United States v. Friedman

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 97-2100



                    UNITED STATES OF AMERICA,



                            Appellant,



                                v.



                       ARNOLD I. FRIEDMAN,



                       Defendant, Appellee.


APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS



           [Hon. Nancy Gertner, U.S. District Judge]


Before

                                

                      Lynch, Circuit Judge,

           Coffin and Bownes, Senior Circuit Judges.


Christopher Alberto, Assistant U.S. Attorney, with whom Donald

K. Stern, U.S. Attorney, was on brief, for appellant.



     Robert L. Sheketoff, with whom Sheketoff & Homan were on

brief, for appellee.



     Jonathon D. Friedmann, with whom Gustavo A. del Puerto and

Gargill, Sassoon & Rudolph, LLP were on brief, for amicus curiaeUnisource Worldwide, Inc.


May 5, 1998


LYNCH, Circuit Judge.  Arnold I. Friedman was convicted

of defrauding several federally insured banks and ordered at

sentencing to pay restitution to the Federal Deposit Insurance

Corporation (FDIC), the victim of his offenses.  Before sentencing,

the district court granted the government's ex parte order to seize

the net proceeds of the sale of his family's oceanfront condominium

to satisfy any court-imposed penalties.  The government appeals an

order by the district court allowing Unisource Worldwide, Inc.

(Unisource), a creditor of defendant's business who had a guarantee

from defendant's wife backed up by her interest in the condominium,

to be paid from proceeds of the sale, as the holder of an interest

in the nature of an equitable lien against the condominium.

  The government argues that this decision exceeded the

district court's authority under the Victim Witness Protection Act

(VWPA), 18 U.S.C.  3663-64, because Unisource was not the victim

of defendant's offenses.  The government also argues that affirming

the judge's order would risk transforming sentencing proceedings

into equitable bankruptcy-style proceedings, thus frustrating

Congress' basic intent to provide restitution for victims.  The

government's concerns, if they were actually raised by the facts of

this case, would present difficult questions under the VWPA.

  We believe that, given the particular facts of this case,

affirming the district court's order does not present the dangers

the government fears because we do not agree that the district

court's order releasing funds to Unisource was an order of

"restitution" to Unisource under the VWPA.  Rather, we regard the

order as an implementation, permissible given the particular

circumstances, of the district court's earlier orders affecting

defendant's property.  We affirm.

                                I.  On October 8, 1996, Arnold I. Friedman pled guilty to

charges of bank fraud in violation of 18 U.S.C.  1344 and of

making false statements in violation of 18 U.S.C.  1014.  The

charges stemmed from check-kiting schemes in which Friedman

defrauded several federally insured banks.  The government, seeking

to ensure that Friedman's assets would be available to satisfy any

court-imposed penalties, filed an ex parte motion under Fed. R.

Crim. Pro. 45(d) requesting an order pursuant to the All Writs Act,

28 U.S.C.  1651, that would temporarily restrain Friedman from

transferring any assets.  On March 14, 1997, the district court

issued this order, requiring Friedman "to cease all transfers of

assets and funds" and directing that "institutions and individuals

who hold any assets or funds in which Arnold I. Friedman holds an

ownership interest shall not transfer any such fund or assets until

further order of this Court."

  One asset that belonged to members of the Friedman family

at this time was a condominium located in Swamscott, Massachusetts. 

The owner of the condominium was the Cupid Ocean Front Realty

Trust; the trustee was Kim Friedman, Arnold Friedman's adult

daughter, and the sole beneficiary was Leslie Friedman, Arnold

Friedman's wife.  At the time of the court's March order, the

condominium had been appraised at approximately $609,000.  On

paper, Arnold Friedman had no interest in the trust or the

condominium.  However, the government contended that Friedman in

fact controlled the asset and that it should be attributed to him,

noting that he had lived in the condominium since its purchase in

1993 and that he listed the condominium as an asset belonging to

him in a February 1997 mortgage application.  Arnold Friedman

acknowledges that, although his position was that the condominium

belonged to his wife through a valid real estate trust, a court

might conclude that he controlled the condominium.

  Friedman had disclosed the existence of the condominium

and the trust to the government at a presentence interview. 

Friedman's lawyer advised him that, because the district court's

March order only covered assets in which he had an ownership

interest, the family was free to put the condominium up for sale. 

The condominium was listed with a broker. After a few months, the

family received an offer of approximately $950,000 for the

condominium.  The closing date was June 26, 1997.

  According to Friedman's lawyer, after the government

learned of the impending sale of the condominium, there was a

meeting between Arnold Friedman, his lawyer and officials of the

Probation Department and the United States Attorney's Bank Fraud

Task Force.  At that meeting, Friedman's lawyer claimed, the

government agreed to permit the sale of the condominium as long as

$250,000 from the proceeds of the sale were put in escrow to be

available at sentencing if the court ruled that the condominium

belonged to Arnold Friedman.  The government disputes that such an

agreement ever existed, but does not dispute that such a meeting

took place.

  In any event, the government never sought to stop the

sale of the condominium on the ground that the sale would violate

the court's March order.  Rather, on June 25, 1997, the day before

closing, the government requested an ex parte order, again pursuant

to the All Writs Act, 28 U.S.C.  1651, directing the United States

Marshals to seize the net proceeds of the sale.  Friedman contends

that the government's action in seeking the order violated the

earlier agreement, and suggests that the order was sought by a

different set of government attorneys than those that were present

at the meeting.  The court granted the ex parte order.

  The order required "all proceeds, (after all secured

claims, liens and other costs associated with the real estate

closing are paid) generated by the . . . sale of the condominium

. . . [to] be turned over to the United States Marshals Service

. . . ."  The order also directed the U.S. Marshals to hold the

funds "until further order of the Court . . . ."

  Pursuant to this order, the following day the U.S.

Marshals seized the proceeds of the sale of the condominium at the

closing.  The U.S. Marshals obtained a check for $342,899, which

represented the sale price of the condominium ($954,617), less the

amount of a mortgage loan ($445,935), another loan ($125,687),

settlement costs, including attorney's fees, title insurance,

broker's commission, etc. ($31,421), and taxes and utility fees to

the Town of Swamscott ($8950).

  As a result of the seizure, one creditor was not paid who

had expected to be paid from the proceeds of the sale.  That

creditor, Unisource, was a supplier of Aim Chemical Enterprises, a

business which Arnold and Leslie Friedman owned and operated

jointly.  Under a credit arrangement with Unisource, Leslie

Friedman had issued a personal guarantee of Aim Chemical's debts to

Unisource, a guarantee that specifically included the condominium. 

Aim Chemical had difficulty paying its bills, and Aim Chemical and

Unisource worked out a payment plan. In early 1997, Aim Chemical

defaulted on this payment plan, and Unisource indicated that it

would take legal action to collect.

  At that time, Leslie Friedman asked Unisource not to

attach the Swamscott property through formal legal proceedings

because she believed it would have a chilling effect on the

impending sale.  Unisource agreed to forbear from filing a formal

attachment, but only after receiving Leslie Friedman's written

guarantee, through her attorney, that it would be paid "[f]rom the

proceeds of the sale of the property" an amount "equal to any

amounts due and owning [sic] and outstanding for more than thirty

(30) days prior to the closing date . . . ."  The agreement stated

that, "[s]imultaneously with the closing," this amount would be

delivered to Unisource in a check.  That amount, $85,773, was not

paid to Unisource at the closing, as Unisource and Mrs. Friedman

had agreed, and those funds were instead seized by the U.S.

Marshals.

     The day after closing, June 27, 1997, Unisource filed a

pleading styled "Motion of Unisource Worldwide, Inc. to Intervene

for a Limited Purpose," purportedly pursuant to Fed. R. Civ. P.

24(a)(2).  The motion requested that the district court "permit[]

Unisource to be paid from the proceeds of the sale as if it had

perfected its lien," arguing that its forbearance had benefitted

all parties, including the government, by facilitating a sale that

might have been discouraged if Unisource had sought to attach the

condominium through formal legal proceedings.  Unisource argued

that its interest was sufficiently definite to come within the

terms of the district court's June order directing that all

"secured claims, liens and other costs associated with the real

estate closing" should be paid from the proceeds of the sale prior

to the seizure by the U.S. Marshals of the balance.

     At a sentencing hearing on July 30, 1997, the district

court heard arguments on the condominium issue.  The defendant

argued that the property belonged to his wife, as beneficiary of

the real estate trust, although he acknowledged that his control of

that asset rendered the issue close.  The defendant also urged the

court to permit Unisource to be paid, arguing that it was necessary

for Aim Chemical's continued viability that its creditors be paid

and that Aim Chemical's continued profitability would ensure his

ability to pay the district court's restitution order.  

     The government argued that the condominium did belong to

Friedman.  The government also argued that Unisource was an

unsecured creditor, and that its interest was therefore not covered

by the June order.  Finally, the government argued that the

district court could not release any funds to Unisource because it

was not a victim of the defendant's crimes, and that the district

court lacked authority under the VWPA to do anything but order

restitution to the victim.

     Although the district court never acted on Unisource's

motion to intervene, it permitted counsel for Unisource to address

the court during the sentencing hearing.  Unisource argued that its

interest in the proceeds of the sale under the letter agreement was

protected by the district court's June order, and that it should be

paid from the proceeds as the holder of an equitable lien to remedy

the improper seizure of its share.

     The district court accepted this argument.  It ordered

restitution to the FDIC in the amount of $1,000,000, and further

directed in its amended criminal judgment that "monies seized by

the government will be released to probation officer to be

distributed to creditor Unisource (not the victim of the instant

offense) and victim FDIC."  The government filed numerous motions

seeking reconsideration of the order permitting Unisource to be

paid, each of which was denied.  

     The government then filed this appeal.  In effect, the

government now wants the $85,773 (which both Friedman and Unisource

say belongs to Unisource) to apply against Friedman's one million

dollar restitution obligation, thus lowering the risk that the full

sum of restitution will not be collected over time.

                              II.

     This appeal involves only the narrow issue of whether the

district court had authority to permit Unisource to be paid from

the proceeds of the sale.  The government argues that the district

court did not.  Friedman did not file a cross-appeal challenging

the district court's implicit determination that an interest in the

condominium could be attributed to him, and that issue is therefore

not before us.

     The government argues that the district court's order

permitting Unisource to be paid from the proceeds of the sale

exceeded the district court's authority under the VWPA, 18 U.S.C.

 3663-64.  The government argues that the district court order

permitting Unisource to be paid was an order of "restitution," and

that, under the VWPA, "restitution may be awarded only to a 'victim

of the offense.'"  United States v. Gibbens, 25 F.3d 28, 33 (1st

Cir. 1994) (quoting 18 U.S.C.  3663(b)(1)).

     We have no quarrel with the government's position that

orders of restitution under the VWPA can only be awarded to the

victim of a defendant's offense, and that ordinary creditors of a

defendant may not entitle themselves to consideration for

restitution by intervening at a sentencing hearing.  However, we

think the government's characterization of what occurred in the

district court misses the mark.  Although the district court's

order permitting Unisource to be paid is memorialized in a portion

of the amended criminal judgment labeled "restitution and

forfeiture," the sentencing hearing makes clear that the district

court did not consider its order as an order requiring Friedman to

pay restitution to Unisource under the VWPA.  Instead, the district

court accepted Unisource's argument that it had an equitable lien

or other definite interest that was protected by the court's June

order which had directed the U.S. Marshals to seize only the net

sale proceeds of the condominium.  

     Thus, the district court never considered its authority

to release funds to Unisouce from the seizure as stemming from the

VWPA directly; rather, its authority derived from its inherent

authority to issue all writs necessary in aid of its jurisdiction

under the All Writs Act, 18 U.S.C.  1651, authority which

certainly includes the power to issue a subsequent order which is

needed to implement an earlier order which the district court had

authority to issue.  Therefore, if the district court had authority

to release funds to Unisource, it stems from its authority to

implement its earlier June order, obtained ex parte at the

government's request, to seize the net proceeds of the condominium

sale.  The order, by its terms, excluded "all secured claims, liens

and other costs associated with the real estate closing . . . ." 

We note that this language came from the government's ex parte

motion.

     If the district court did not err in its interpretation

of its own earlier June order, its decision to release funds to

Unisource can be sustained as within the district court's authority

under 28 U.S.C.  1651.  The government does not contend that the

district court's June order, obtained ex parte at the government's

request, violated the VWPA because it permitted "secured claims,

liens and other costs associated with the real estate closing" to

be satisfied before the seizure of the balance of the proceeds for

the ultimate purpose of providing restitution to victims.  Indeed,

the government proposed that language.  Nor does the government

contend that the district court lacked authority to correct a

mistake in the implementation of its June order.  The district

court plainly could have required, for example, that the U.S.

Marshals release funds to a holder of a mortgage interest in the

property whose interest had been mistakenly seized at the real

estate closing, despite the fact that such a person, like

Unisource, would not have been a victim of the offense under the

VWPA.

     Instead, the government contends that the district

court's order protected only secured creditors and that Unisource,

which had not filed a formal attachment, was not secured.  The

government also argues that, because Unisource was in its view

merely an ordinary, unsecured trade creditor, affirming the

district court's actions would risk transforming sentencing

proceedings into equitable bankruptcy-style proceedings in which

various creditors of the defendant would be permitted to make

claims against the defendant's property.  This, argues the

government, would frustrate Congress' intent that the award of

restitution to victims of crime should be the primary focus of

sentencing proceedings, and that victims' claims should take

priority over those of many other creditors.  See 18 U.S.C. 

3613(c) (giving liens created by orders of restitution the same

status as tax liens).

     We do not agree that affirming the district court's

actions presents such a danger given the particular circumstances

of this case.  First, the government's argument assumes that

Unisource was an ordinary trade creditor, and we believe that the

record does not support this contention.  Under Massachusetts law,

an equitable lien is defined as "a charge upon specific property,

entitling the holder of the lien to have the property applied in

equity to the payment of his debt as against all other claimants of

the property except purchasers for value without notice." 

Ballentine v. Eaton, 8 N.E.2d 808, 809 (Mass. 1937).  In

Massachusetts, an equitable lien may arise from the express

agreement of a debtor to pay a creditor out of a specific fund or

property.  See Check v. Kaplan, 182 N.E. 305, 306 (Mass. 1932)

("[A]s between the parties a right in the nature of a lien on an

identified and particular fund may be created [by express

agreement] which will in appropriate circumstances by enforced in

equity"); Delval v. Gagnon, 99 N.E. 1095 (Mass. 1912); Pinch v.

Anthony, 90 Mass. (8 Allen) 536, 539 (1864) ("The rule is perfectly

well settled, that a party may by express agreement create a charge

or claim in the nature of a lien on real as well as personal estate

of which he is the owner or possessor, and that equity will

establish and enforce such a claim . . . .").  A leading legal

dictionary defines the term "equitable lien" as follows:

     A right, not existing at law, to have specific

     property applied in whole or in part to

     payment of a particular debt or class of

     debts.  An equitable lien arises either from a

     written contract which shows an intention to

     charge some particular property with a debt or

     obligation or is implied and declared by a

     court of equity out of general considerations

     of right and justice as applied to relations

     of the parties and circumstances of their

     dealings.



Black's Law Dictionary 539 (6th ed. 1990) (citations omitted).

     Given these legal principles, Unisource was no ordinary

unsecured trade creditor seeking to satisfy a debt, as the

government contends.  Rather, it had earlier arranged a payment

plan with the Friedman business that included a personal guarantee

of its debts from Leslie Friedman, a guarantee that specifically

included the condominium at issue.  After the Friedman business had

again become delinquent in its payments under the payment plan,

Unisource announced its intention to initiate proceedings to

formally attach the condominium.  Only after receiving a written

promise that its debt would be satisfied from the proceeds of the

impending sale did Unisource forbear from seeking the attachment. 

Unisource's forbearance benefitted all parties by facilitating the

sale.  This, in turn, provided the victim FDIC with substantial

monetary restitution that might well have been reduced if the

property had not been sold at the time, but sold later at auction,

quite probably at a lower price.

      Under these circumstances, it was not clearly erroneous

for the district court to conclude that Unisource held an equitable

lien under Massachusetts law arising from the April agreement.  SeeCheck, 182 N.E. at 173 (regarding the existence of an equitable

lien arising from the parties' express agreement as "a pure

question of fact upon which the decision of the trial judge must

stand").  Moreover, even if the interest was not definite enough to

rise to the level of a lien under Massachusetts law, the June order

did not protect only lienholders.  Rather, it also protected other

third parties who expected to be paid from the proceeds of the

condominium sale, such as the attorneys and brokers, none of whom

necessarily had a secured interest in the property.  The district

court was thus within its discretion to interpret its own June

order as protecting Unisource's interest in these circumstances. 

Although Unisource's claim was not specifically mentioned as among

those interests that would be satisfied prior to seizure of the

balance, this is explained by the fact that the order was obtained

ex parte at the government's request without notice to Friedman or

potential creditors.  Under such circumstances, the district court

did not err by interpreting its earlier order as including

Unisource as among those claimants it intended to protect.

     We emphasize the narrowness of our decision.  It was the

government which asked for the June order to be drafted in a manner

that permitted the sale to take place and which protected the

interests of those third parties who legitimately expected to be

paid from the proceeds of the sale.  The government did not request

that only claimants with interests superior to its own (as yet

inchoate) interest in the property be paid before the balance was

seized for the anticipated restitution order; rather, the June

order directed that "all secured claims, liens, and other costs

associated with the real estate closing [be] paid" (emphasis

added).  

     We express no opinion on whether, if the government had

instead sought to prevent the sale pursuant to the district court's

March order and had asserted a lien against the property arising

from a future restitution order, its interest would have been

superior to Unisource's interest.  Second, as the district court

never ruled on Unisource's motion to intervene, we express no

opinion on whether it was entitled to be heard at the sentencing

hearing, although we believe the district judge could permit

Unisource's attorney to address the court under the circumstances. 

Finally, this decision most emphatically does not endorse broad

bankruptcy-style proceedings in the guise of sentencing hearings;

such hearings would likely frustrate Congress' intent in enacting

the VWPA.  We hold only that, in the particular circumstances of

this case, the district court did not err by regarding Unisource's

interest in the proceeds of the sale of the condominium as

sufficiently definite that it was within the terms of its June

order.  Thus, the district court had authority under 28 U.S.C. 

1651 to order that funds be released permitting Unisource to be

paid from the proceeds of the sale of the Friedman condominium. 

The fact that the challenged order was part of a larger order

labeled a "restitution" order was an apparent slip of the pen, and

we see no need to elevate form over substance.

     The judgment of the district court is affirmed.