United States v. James House

          ORDER GRANTING MOTION TO STAY AND DENYING GOVERNMENT'S MOTION TO DISMISS WITHOUT PREJUDICE RE: DKT. NOS. 23, 27, 32

          SUSAN ILLSTON UNITED STATES DISTRICT JUDGE.

         On August 5, 2016, the Court held a hearing on petitioners’ motion to stay. For the reasons set forth below, the Court GRANTS petitioners’ motion for a stay and DENIES the government’s motion to dismiss without prejudice to renewal once the stay is lifted.

         BACKGROUND

         On March 18, 2014, the government filed a twenty-nine count indictment against David Lonich, Brian Melland, and Sean Cutting.^[1] United States v. Lonich et al., Case No. CR-14-139 SI. Melland, Cutting and Lonich are charged with, inter alia, conspiracy to commit wire and bank fraud in violation of 18 U.S.C § 1349 (Count One), bank fraud in violation of 18 U.S.C. § 1344 (Count Two), wire fraud in violation of 18 U.S.C. § 1343 (Counts Three through Eight), conspiracy to make false statements to a bank in violation of 18 U.S.C. § 371 (Count Nine), conspiracy to commit money laundering in violation of 18 U.S.C. §1956(h) (Count Ten), and money laundering in violation of 18 U.S.C. § 1957 (Counts Eleven through Twenty-Two). Madjlessi was a real estate developer, Lonich was Madjlessi’s attorney, Cutting was President and CEO of Sonoma Valley Bank until it failed in August 2010, and Melland was the Senior Vice President and Chief Loan Officer of Sonoma Valley Bank until March 2010. The indictment also sought forfeiture pursuant to 18 U.S.C. §§ 982(a)(1), 982(a)(2)(A), and 982(b).

         On June 20, 2014, defendant James House was charged by information with five counts of violations of 18 U.S.C. § 1349 (Conspiracy to Commit Bank/Wire Fraud); 18 U.S.C § 1343 (Wire Fraud); 18 U.S.C. § 1344 (Bank Fraud); 18 U.S.C. § 371 (Conspiracy to Make False Statement to Bank); and 18 U.S.C. § 1956(h) (Conspiracy to Commit Money Laundering). The information also sought criminal forfeiture pursuant to 18 U.S.C. §§ 982(a)(1) and 982(a)(2)(A), 18 U.S.C. § 982(b), and 28 U.S.C. § 2461(c). In an order filed July 9, 2014, the Court found the Lonich and House cases related.

         The following facts are alleged in the Lonich indictment.^[2] From approximately March 2009 until approximately September 2012, Madjlessi, Melland, Cutting, Lonich and House^[3] defrauded Sonoma Valley Bank and others by means of materially false and fraudulent pretenses, representations, and promises and by omission and concealment of material facts. Specifically, the government alleges that on or around April 2008, Madjlessi defaulted on an IndyMac Bank loan of more than $30, 000, 000 that he had personally guaranteed and that had been used to fund construction of a condominium project called the Park Lane Villas (“PLV”) East. According to the government, Madjlessi, Melland, Cutting, Lonich and House conspired to have Madjlessi bid on and obtain this defaulted loan contrary to FDIC regulations and through House as a straw borrower. The government alleges that in March 2009, Lonich created an entity called 101 Houseco, and installed House as its nominal owner. The government charges that House was a straw buyer who exercised no meaningful control of 101 Houseco and that instead, Madjlessi and Lonich exerted control over the company.

         To fund the bid for the defaulted IndyMac loan, Madjlessi approached Sonoma Valley Bank executives Melland and Cutting seeking a loan for 101 Houseco. Melland and Cutting knew that 101 Houseco was a straw purchaser, and they took steps to authorize that loan, which was initially disbursed to 101 Houseco in March 2009. Sonoma Valley Bank loaned a total of almost $9, 500, 000 to 101 Houseco. Of the final balance, more than $4, 000, 000 was used to purchase Madjlessi's defaulted IndyMac loan and more than $4, 500, 000 went to Masma Construction, a company controlled by Madjlessi. In or about January 2010, Madjlessi and Lonich, utilizing House, caused 101 Houseco to settle a pending civil suit relating to Madjlessi’s defaulted loan, foreclose on PLV East, and obtain title to the project.

         On June 19, 2014, the government recorded in the Lonich case a notice of lis pendens as to the real property and improvements located at 3751 Sebastopol Road, Santa Rosa, California. Dkt. No. 40 in CR 14-139 SI. This is the PLV property.

         On July 18, 2014, House pled guilty to counts one through five of the information. Dkt. No. 7. In his plea agreement, House admitted that he conspired with Madjlessi and Lonich in a scheme to defraud Sonoma Valley Bank with the ultimate goal of allowing Madjlessi and Lonich to gain control of PLV East. House admitted that in furtherance of the scheme he acted as the owner of 101 Houseco in order to obtain the loan for Madjlessi from Sonoma Valley Bank. House also admitted that he knew that 101 Houseco was actually controlled by Madjlessi and Lonich but falsely represented to Sonoma Valley Bank that he was the owner of 101 Houseco. House also agreed to forfeit, to the United States “any property constituting, or derived from, proceeds obtained directly or indirectly, resulting from the violations alleged in Counts One through Three of the Information”; and “any property, real or personal, involved in the in the violation alleged in Count Five of the Information and property traceable thereto, including but not limited to a sum of money equal to the amount of property involved in said violation.” Id. ¶ 14.

         On April 8, 2016, the United States applied in the House case for a preliminary order of forfeiture of 3751 Sebastopol Road, Santa Rosa, California. On April 11, 2016, Court entered the preliminary order of forfeiture.

         On May 17, 2016, a petition opposing the preliminary order of forfeiture was filed by Lonich in his capacity as the attorney for 114 Park Lane Santa Rosa, LLC. Dkt. No. 18. The petition states that House “does not now, nor did he ever, own the real property and improvements thereon described in the Preliminary Order of Forfeiture.” Id. ¶ 1. The petition also states the property is owned by 101 Houseco, and that “despite House’s contrary allegations in his guilty plea, that 101 Houseco, LLC obtained the subject property lawfully, and not through any fraud or any other criminal conduct. Accordingly, upon hearing, petitioner intends to prove that the subject property is not subject to forfeiture.” Id. ¶ 2. The petition also states that since September 6, 2012, 114 Park Lane Santa Rosa, LLC has been the sole member of 101 Houseco LLC, and that “[t]he issue of petitioner's sole membership, however, is the subject of a lawsuit now pending in the Sonoma Superior Court and designated by Case No. SCV-255142.” Id. ¶ 3.

         On June 10, 2016, 101 Houseco, LLC filed a petition opposing the preliminary order of forfeiture. Dkt. No. 21. That petition was also filed by Lonich in his capacity as attorney for 101 Houseco, LLC. As with the petition filed by 114 Park Lane Santa Rosa, LLC, the petition claims that House never owned the subject property and that 101 Houseco, LLC is the lawful owner and that the property is not subject to forfeiture. Id. ¶¶ 1-2.

         On June 15, 2016, the government filed a motion to dismiss the petition of 114 Park Lane Santa Rosa, LLC, for lack of standing.^[4] Dkt. No. 23. On June 30, 2016, 114 Park Lane Santa Rosa, LLC and 101 Houseco, LLC moved to stay the forfeiture proceedings until the conclusion of the Lonich case. Dkt. No. 32. The government opposes ...