Stapleton v. Two Million Four Hundred Thirty-Eight Thousand, One Hundred & Ten Dollars

ADAMS, Circuit Judge

(concurring):

Although I agree with the result reached by the majority, my views differ sufficiently to warrant a separate statement regarding the jurisdictional problem and the interpretation of the New Jersey forfeiture statute.

The dispute here centers on whether Hudson County, New Jersey or the United States is the rightful owner of the $2,438,110 found in garage #48 in Jersey City, New Jersey. Hudson County claims the money as a consequence of the operation of the New Jersey Forfeiture Statute, N.J.Stat.Ann. § 2A:152-6 et seq. The United States asserts that the money is due it because of a valid tax lien, under 26 U.S.C. § 6321, based on the Moriartys’ failure to pay federal income tax.

A. The Jurisdictional Problem: Applicability of 28 U.S.C. § 2410

Because Hudson County initiated this lawsuit in the state courts of New Jersey, and the suit is in federal court following removal by the original named defendant, our inquiry implicates the jurisdiction that the New Jersey court had over the original action. “The jurisdiction of the federal court on removal is, in a limited sense, a derivative jurisdiction. If the state court lacks jurisdiction of the subject-matter or of the parties, the federal court acquires none, although it might in a like suit originally brought there have had jurisdiction.” Lambert Run Coal Co. v. B. & O. R.R. Co., 258 U.S. 377, 382, 42 S.Ct. 349, 351, 66 L.Ed. 671 (1922).

Neither at the trial court nor on appeal has either side discussed the possibility of jurisdiction based on 28 U.S.C. § 2410. Section 2410 becomes all the more relevant because of the majority’s holding that jurisdiction was lacking because the United States had not consented to be sued. The relevant portion of section 2410 reads:

“(a) Under the conditions prescribed in this section and section 1444 of this title for the protection of the United *1219States, the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter—
“(1) to quiet title to,
“(2) to foreclose a mortgage or other lien upon,
“(3) to partition,
“(4) to condemn, or
“(5) of interpleader or in the nature of interpleader with respect to, real or personal property on which the United States has or claims a mortgage or other lien.”

The United States clearly has consented to suit by third parties, in a state court, as well as in a district court, under the five listed categories.

The money in dispute is personal property and the United States claims a lien on the money based on 26 U.S.C. § 6321 because Moriarty owes it taxes.1 If the nature of the claim to the money made by Hudson County falls within one of the five categories, the New Jersey state court would have had jurisdiction over the original lawsuit and the District Court would have had jurisdiction after the removal.

We are presented with two problems of interpretation regarding section 2410. First, the District Director of the Internal Revenue Service was the named defendant in the action prior to removal to the District Court. It was not until January, 1969 that the United States was substituted for the District Director as the defendant. While section 2410 authorizes an action against the United States to be commenced in the state courts, it is unclear whether the United States must be made a party at the time of commencement or whether naming an officer of the United States will suffice. Compare In re Escheat of Monies, 187 F.2d 131,135 (3d Cir. 1950), with First Nat’l Bank of Emlenton v. United States, 265 F.2d 297, 300 (1959). Because of the disposition of the jurisdictional question on other grounds, it is not necessary to express an opinion on this knotty problem/2

The second question regarding jurisdiction is whether the action by Hudson County is one of those for which Congress expressed the intent, in section 2410, to waive the sovereign immunity of the United States. It appears that the only provision that may be considered applicable to the resolution of this problem is section 2410(a) (2), which would permit Hudson County to sue “to foreclose a mortgage or other lien upon” monies on which the United States claims a lien. That the United States claims the $2,438,110 by a lien is manifest from the record and from the language of 26 U.S.C. § 6321. It is not at all clear, however, that Hudson County is attempting to foreclose a mortgage or a lien, or that Congress intended to waive the sovereign immunity of the United States when there is a suit by a state to enforce a forfeiture.

Throughout this litigation, Hudson County has asserted that it is entitled to the money because of N.J.Stat.Ann. § 2A: 152-6 et seq., and that the money has been forfeited to it. Section 2A:152-9 never speaks in terms of the creation of a lien in favor of a county whenever money is seized in connection with a gambling operation. Instead, it states that “the county treasurer may * * * make application * * * to the county court for an order to show cause why such money * * * shall not be forfeited * * *.” Therefore, *1220because Hudson County’s action is not one “to foreclose a * * * lien,” it would be possible, on this basis alone, to hold that section 2410 does not authorize this suit to be brought in a state court.

The legislative history of section 2410 and its predecessors makes even more apparent that Congress did not provide that a suit might be filed in a state court against the United States for a forfeiture proceeding.

“This legislation has been recommended * * * to relieve against the injustice with which mortgagees are confronted under the present state of the law who find, when it is necessary to foreclose their mortgages, that there has been filed against the property a junior lien by the Federal Government for some debt due the United States by the owner of the equity in the property, and for which the mortgagee owes no obligation either legal or moral. In such circumstances, the mortgagee finds himself at an impasse., It is impossible for him to bring about a judicial sale of the property owing to the cloud upon the title created by the Government’s lien. He can not remove the lien as there is no method by which he may bring the United States in as one of the parties to the foreclosure proceeding. * H. R.Rep.No.95, 71st Cong., 2d Sess. I.

Thus it is clear that Section 2410 was enacted to protect innocent purchasers whose property was encumbered by a junior federal lien. Although, by judicial interpretation, section 2410 has been broadened to encompass suits by municipalities brought in state courts to foreclose their tax liens as against liens asserted by the United States, New York City v. Evigo Corp., 121 F.Supp. 748 (S.D.N.Y.1954), no cases have been brought to our attention permitting such an action when a county has sought to enforce a forfeiture. There is no evidence that a suit to enforce a forfeiture was contemplated by Congress, and there would appear to be no compelling reason for so extending the scope of section 2410.3

B. Interpretation of New Jersey Forfeiture Law

Even assuming arguendo that a state court has jurisdiction to entertain a suit by a municipality against the United States to enforce a forfeiture, it is not clear that the District Court was correct in its interpretation of the applicable New Jersey law dealing with forfeiture. The original New Jersey forfeiture statute provides that “any furniture, implement, device or machine, made or used for the purpose of gambling” becomes the property of the county and is forfeited. N.J.Stat.Ann. § 2A:152-6. Under this provision, the contraband is forfeited at the moment of its illegal use, Farley v. $168,400.97, 55 N.J. 31, 259 A.2d 201 (1969). But the county has the burden of proving the illegal use before the forfeiture may be enforced, Krug v. Board of Chosen Freeholders, 3 N.J.Super. 22, 65 A.2d 542 (App.Div. 1949).

In 1942, the state legislature added provisions to the basic statute making it-clear that the county, as opposed to the state, would be entitled to any seized money. The provision created the presumption that any money seized in connection with an arrest for violation of a gambling law was prima facie contraband and forfeit. N.J.Stat.Ann. § 2A:-152-7. See Farley v. $168,400.97, supra. Thus, depending on which provision is applicable the one placing the burden on the county, or the one creating a presumption in favor of the county — the county may or may not be required to establish affirmatively the connection between the seized money and the gambling operation.

The county asserts that it is entitled to the benefit of the presumption of sec*1221tion 152-7, and if it is not, that it has in any event proved the illegal use because the $2.4 million was utilized as the bank for Moriarty’s numbers operation. The county relies heavily on Farley to support its position that the presumption applies here.

Farley arose out of the same events which precipitated the present lawsuit. Following the discovery of the $2.4 million in garage #48, the Jersey City Police Department entered garage #56, just down the street, and discovered the $168,400.97 along with gambling paraphernalia belonging to Moriarty. The dates on the seized lottery slips indicated that Moriarty had been operating a numbers game from December 14, 1961 to February 10, 1962. While he was serving his sentence for conviction of other gambling offenses, Moriarty was indicted for a series of violations. He pleaded guilty to possession of the seized lottery slips on various dates from December 14, 1961 to July 6, 1962. Upholding Hudson County’s claim to the money against an asserted tax lien by the United States, the New Jersey Supreme Court held that the forfeiture contemplated by the New Jersey statutes occurred at the time of the illegal use and did not await either actual seizure of the funds by the state or a judicial determination of forfeiture. The court also held that the arrest for violation of gambling laws and the seizure of the funds need not be simultaneous.

Hudson County would view Farley as standing for the broad propositions that in order for the presumption of section 152-7 to become operable there need not be a seizure of the funds by State officials, and that any inferential link between the money and gambling is sufficient to make the money prima facie contraband. However, Hudson County’s view of Farley overlooks several important considerations. In Farley it was beyond question that, based on the location of the $168,400.97, the money was used in the operation of Moriarty’s numbers business. Further, because of Moriarty’s plea of guilty to possession of the numbers slips; there was no doubt that the money had in fact been seized in connection with an arrest for violation of gambling laws.

In the present ease, the money was seized by agents of the F.B.I., not by state officials. Although it draws no distinction between seizures by one sovereign or the other, the presumption section was enacted in 1942 as part of a broad legislative scheme to simplify the procedure for determining claims to seized money. Farley, supra. Section 152-8 states that pending the disposition of the money, it shall be deposited with the county treasurer.4 It is difficult to imagine the purpose of this provision unless the legislature envisioned seizure by state officials in the first instance. Thus, it would appear that the presumption section would be inapplicable for this reason alone.

*1222Other reasons exist, however, to compel the conclusion that the presumption section is not applicable in this case. Moriarty has never admitted that the $2,-438,110 was used as part of his gambling operation. When this money was found in garage #48, no evidence of gambling was uncovered. The County has not pointed to any arrest in connection with which this money was seized. The County asserts that the $2.4 million represents an accumulation of profits by Moriarty from his illegal business or that the money was used by him as the bank for his operation. The argument perhaps would continue that the money was seized in connection with any of Moriarty’s numerous gambling arrests. It appears doubtful that any case interpreting the presumption section would permit the arrest to be unspecified. Moreover, the presumption section is penal in nature, and, as such, must be construed strictly. State v. La Bella, 88 N.J.Super. 330, 212 A.2d 192 (1965). Logic would dictate then that the money must be seized in connection with a specific gambling arrest. Therefore, absent both a seizure by state officials and a reference to a particular arrest, the County should not have been given the advantage of section 152-7.

Section 152-6,5 on the other hand, requires neither actual arrest nor seizure by state officials to create a forfeiture. As noted above, section 152-6 does put the County to its proof that the money was used illegally. The County attempted to prove in the District Court that the money was employed as Moriarty’s bank, and has asserted on appeal the reasonableness of that conclusion. Because it improperly relied on the presumption of section 152-7, the District Court never found, as a fact, that the money was used as Moriarty’s bank. Rather, it found the money to be “wholly the ‘product’ of a gambling operation,” as distinguished from finding that it was “used for the purpose of gambling,” as the statute requires. The District Court’s conclusion that money which is the product of gambling is subject to forfeiture appears to be contrary to New Jersey decisional law. In Krug v. Board of Chosen Freeholders, supra, 65 A.2d at 543, the Court stated:

“ . . . The money was seized on the theory that it was an integral part of the gambling operation and thus there attached to it the characteristic of a gambling device. Money as such is not ordinarily an instrument of gambling or subject to seizure and confiscation as such an instrument, but is generally the stake for which men gamble and, therefore, not subject to confiscation as a gambling device. Money may, however, become subject to such seizure where it has become an integral part of the gambling operation. . .

Therefore, money which represents nothing more than an accumulation of profits from gambling “the stake for which men gamble” or the product of gambling is not subject to forfeiture under New Jersey law.

*1223The only theory which would support the County’s assertion that the money was forfeited is that the $2.4 million was used as the bank for Moriarty’s operation. Testimony was introduced by the County to support this view and evidence was introduced by the United States to refute it. The District Court felt it unnecessary to make a finding on this point. Viewing only the record, I cannot say that, as a matter of law, either side should prevail on this issue.

Thus, even if it were held that jurisdiction were present, I would be constrained to remand the case to the District Court for further findings of fact concerning the use of the $2.4 million under the terms of section 152-6 of the Forfeiture Act.

. 26 U.S.C. § 6321 reads:

“If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.”

. Prior to the enactment of 26 U.S.C. § 7426, actions against the District Director could be commenced by third parties in Federal Court only. See, H.Rep.No.1884, 89th Cong., 2d Sess., 27 (1966).

. Other courts have also adopted an approach narrowly construing this provision. See e. g., Falik v. United States, 343 F.2d 38 (2d Cir. 1965), Shaw v. United States, 321 F.Supp. 1267, 1269 (D.Vt.1970), Johnson Service Co. v. H. S. Kaiser Co., 324 F.Supp. 745 (N.D.Ill. 1971).

. One of the difficulties with this case is that both sides have tended to characterize it as a forfeiture proceeding. As contemplated by the New Jersey scheme, the action is basically in rem. Normally, an officer of a county will have seized the contraband money and have deposited it with the county treasurer. The county will then initiate a proceeding which states to the world that the money will be forfeited to the county unless someone can show a higher right to the money. Thus, in Farley v. $168,400.97, supra, the United States was required to appear in the New Jersey courts in order to assert its tax lien on the money.

The present action, on the other hand, is in a very different posture. The United States has seized the money pursuant to a lien, and Hudson County has sued the government in an attempt to put the money in the County treasury. The suit appears to be in personam — directly against the United States — and Hudson County relies on the New Jersey forfeiture laws as to the basis for its cause of action, not as the form of the action. Because this lawsuit is not a forfeiture proceeding in the traditional sense, the applicability of the presumption section is highly questionable since it is a portion of a statute setting forth the procedures for enforcing a forfeiture.

. Section 152-6 rends :

“Whenever any furniture, implement, device or machine, made or used for the purpose of gambling or for the playing of any game wherein money or other thing of value is wagered or gambled, shall be seized or captured by the police, constabulary or other officer, the prosecutor of the county where such seizure is made shall have the same destroyed or rendered useless for the uses and purposes aforesaid, and it shall be unlawful to return them to the person or persons owning the same, or to any other person; provided, it shall be lawful for the prosecutor, in his discretion and subject to rules and regulations which may be promulgated by the attorney general, to donate and deliver such of them as may be used for lawful purposes to any institution located within the county where such seizure is made and which is under the control and operation of the federal government, or to any institution, wherever located, which is under the control and operation of the state of New Jersey or any political subdivision thereof, or to any institution located within the county where such seizure is made and which is under the control and operation of any public, semipublic, or private, charitable, religious or philanthropic institution or organization.”