Stacey Shefton was involved in a mortgage fraud scheme by which she fraudulently obtained $726,856.60 in loan proceeds from Long Beach Mortgage Company (“Long Beach“) by presenting fraudulent documents.
As previously reported by Mortgage Fraud Blog, the scheme began on November 23, 2004, when Lawrence Dillard (the “buyer”) agreed to purchase real property at 1254 Greenridge Lane, Lithonia, Georgia (the “Greenridge Property”) from PremierOne Properties (the “seller”). Before that sales transaction, GreenPoint Mortgage Funding, Inc. (“GreenPoint“) already had two security deeds of record (the “GreenPoint mortgages”) on the Greenridge Property.
In order to purchase the property, the buyer obtained two loans, totaling $800,000, from Long Beach. Attorney’s Title Insurance Fund, Inc., (“The Fund“) issued title insurance policies to Long Beach that insured Long Beach‘s security deeds securing the new loans.
Before closing, the seller informed the closing attorney that GreenPoint had sold its existing mortgages on the Greenridge Property and assigned them to Wilshire Mortgage Company (“Wilshire“). The seller gave the attorney statements purportedly from Wilshire that showed the amounts due to Wilshire to pay off the existing mortgages.
At closing, the closing attorney issued two payoff checks, totaling $726,856.60, payable to Wilshire out of the Long Beach loan proceeds. The attorney mailed the checks to the address provided in Wilshire‘s loan payoff statements.
Several months later, Long Beach discovered that the GreenPoint mortgages had never been assigned to Wilshire or anyone else. Moreover, they were in default. Consequently, the first and second GreenPoint mortgages had not and would not be canceled. Long Beach‘s security deeds were subordinate to the existing GreenPoint mortgages, leaving Long Beach with little or no security for its loans.
Long Beach made claims on the two title policies issued by the Fund, and the Fund paid off the total amount due under the GreenPoint mortgages to clear the encumbrances on Long Beach‘s title. On or about October 31, 2005, the Fund paid GreenPoint a total amount of $742,000.
This mortgage fraud scheme that resulted in the Fund‘s $742,000 loss was perpetrated by Stacey Shefton and others. Shefton was affiliated with both Wilshire and the seller PremierOne, and leased the unused office space to which the payoff checks were sent. Shefton obtained for his personal use the entirety of the Long Beach funds which were supposed to be used to pay off the existing mortgages and thus to clear title to the Greenridge Property and give Long Beach its desired security positions. Thus, because Shefton diverted the Long Beach loan proceeds to himself, Long Beach is the direct victim of Shefton‘s fraud.
Shefton was indicted and pled guilty to wire fraud. As part of his plea agreement, Shefton agreed to forfeit to the United States certain property in his possession or control (the “Forfeited Property”) that constituted or derived from proceeds Shefton obtained as a result of the wire fraud. The Forfeited Property includes a car; a motorcycle; the funds in six different bank accounts; approximately $300,000.00 in cash seized from a storage facility; and furniture, appliances, and other personal property located at the Greenridge Property. Shefton admitted in his plea agreement that the cash and all the funds in the bank accounts represented proceeds of the mortgage fraud scheme by which Shefton intercepted the Long Beach loan proceeds.
The government sought, and the district court granted, a preliminary order of forfeiture.
Thereafter, the Fund asserted a legal interest in the Forfeited Property that Shefton obtained from the Long Beach loan proceeds. The Fund petitioned the district court for an ancillary hearing, pursuant to 21 U.S.C. § 853(n)(2), to adjudicate the validity of the Fund‘s alleged interest in the property. According to the Fund‘s petition, the Forfeited Property is, or can be traced to, the Long Beach loan proceeds, which Shefton fraudulently obtained, and Shefton‘s fraud was the sole reason the Fund had to pay off the GreenPoint mortgages.
The government moved to dismiss the Fund’s § 853(n)(2) petition. The government recognized Long Beach (and the Fund) as a victim of Shefton‘s fraud. However, the government argued that the Fund, “one of the many victims of the Shefton … fraud scheme,” was merely an unsecured creditor and lacked standing to contest the forfeiture. Specifically, the government contended that the Fund did not have a “legal interest” in the Forfeited Property, as required by § 853(n)(6).
The Fund responded that it had the requisite legal interest through Long Beach. Shefton fraudulently obtained from Long Beach the proceeds of Long Beach‘s loans and used those proceeds to acquire the Forfeited Property. Long Beach was therefore entitled to a constructive trust on Shefton‘s Forfeited Property bought with Long Beach‘s money. And, pursuant to the terms of the Fund‘s title insurance policies and state law, the Fund was subrogated to the rights and claims of Long Beach against Shefton once it paid off the GreenPoint mortgages on Long Beach‘s behalf. Thus, the Fund succeeded to all of Long Beach‘s rights and disabilities with respect to the Long Beach loan proceeds fraudulently transferred to Shefton. In other words, the Fund stands in the shoes of Long Beach.
In reply, the government did not contest that the Forfeited Property was, or was purchased with, the Long Beach loan proceeds. Instead, the government noted that Congress has not defined the term “legal interest” in § 853(n)(6)(A), and argued that “it would frustrate the operation and effect of the forfeiture statute” to construe as a § 853(n)(6)(A) “legal interest” a constructive trust that arises “whenever a victim to a fraud voluntarily transfers money to another person.”
The district court granted the government’s motion to dismiss, concluding that the Fund‘s constructive trust claim could not be imposed to defeat the government’s forfeiture claim. The Fund appealed. The appellate court agreed with the majority of circuits that have held that a constructive trust can serve as a superior legal interest under § 853(n)(6)(A) and thus can serve as grounds for invalidating a criminal forfeiture order. The appellate court reverse the district court’s dismissal of the Fund‘s petition and remand for further proceedings consistent with their opinion.