates that his brief "addresses, perhaps in a more concise way, both the facts and legal arguments previously presented to this Court as well as any additional matters deemed important and relevant . . ." March 15, 2005 Lai Heung Chan Supplemental Brief After Hearing at 2. Thus, the Court concludes that Lai Heung Chan has abandoned this version of events.
Lai Heung Chan cites New York cases which hold that imposition of a constructive trust does not require fraud or a wrongful act, it can be done to fulfill the true intent of the parties. However, these cases are contrary to California law, which must be followed by this Court.
Therefore, because no fraud or mistake was involved in the purported transfer of the property from the Living Trust to Defendant, the request for the imposition of a constructive trust is DENIED.
C. Resulting Trust
"Under California law, a resulting trust arises in favor of the party who pays the purchase price for a parcel of land and places the title to that land in the name of another person." In re San Diego Realty Exch., Inc., 132 B.R. 424, 428 (S.D. Cal. 1991) (citing Cal Civ. Code § 853 and California cases). "The resulting trust arises to enforce the inferred intent of the parties that the apparent purchaser should acquire and hold the property for the party with whose means the property was acquired." Id. However, when the transferee is a child or other natural object of the bounty of the payor, an inference is raised that a gift was intended, and the burden is on the payor seeking the creation of a resulting trust to prove that she did not intend to make a gift to the transferee. Altramano v. Swan, 20 Cal. 2d 622, 628 (1942); Lloyds Bank California v. Wells Fargo Bank, 187 Cal. App. 3d 1038, 1043 (1986).
Lai Heung Chan argues that she is the beneficiary of a resulting trust that arose when the property was purchased. She argues that the intent of the parties was expressed in the Consent Agreement and that, because she made the down payment on the property of approximately $588,000, she fulfilled the terms of the Consent Agreement and one-half of the property rightfully belongs to her. She reasons that because title to the property was taken in the name of Defendant, Defendant holds the residence in a resulting trust for Defendant's mother. Further, she argues that the intent of the September 5, 1998 Grant Deed, or "wild deed," "was to actually transfer the property from [Chris Yiu] and [Defendant], in whose names the property was at the close of escrow, to [Chris Yiu] and Lai Heung Chan in furtherance of the parties' agreement and the payment for the purchase of the property." Lai Heung Chan Supplemental Brief After Hearing at 9.
Even if Lai Heung Chan paid the down payment with her own funds, she must disprove the inference that this money was a gift to Defendant, as her daughter, the natural object of her bounty.
The facts relied upon by Lai Heung Chan do not indicate that the parties intended that she would own half the property. First, the Consent Agreement was never recorded. Therefore, this document could have been executed at any time, and the Court accords it little evidentiary weight. Second, Lai Heung Chan has never explained the source of the large sum of money that she indicates she provided as the down payment for the residence. She moved to quash the government's subpoena for her bank records and, although she withdrew her motion, there is no evidence before the Court that she has provided them. The document titled "Outgoing Funds Transfer Request" which evidences the transfer of $578,278.49 to Old Republic Title Company from a United Savings Bank account in the name of Lai Heung Chan indicates that the transfer was originated by Kwai Fong Chan, who is the Defendant. Thus, Defendant had control over this bank account and the funds could well have come from her illegal activities.
Third, the Deed of Trust recorded on September 1, 1998 to secure the Bank of America mortgage shows Defendant and Chris Yiu as obligors.
Fourth, although Lai Heung Chan argues that, but for the mistake in the name of the grantor, the September 5, 1998 Grant Deed would have transferred title to herself and Chris Yiu, this is not the case. As discussed above, the 1998 Grant Deed purported to transfer title to Chris Yiu and Lai Heung Chan as trustees of the Living Trust of which Chris Yiu and Defendant were the beneficiaries. Thus, this evidence does not indicate that the parties intended to have title transferred to Lai Heung Chan in her own right.
Fifth, Defendant and Chris Yiu recorded a homestead declaration on November 6, 1998, after the claimed attempt to deed the property to Lai Heung Chan.
Sixth, as indicated in the Court's November 4, 2004 Order, after title to the property was transferred to Defendant, Defendant relied on the fact that she was the owner of the property to obtain her appearance bond. She executed as trustor a Deed of Trust as a lien on the property in favor of the Court as beneficiary. The Deed of Trust indicates that title to the property is held by Defendant and her husband as community property. Roberts Dec. in Response to Defendant's Opposition (Second Roberts Dec.), Ex. B. Defendant also executed a document entitled "Obligation" in connection with her appearance bond in which she again represented that she was the owner of the property. Second Roberts Dec., Ex. C.
Therefore, the evidence weighs heavily in favor of finding that Defendant, Chris Yiu and Lai Heung Chan never intended that Lai Heung Chan would own half the property. The Court concludes that a resulting trust was not created. Lai Heung Chan's request for the imposition of a resulting trust is DENIED.
Because the Court denies the request for imposition of a constructive or resulting trust, it does not reach the government's argument that its lien takes priority over any equitable interest asserted by Lai Heung Chan.
D. Lai Heung Chan's Motion To File Reply and For Oral Argument
After the March 7, 2005 hearing on all pending motions, at which Lai Heung Chan appeared through counsel, Lai Heung Chan moved to file a reply brief and for oral argument. Chris Yiu joined in the motion.
As detailed in the procedural history of the instant motions, two hearings were held on the Objectors' motions regarding the government's writ of execution. On February 7, 2005, a first hearing was held at which Defendant and Chris Yiu were present but only Defendant was represented by counsel. Defendant and Chris Yiu asked the Court to stay ruling on the motions until counsel for all Objectors could submit briefs. The Court agreed and a further hearing was set for March 7, 2005 to give counsel time to file their briefs. At the March 7, 2005 hearing, all Objectors were represented by counsel and each argued on behalf of their client's interests.
Furthermore, the docket will reflect that prior to the February 7, 2005 hearing, the Objectors filed many briefs to which the government filed responsive pleadings. Counsel for Lai Heung Chan and Chris Yiu were aware of the government's responses from previous pleadings and had ample opportunity to address them in their briefs. The Court sees no benefit from allowing further replies on these issues.
In light of the fact that many briefs have been filed and two hearings have been held on these motions, the Court DENIES Lai Heung Chan's motion to file a reply and for further oral argument.
II. Chris Yiu's Ownership Interest
As discussed above, at the February 7, 2005 hearing, Chris Yiu and Defendant asked the Court to stay ruling on their motions until their counsel could submit briefs on the ground that counsel could present more cogent arguments than they had presented in their pro se briefs. The Court agreed to the stay. On March 14, 2005 Chris Yiu's counsel filed a brief titled, "Third Party Claimant Chris Yiu's Brief in Opposition to Govt's Attempt to Enforce Restitution Order Against Mr. Yiu's Share of Fremont Family Home and Request for Hearing/Trial Re Same." On March 7, 2005, Defendant's counsel filed a brief titled, "Supplemental Pleading in Support of Motion for Reconsideration of Court's Order Granting Writ of Execution; To Quash Writ of Execution; and Claims of Exemption." On March 16, 2005, Defendant's counsel filed another brief titled, "Further Supplemental Pleading in Opposition Writ of Execution." Except where specified, the Court addresses only the arguments presented in the attorneys' briefs.
A. Liability of Chris Yiu's Ownership Interest
The government relies on In re Soderling, 998 F.2d 730, 733-34 (9th Cir. 1993), which determined that a criminal restitution obligation was a "debt" within the meaning of California community property law, to argue that Chris Yiu's community property interest in the property can be used to satisfy Defendant's restitution judgment. Chris Yiu argues thatIn re Soderling was incorrectly decided.
1. Governing Law
The threshold question is whether State or federal law governs Chris Yiu's claim. In United States v. Lester, 85 F.3d 1409, 1412-13 (9th Cir. 1996), the court explained that in drug forfeiture actions, ownership of property is determined by State law, but once those ownership interests are defined, federal law determines whether those property interests must be forfeited to the government. Id. at 1412. In Lester, the court determined that the property at issue was community property and that, under California law, each spouse has an undivided one-half ownership interest in community property. Id. The court then looked to federal law to determine if the innocent wife's community property could be forfeited under 21 U.S.C. § 853(p), whereby if any of a defendant's forfeitable assets are unavailable, the court can order forfeiture of any other property of the defendant. Id. at 1410. The court noted that under § 853(p), "only the substitute property of the defendant may be forfeited to the Government." Id. The court concluded that, under § 853(p), the wife's undivided one-half interest in the community property was not subject to forfeiture. Id.
The Lester court explained that the district court had erred because, instead of looking to federal law to determine whether the wife's interest could be forfeited, it had relied on State community property law and found that it could be; California law provides that the marital community is liable for a debt incurred by either spouse during marriage, that a "debt" is an obligation incurred by a married person before or during marriage, and that the definition of "debt" encompasses the obligations which arise from a criminal forfeiture action against a spouse. Id. at 1413.
United States v. Hooper, 229 F.3d 818, 820 (9th Cir. 2000), another forfeiture case, also analyzed which law controls when the government attempts to seize property in a criminal forfeiture action. In Hooper, the government sought forfeiture under 21 U.S.C. § 853(a), which provides, "Irrespective of any provision of State law, persons convicted of drug trafficking forfeit any property constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of such violation." Id. The court determined that even if an innocent claimant had a community property interest in the property purchased from the proceeds of the illegal drug trafficking, the claimant was barred from relief by § 853(a).Id. The court acknowledged that State law determined whether the claimant had a property interest, but held that federal law governed whether that interest was forfeitable. Section 853(a) provided that the judgment was enforceable against community property if it was purchased with the proceeds of illegal activity. Id.
Although Lester and Hooper involved forfeitures and not restitution judgments, the situations are analogous and the Court concludes that it must first look to State law to determine what kind of property interest Chris Yiu holds, and then look to federal law to determine if that property interest can be used to satisfy Defendant's restitution judgment.
2. Community Property or Separate Property
Thus, the Court must first determine the nature of Chris Yiu's ownership interest in the property under State law. In his pro se brief, Chris Yiu maintained that, despite the fact that title to the property is in his and Defendant's name as community property, he owns the property as separate property. This argument may have been abandoned because it is not repeated in the latest brief filed by Chris Yiu's attorney. However, in an abundance of caution, the Court will address it.
California Family Code § 760 defines community property as "all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state." California Family Code § 751 provides that "the respective interests of the husband and wife in community property during the continuance of the marriage relation are present, existing, and equal interests." California Family Code § 770(a) defines separate property as, "(1) All property owned by the person before marriage; (2) All property acquired by the person after marriage by gift, bequest, devise or descent; (3) The rents, issues, and profits of the property described in this section."
The property was acquired by Chris Yiu and Defendant during their marriage while they were domiciled in California. Under § 760, it qualifies as community property. Further, Chris Yiu does not assert that he acquired the property before his marriage or after marriage by gift, bequest, devise or descent. Therefore, the residence does not qualify as separate property under § 770. Thus, according to State law, Chris Yiu's ownership interest in the residence is a community property interest.
3. Applicable Federal Law
Next, the Court must look to federal law to determine if the government may use Chris Yiu's community property interest to satisfy Defendant's restitution judgment.
In this case, the government is acting under the Federal Debt Collection Act (FDCA), 18 U.S.C. §§ 3001 et seq. Section 3202 of the FDCA provides, in relevant part:
Defendant argues that 21 U.S.C. § 881, which applies to civil forfeitures, protects an innocent spouse's community property. Even if this is the correct interpretation of § 881, it is inapplicable here because the government is proceeding under 18 U.S.C. § 3202 and this is the statute that must be analyzed to determine if the government is authorized to apply Chris Yiu's community property interest in the property to Defendant's restitution judgment.
All property in which the judgment debtor has a substantial nonexempt interest shall be subject to levy pursuant to a writ of execution. . . . Co-owned property shall be subject to execution to the extent such property is subject to execution under the law of the State in which it is located.
18 U.S.C. § 3202.
Defendant's interest in the property meets § 3202's requirement that it be non-exempt. The exemptions a criminal defendant may rely upon to avoid execution against his or her property are found in 18 U.S.C. § 3613. Section 3613 provides, in relevant part:
(a) The United States may enforce a judgment imposing a fine in accordance with the practices and procedures for the enforcement of a civil judgment under Federal law or State law. Notwithstanding any other Federal law . . ., a judgment imposing a fine may be enforced against all property or rights to property of the person fined, except that —
(1) property exempt from levy for taxes pursuant to section 6334(a)(1), (2), (3), (4), (5), (6), (7), (8), (10), and (12) of the Internal Revenue Code of 1986 shall be exempt from enforcement of the judgment under Federal law;
. . .
(f) In accordance with section 3664(m)(1)(A) of this title, all provisions of this section are available to the United States for the enforcement of an order of restitution.
Although § 3613(a)(1) refers to IRC § 6334(a), it omits § 6334(a)(13), which is the Internal Revenue Code's homestead exemption. Thus, the primary residence of a criminal debtor is not exempt from enforcement of a judgment.
Although neither of the parties briefed whether community property comes within § 3202's definition of co-owned property, a court in another district has indicated that community property is one of several types of co-owned property. See Schueler v. Rayjas Enterprises, Inc., 847 F. Supp. 1147, 1157 (S.D.N.Y. 1994) (Co-owned property includes, but is not limited to, joint tenancy, co-tenancy, community property and similar interests). Section 3202 ensures that State laws on co-owned property, including community property, are respected under the FDCA. Id. This Court concludes that community property is co-owned property within the definition of the FDCA.
Therefore, because the property is non-exempt and co-owned, § 3202 directs the Court to look to California law to determine if Chris Yiu's community property interest in the property can be used to satisfy Defendant's restitution judgment.
California Family Code § 902 provides that a debt is an obligation incurred by a married person before or during marriage, whether based on contract, tort or otherwise. Thus, the restitution judgment here is a debt because it is an obligation incurred by Defendant during her marriage. Further, as indicated in the November 4, 2004 Order, under Family Code § 910, which provides that the community estate is liable for a debt incurred by either spouse before or during marriage regardless of whether one or both spouses are parties to the debt, Chris Yiu's community property interest in the residence is liable for the restitution judgment. The Ninth Circuit in In re Soderling, analyzed these same statutes and concluded that the California Supreme Court would determine, if the issue were put before it, that federal criminal restitution judgments are debts under California community property law.Soderling, 998 F.2d at 734.
California Family Code § 910 provides:
(a) Except as otherwise expressly provided by statute, the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.
(b) "During marriage" for purposes of this section does not include the period during which the spouses are living separate and apart before a judgment of dissolution of marriage or legal separation of the parties.
In 1993, when In re Soderling was decided, California Family Code § 902 was codified at California Civil Code § 5120.020 and California Family Code § 910 was codified at California Civil Code § 5120.110.
Chris Yiu argues that the Soderling court was wrong because the Ninth Circuit was not aware of the California cases People v. Calhoun, 145 Cal. App. 568 (1983) and People v. Richards, 17 Cal. 3d 614, 62-21 (1976). In Richards, the California Supreme Court addressed whether probation could be conditioned on payment of restitution for a crime of which the defendant was acquitted.Id. at 616. The court looked at California Penal Code § 1203.1, which governs conditions of probation including fines and restitution, stating that its major goal was "to rehabilitate the criminal . . . The trial judge herein appeared to posit an additional and ill-conceived purpose: to resolve the civil liability of the criminal. In making the restitution order, the court observed that defendant `owed the money' to Ward, and `allowing him to avoid this debt would be unjust.' Disposing of civil liability cannot be a function of restitution in a criminal case." Id. at 620.
Richards is inapplicable to this case. Here the restitution order was imposed for a crime to which Defendant admitted guilt. The restitution order here is for compensation of the victim and rehabilitation of Defendant. Therefore, theRichards court's concern that a court not dispose of civil liability in a criminal case is not present.
Calhoun addressed whether a criminal restitution judgment could be discharged in the defendant's bankruptcy case. The court determined that a State criminal restitution judgment is not a debt as defined in the Bankruptcy Code, and therefore it was not discharged in the debtor's bankruptcy case. Calhoun, 145 Cal. App. 3d at 570-71.
As pointed out by the government, the California Penal Code has changed since Calhoun was decided. The California Penal Code now appears to treat restitution obligations as debts. In 1996, California Penal Code § 1202.4 was amended to provide:
(a)(1) It is the intent of the Legislature that a victim of crime who incurs any economic loss as a result of the commission of a crime shall receive restitution directly from any defendant convicted of that crime.
. . .
(3) The court, in addition to any other penalty provided or imposed under the law, shall order the defendant to pay both of the following:
(A) A restitution fine in accordance with subdivision (b).
(B) Restitution to the victim or victims, if any, in accordance with subdivision (f), which shall be enforceable as if the order were a civil judgment.
. . .
(f) In every case in which a victim has suffered economic loss as a result of the defendant's conduct, the court shall require that the defendant make restitution to the victim or victims in an amount established by court order, based on the amount of loss claimed by the victim or victims or any other showing to the court.
. . .
(i) The restitution order imposed pursuant to subdivision (f) shall be enforceable as if the order were a civil judgment.
Thus, California Penal Code § 1202.4(a)(3)(B) and (i) direct that a restitution order is enforceable as if it were a civil judgment. California law governing the enforcement of civil judgments provides that community property is liable for the payment of a judgment. See Cal. Civ. Pro. Code § 695.020(a) ("community property is subject to enforcement of a money judgment as provided in the Family Code.").
Furthermore, In re Soderling has not been overruled nor has the California Supreme Court issued an opinion undermining it. On the contrary, in Lester, the Ninth Circuit indicated thatSoderling was correctly analyzed. See Lester, 85 F.3d at 1413 n. 7. In the absence of any contrary higher authority, this Court must follow Ninth Circuit case law. Therefore, the Court rejects Chris Yiu's argument that this Court should not followSoderling.
Chris Yiu also relies on other sections of the California Penal Code to support his argument. He asserts that California Penal Code §§ 186.11(g)(5) and (i)(3) indicate that his community property interest is protected. These subsections are part of legislation enacted in 1995 to "establish a process in which the assets of those alleged to have committed aggravated white collar crimes could be frozen at the time of their arrest to secure the assets in order to pay restitution for the crime victims." People v. Green, 125 Cal. App. 4th 360, 367 (2004). It creates an aggravated white collar crime enhancement which applies to a person who is convicted in a single criminal proceeding of two or more felonies involving fraud or embezzlement. Id. The bulk of the statute is devoted to creating a procedure for preserving and then levying on the defendant's assets. Id.
The first subsection cited by Chris Yiu, California Penal Code § 186.11(g)(5), governs the procedure to be followed by the prosecutor at the same time as or subsequent to the filing of a complaint or indictment and provides, "the court, in making its orders, shall seek to protect the interests of any innocent third persons, including an innocent spouse, who were not involved in the commission of any criminal activity." This section is not applicable to Defendant's restitution judgment because it was the result of a criminal conviction and not imposed by the government at the time of filing the complaint against Defendant. The second subsection cited by Chris Yiu, California Penal Code
§ 186.11(i)(3), governs the procedure to be followed after the defendant is convicted and provides, "In making its final order, the court shall seek to protect the legitimately acquired interests of any innocent third persons, including an innocent spouse, who were not involved in the commission of any criminal activity."
The parties have not cited cases interpreting this subsection, nor could the Court find any. The Court concludes that the term, "legitimately acquired interest" does not apply to the spouse's community property interest, or the statute would so indicate. It is not likely that this law, the purpose of which is to protect victims of fraud and embezzlement, would provide less protection for these victims than does California Penal Code
§ 1202.4, discussed above.
Accordingly, based upon the California Family Code, Penal Code and Enforcement of Judgments Law, community property of the non-debtor spouse is subject to enforcement of a restitution judgment. Therefore, Chris Yiu's community property interest in the property may be used to satisfy Defendant's restitution judgment.
B. Exhaustion of Defendant's Separate Property
Citing In re Marriage of Stitt, 147 Cal. App. 3d 579, 587 (1983) and California Family Code § 1000, Chris Yiu argues that the government must first exhaust Defendant's separate property before it can look to Chris Yiu's community property to satisfy the restitution judgment.
California Family Code § 1000 governs liability for death or injury caused by a spouse. It provides that such a liability is to be satisfied as follows:
(b)(1) If the liability of the married person is based upon an act or omission which occurred while the married person was performing an activity for the benefit of the community, the liability shall first be satisfied from the community estate and second from the separate property of the married person.
(2) If the liability of the married person is not based upon an act or omission which occurred while the married person was performing an activity for the benefit of the community, the liability shall first be satisfied from the separate property of the married person and second from the community estate.Stitt held that, under Family Code § 1000, because the husband did not participate in his wife's embezzlement scheme and because no benefit to the community was shown, the wife's criminal defense attorney had to look first to the wife's separate property for recovery of his fee and only then could he look to the community property. Stitt, 147 Cal. App. 3d at 587.
Defendant argues that Stitt stands for the proposition that Chris Yiu's community property can never be used to satisfy the restitution judgment. In Stitt, the court explicitly stated that the creditor could reach the husband's community property once the wife's separate property was exhausted. Id. at 587. However, on the issue of the marital dissolution settlement, the court held that it was proper to assign full financial responsibility for the wife's embezzlement to the wife, thus preventing her assertion of community debt from diminishing the husband's share of the community property. Id. at 588. Because this case does not involve a marital dissolution settlement, the second part of the court's analysis is inapplicable.
Chris Yiu argues that the government has not made a showing that it has first looked to Defendant's separate property to satisfy the restitution judgment and that it has not taken Defendant's deposition to ascertain the existence or extent of her separate property. Therefore, Chris Yiu argues, the government's enforcement efforts against the community property should be stayed until the government has exhausted Defendant's separate property.
The government replies that § 1000 governs liability in a wrongful death or injury case, and so is not applicable here. Alternatively, the government argues that even if the statute does apply, it has no obligation to follow California procedures when collecting a federal debt. Finally, the government argues that it "has made every effort to obtain financial information from defendant Chan before seeking to execute on her property. She has steadfastly refused to comply. Before the execution process began, the United States' efforts to have defendant Chan to make payments on the debt were flatly rejected." Government Opposition at 8.
The government is correct that § 1000 appears to apply to tort claims based upon death or injury which is not at issue here. However, in Stitt, the court applied § 1000 to a debt other than one caused by death or injury. Also, the government's argument that it is not obliged to follow California procedures when collecting a federal debt may not be correct; as discussed above, 18 U.S.C. § 3202 of the FDCA provides that co-owned property is subject to execution to the extent it is subject to execution under the law of the State in which it is located. Therefore, to collect the restitution debt from the community estate, it may be that the government must follow California community property law. However, the government has made efforts to obtain financial information from Defendant in order to collect the debt from her and has filed a motion to compel discovery from her, which will be discussed below, but Defendant has not responded.
Furthermore, Chris Yiu has not made any showing of the source of the funds for the property, or of where Defendant's ill-gotten gains were spent. It may be that the fruits of Defendant's illegal activities benefitted the community estate. Nor has Chris Yiu shown that Defendant has any separate property. Therefore, Chris Yiu's argument that the government must first exhaust Defendant's separate property before it can look to his community property is unpersuasive.
C. Homestead Exemption
Chris Yiu argues that he is entitled to a homestead exemption in the amount of $75,000. Under California Civil Procedure Code § 704.730(a)(1), the amount of a homestead exemption is $50,000 unless, under subsection (a)(2), the judgment debtor or spouse of the judgment debtor "who resides in the homestead is at the time of the attempted sale of the homestead a member of a family unit, and there is at least one member of the family unit who owns no interest in the homestead or whose only interest in the homestead is a community property interest with the judgment debtor."
In other filings, the government has conceded that Chris Yiu is entitled to a homestead exemption in the amount of at least $50,000. However, it appears that Chris Yiu satisfies the requirements of § 704.730(a)(2) in that he is the spouse of the judgment debtor, living in the homestead at the time of the sale, he is a member of a family unit and his only interest in the homestead is a community property interest with the judgment debtor. Therefore, Chris Yiu is entitled to a $75,000 homestead exemption.
D. Chris Yiu's Due Process Rights
Chris Yiu argues that because he was not a party to Defendant's sentencing hearing, his due process rights are violated if his community property is taken from him without a hearing as to the proper amount of restitution. Citing McClure v. Ashcroft, 335 F.3d 404, 411 (5th Cir. 2003), the government argues that Chris Yiu lacks standing to challenge the validity of a criminal judgment.
The cases cited by Chris Yiu are inapplicable to this proceeding. For instance, United States v. James Daniel Good Real Property, 510 U.S. 43, 48-49 (1993) addresses a civil forfeiture proceeding and the other cases focus on the defendant's due process rights at sentencing. No case cited by Chris Yiu addresses whether a third party may challenge the sentence imposed on a criminal defendant.
Although the Court has found no Ninth Circuit authority on this issue, the Fifth Circuit presented an in-depth analysis of it inMcClure, 335 F.3d at 411-13. In that case, third parties filed a civil action challenging a special condition of a final judgment entered in a criminal case on the ground that the special condition violated their constitutional rights. Id. at 406. The Fifth Circuit noted that standing is comprised of two components:
(1) constitutional requirements based on the case-and-controversy clause in Article III of the Constitution; and (2) prudential requirements, crafted by the courts. Id. at 408. The Fifth Circuit assumed the plaintiffs satisfied the constitutional case-and-controversy requirements that their claimed injury be personal, particularized and concrete. Id. However, the court held that because the special condition challenged by the plaintiffs "is part of a final criminal judgment, prudential considerations preclude Plaintiffs' having standing." Id. at 411. In coming to this conclusion, the Fifth Circuit reviewed extensive case law and the Federal Rules of Criminal Procedure, both of which supported the policy of finality of criminal judgments. Id. at 411-13. This Court finds the analysis in McClure well-reasoned and persuasive. Therefore, the Court concludes that Chris Yiu lacks standing to challenge the constitutionality of the restitution judgment.
III. Defendant's Motion for Reconsideration
Defendant moves the Court to reconsider the November 4, 2004 Order Granting Plaintiff's Application for Writ of Execution.
The Federal Rules of Criminal Procedure do not address reconsideration of an order. However, Rule 12 of the Rules Governing § 2255 Proceedings provides that the district court may apply the Federal Rules of Civil or Criminal Procedure to any issue arising in a § 2255 motion that is not specifically prescribed by the § 2255 Rules. Because the § 2255 Rules do not provide for motions for reconsideration, courts apply Federal Rules of Civil Procedure 59 or 60 which govern motions for relief from a judgment or order. The Court will follow Rule 12 here and apply the Federal Rules of Civil Procedure to Defendant's motion for reconsideration.
Because Defendant did not file her motion within ten days of the date on which the Court issued its Order Granting Petition for Writ of Execution, Defendant's motion for reconsideration is governed by Rule 60(b), not Rule 59(e).
The Ninth Circuit has held that Rule 60(b) "provides for reconsideration only upon a showing of (1) mistake, surprise, or excusable neglect; (2) newly discovered evidence; (3) fraud; (4) a void judgment; (5) a satisfied or discharged judgment; or (6) `extraordinary circumstances' which would justify relief."School Dist. No. 1J, Multnomah County, Oregon v. ACandS, Inc., 5 F.3d 1255, 1263 (9th Cir. 1993) (quoting Fuller v. M.G. Jewelry, 950 F.2d 1437, 1442 (9th Cir. 1991)). Mere dissatisfaction with the court's order, or belief that the court is wrong in its decision, are not grounds for relief under any subparagraph of Rule 60(b).
Defendant asserts many of the same arguments raised by Lai Heung Chan and Chris Yiu. These arguments are denied for the reasons discussed above. Defendant asserts that the November 4, 2004 order violates her rights to due process. Defendant has had several hearings and has filed many briefs challenging the writ of execution and the government has acted in compliance with the procedures set forth in the FDCA. Therefore, Defendant's due process rights have not been violated.
Defendant also argues that her Eighth Amendment right to be free from cruel and unusual punishment has been violated by the large amount of the restitution judgment, and presents other theories challenging the validity of the restitution judgment. Defendant made these same arguments in her motion to vacate or amend sentence brought under 28 U.S.C. § 2255. In its February 9, 2005 Order Denying § 2255 Motion, the Court ruled that restitution judgments were not subject to collateral attack. February 9, 2005 Order at 5. Plaintiff cannot attempt to relitigate the restitution judgment in the guise of a motion for reconsideration. Therefore, Defendant's challenge to the restitution judgment is denied.
Citing sections of the Internal Revenue Code, specifically IRC §§ 6323 and 6334, Defendant argues that the property is exempt from lien. However, as discussed previously, 18 U.S.C. § 3613(a) establishes the exemptions a criminal defendant may rely upon to avoid execution against his or her property. Although § 3613(a) refers to IRC § 6334, upon which Defendant relies, there is a notable difference — § 3613 omits § 6334(a)(13), which is the Internal Revenue Code's homestead exemption. Thus, the primary residence of a criminal debtor is not exempt from enforcement of a judgment. This statute, therefore, does not prevent the enforcement of the restitution judgment against Defendant's residence.
Finally, Defendant argues that, in the event the government is allowed to sell the property, she is entitled to a $75,000 homestead exemption under California law. As noted by the government, exemptions for criminal defendants are governed by federal, not State law. Furthermore, even under California law Defendant would not be entitled to a homestead exemption. California Code of Civil Procedure § 704.730(b) provides:
Notwithstanding any other provision of this section, the combined homestead exemptions of spouses on the same judgment shall not exceed [$75,000] regardless of whether the spouses are jointly obligated on the judgment and regardless of whether the homestead consists of community or separate property or both.
As discussed above, Chris Yiu is entitled to a homestead exemption in the amount of $75,000. Thus, under § 704.730(b), Chris Yiu and Defendant together can receive no more than $75,000. Therefore, Defendant's motion for reconsideration is DENIED.
IV. Government's Motion to Compel Discovery and for Sanctions
In its motion, the government indicates that it requested discovery from Defendant regarding her finances and the property and that she failed to respond. The government submits the declaration of Stephen Johnson, Assistant United States Attorney, in support of its motion. Johnson states the following. On February 10, 2005, pursuant to Federal Rules of Civil Procedure 33 and 34, the government served interrogatories and requests for the production of documents on Defendant. Defendant failed to respond to the discovery requests within the thirty-day statutory deadline nor did she request an extension of time in which to respond. On March 22, 2005, Johnson sent by fax a "meet and confer" letter advising Defendant's counsel that Defendant's responses were overdue. Defendant's counsel did not respond to the fax. On March 28, 2005, Johnson left a telephone message for Defendant's counsel. On March 28, 2005, Defendant's counsel called Johnson and told him that he did not have any documents in his possession to respond to the discovery requests. Johnson unilaterally extended the time for Defendant to respond to discovery to April 4, 2005, and Defendant still did not respond. Johnson certifies that the government has attempted in good faith to confer with Defendant to obtain her discovery responses without court action.
On April 6, 2005, the government filed the instant motion to compel discovery and for the discovery sanction of finding that Defendant has waived all objections to the government's discovery requests. Defendant has not filed an opposition.
On April 26, 2005, Defendant filed a document titled "Notice of Filing to Include in And to Augment the Record," which includes copies of documents that are addressed to Microsoft and the United States Department of the Treasury. These documents are not responsive to the government's discovery requests.
The Court finds that the government has complied with the service requirements of Rule 33 and 34, that Defendant has not responded as required by the Rules, and that the government has certified that it has in good faith conferred or attempted to confer with Defendant in an effort to obtain her responses without court action. Thus, the requirements for the imposition of discovery sanctions under Rule 37(d) have been met. The Court grants the government's motion to compel discovery. The Court orders Defendant to respond to the government's first request for production of documents and first set of interrogatories within seven days from the date of this Order. The Court also grants the government's request for the sanction that Defendant has waived all objections to the government's discovery requests because she has failed to serve them in a timely fashion. See Davis v. Fendler, 650 F.2d 1154, 1160 (9th Cir. 1981) (failure timely to file written objections to interrogatories results in a waiver of objections).
CONCLUSION
For the foregoing reasons, the Court denies the following motions or claims: Defendant's motion for reconsideration (Docket # 122), Defendant's claim of exemption (Docket # 120), Lai Heung Chan's motion to quash (Docket # 118), Lai Heung Chan's motion to file a reply and for oral argument (Docket # 176), Lai Heung Chan's motion to quash subpoena for bank records (Docket # 154) and Chris Yiu's request to set aside writ of execution (Docket # 148). Chris Yiu's claim of exemption is granted (Docket # 119). The government's motion to compel discovery and for discovery sanctions is granted (Docket # 178).IT IS SO ORDERED.