Larson v. United States

United States Court of Appeals
For the First Circuit

No. 00-2455

DUANE W. LARSON,

Plaintiff, Appellant,

v.

UNITED STATES,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Richard G. Stearns, U.S. District Judge]

Before

Campbell, Senior Circuit Judge,
Torruella, Circuit Judge,
and Stahl, Senior Circuit Judge.

Duane W. Larson on brief pro se.
Donald K. Stern, United States Attorney, Shelbey D. Wright
and Jennifer Hay Zacks, Assistant U.S. Attorneys, on brief for
appellee.

December 27, 2001
 Per Curiam. Appellant Duane W. Larson (“Larson”)

filed this action in the district court to recover interest

on funds which the federal government had seized for

purposes of civil forfeiture but which were ultimately

returned to him. The district court awarded to Larson the

interest actually earned on his money while it was in the

government’s hands. This, however, was a fairly minimal

amount since for most of the time the government held it,

the money was in a non-interest bearing account.

Larson argues on appeal that he should have

received the “constructively-earned” interest on his money,

i.e., that interest which would have accrued if the

government had placed the money in an interest-bearing

account. For the first time on appeal, the government

argues that it is immune from any award of interest at all.

It contends not only that Larson is not entitled to

“constructively-earned” interest, but that even the

district court’s award of the minimal interest actually

earned should be set aside and judgment entered for the

government.

The appeal presents a matter of first impression

in this circuit, although subsequent legislation enacted

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 last year by Congress makes the legal issue here largely

irrelevant in future proceedings.

I.

In 1985, Larson was convicted on federal drug and

tax evasion charges and ordered to serve a ten-year prison

sentence. In 1990, the government began to suspect that

Larson was engaged in money laundering from prison (with the

assistance of his wife, who was not in prison). In June

1990, the U.S. Customs Service seized a total of $55,584.90

from two bank accounts owned by Larson and began civil

forfeiture proceedings.

Larson disputed the seizure. Ultimately the

government declined to prosecute Larson and in mid-1994 it

agreed to return the money it had seized. Larson then sued

to recover interest on the funds.1 The district court agreed

that Larson should recover the interest his money actually

had earned while it was held by the government. While the

government initially represented to the court that the money

1The procedural history of Larson’s claim is complex, but
largely irrelevant for purposes of the appeal. Larson first
filed an administrative claim, which was denied. He then filed
suit in the district court, which dismissed on the grounds that
the claim was more properly one to be filed with the U.S. Court
of Federal Claims. That court found it lacked jurisdiction
because the district court had exclusive jurisdiction over
matters involving forfeiture. Larson then filed a new suit in
the district court.

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had earned approximately $10,000 in interest, it later

disclosed that for most the four years during which the

money was in the government’s possession, it had been held

in a non-interest bearing account. The total interest

actually earned was $891.09.

Larson argued that the government should be liable

to him for the amount of interest that would have been

earned had the money been deposited in an interest-bearing

account during the entire time it was in the government’s

possession. The court rejected that contention, and it

entered judgment for Larson in the amount of $891.09. He

filed this timely appeal.

Larson now argues that the government should be

liable to him for “constructive interest,” i.e., the amount

of interest the money would have earned had the government

kept it in an interest-bearing account. Although it did not

cross-appeal, the government in its brief argues for the

first time that the district court was without jurisdiction

to award any interest at all because the government enjoys

sovereign immunity as to interest claims against it. The

circuits are split on this issue, and this circuit has never

addressed the matter directly.

II.

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 In Library of Congress v. Shaw, 478 U.S. 310

(1986), the Supreme Court made it clear that “[i]n the

absence of express congressional consent to the award of

interest separate from a general waiver of immunity to suit,

the United States is immune from an interest award.” Id. at

314. Moreover, “the force of the no-interest rule cannot be

avoided simply by devising a new name for an old

institution.” Id. at 321. At the time the instant suit was

commenced, federal law provided the following:

Upon the entry of judgment for the
claimant in any proceeding to condemn or
forfeit property seized under any Act of
Congress, such property shall be
returned forthwith to the claimant or
his agent; but if it appears that there
was reasonable cause for the seizure,
the court shall cause a proper
certificate thereof to be entered and
the claimant shall not, in such case, be
entitled to costs, nor shall the person
who made the seizure, nor the
prosecutor, be liable to suit or
judgment on account of such suit or
prosecution.

28 U.S.C. § 2465 (1999). The statute, as it then stood,

made no provision for, or reference to, the recovery of pre-

judgment interest. Shaw, 478 U.S. at 319; United States v.

$30,006.25 in U.S. Currency, 236 F.3d 610, 614 (10 th Cir.

2000), cert. denied, 122 S. Ct. 130 (2001).

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 At least three circuits have held that where the

government, claiming a right to civil forfeiture, has seized

funds, but has ultimately returned the funds to their owner,

sovereign immunity bars the recovery of any interest the

money earned while in the possession of the government. The

Second, Eighth and Tenth circuits have reasoned that such

interest would constitute the award of pre-judgment

interest, and since 28 U.S.C. § 2465 does not provide for

the recovery of pre-judgment interest in this situation (and

since no other statute expressly waives sovereign immunity),

the government enjoys sovereign immunity from interest

claims. See $30,006.25 in U.S. Currency, 236 F.3d at 614-

15; United States v. $7,990.00 in U.S. Currency, 170 F.3d

843, 845-46 (8th Cir.), cert. dismissed, 528 U.S. 1041

(1999); Ikelionwu v. United States, 150 F.3d 233, 238-39 (2d

Cir. 1998).

Two other circuits disagree. In United States v.

$277,000 U.S. Currency, 69 F.3d 1491 (9th Cir. 1995), the

Ninth Circuit held that the interest actually earned while

seized funds were held by the government was not interest at

all, but rather, the “profit from wrongly seized property.”

Id. at 1493. The court further reasoned that even where the

money did not actually earn interest, the government should

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be liable for the interest the money would have earned, had

the government placed it in an interest-bearing account.

Where a disputed res is capable of being
put to use for someone, it makes no
sense whatsoever that a pile of dollar
bills should be left doing no good for
anyone. Certainly in any normal
commercial dispute over property, the
disputed property would, as soon as
practical, be placed in an escrow
account to earn interest that would go
to whoever was the ultimate winner.

Id. at 1494. Moreover, the court concluded that in a sense,

money held by the government always “constructively” earns

interest, since “all financial assets in the hands of the

government are a means by which the government does not have

to borrow equivalent funds.” Id. at 1495.

The Sixth Circuit concurred with this view, in

United States v. $515,060.42 in U.S. Currency, 152 F.3d 491

(6th Cir. 1998). Noting that the Ninth Circuit’s decision in

$277,000 in U.S. Currency had been authored by a Sixth

Circuit judge sitting by designation, it adopted the

reasoning set out by the Ninth Circuit and allowed for the

recovery of “constructively-earned interest” on seized funds

which were later returned. $515,060.42 in U.S. Currency, 152

F.3d at 504-06.

One other circuit has cited this approach with

apparent approval, but ultimately it did not need to decide

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which view to adopt in order to resolve the case before it.

In United States v. 1461 West 42 nd St., Hialeah, Fla., 251

F.3d 1329 (11th Cir. 2001), the Eleventh Circuit refused to

award interest on returnable rents and profits. It cited

$515,060.42 in U.S. Currency with approval, but said that no

interest (either actual or constructive) had been earned

because all rental income had been used by the government to

pay management and operating expenses of the real estate

while in the government’s possession. It seems the same

result could have been reached (i.e., a result in favor of

the government) by finding that sovereign immunity barred

the claim.

Only one First Circuit case has dealt with the

issue of interest constructively earned on seized money, but

that case is readily distinguishable. In United States v.

Kingsley, 851 F.2d 16 (1 st Cir. 1988), the government

requested and received an order from the district court

directing that seized cash be transferred to the custody of

the U.S. Marshal and then be deposited into an interest-

bearing account. A plea agreement Kingsley later signed

provided that the government would apply the seized assets

to his outstanding tax debt. Despite the court order, the

government failed to deposit the money in an interest-

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bearing account. This court held under a contract theory

that in entering into the plea agreement, Kingsley

reasonably had relied upon the court’s order to place the

funds in an interest-bearing account. Thus, when entering

into the plea agreement, he reasonably assumed that interest

on the funds would be available to reduce his tax debt. The

government’s breach entitled defendant to damages. Id. at

21. No mention was made of the rule in Shaw, not

surprisingly because the court’s award was not one for pre-

judgment interest per se; rather, the award was in the form

of damages directly caused by the breach of contract.

In its decision allowing an award of interest, the

Ninth Circuit in $277,000 U.S. Currency relied in part on

our decision in Kingsley. The Ninth Circuit noted that in

both cases, the court had ordered the funds placed in an

interest-bearing account (actually, in the Ninth Circuit

case, the court order simply stated that the government “may

deposit” the funds in an interest-bearing account), and it

said that as in Kingsley, the claimant could “reasonably

rely” on that order being carried out. The Ninth Circuit

said the claimant in its case had reasonably relied by

foregoing any efforts to obtain a release of the property on

bond. $277,000 U.S. Currency, 69 F.3d at 1497.

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 But, the facts in Kingsley seem clearly

distinguishable from those in the Ninth Circuit case. In

Kingsley, the claimant entered into a contract (his plea

agreement) in reliance on the court’s order mandating

deposit of the money in an interest-bearing account, and the

government’s breach of that contract resulted in an award of

damages. In the latter case, the claimant did not enter

into any contract in reliance on the order, so no claim for

contract damages could accrue to him. Moreover, it seems

far less certain that any reliance by the claimant in

$277,000 U.S. Currency would have been reasonable, given the

permissive language of the court’s order.

The Ninth Circuit’s view thus appears to stand or

fall on its alternative rationale: that the award was not

interest at all, but rather, the “profit from wrongly seized

property,” $277,000 U.S. Currency, 69 F.3d at 1493; that it

did not make sense to allow the government to let the money

just sit there; and that the same would not be allowed in

any commercial dispute between private parties. The problem

with this rationale, however, is that neither fairness

considerations nor rules applicable to private disputes can

alone provide grounds for abrogating sovereign immunity. As

the Supreme Court made clear in Shaw, “[c]ourts lack the

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power to award interest against the United States on the

basis of what they think is or is not sound policy.” Shaw,

478 U.S. at 321. The Court went on to caution in Shaw that

“the force of the no-interest rule cannot be avoided simply

by devising a new name for an old institution.” Id. at 321.

In characterizing such claims not as “pre-judgment

interest,” but as “profit from wrongly seized property,” the

Ninth Circuit can be said simply to have devised “a new name

for an old institution.” $277,000 U.S. Currency, 69 F.3d

at 1493.

Congress has since changed the forfeiture statute

so as specifically to allow the recovery both of interest

actually earned and interest that could have been earned.

28 U.S.C. § 2465 now provides for the recovery of “interest

actually paid to the United States from the date of seizure

or arrest of the property that resulted from the investment

of the property in an interest-bearing account or

instrument,” 28 U.S.C. § 2465(b)(1)(C)(i) (2000), and “an

imputed amount of interest that such currency, instruments,

or proceeds would have earned at the rate applicable to the

30-day Treasury Bill, for any period during which no

interest was paid.” 28 U.S.C. § 2465(b)(1)(C)(ii) (2000).

But, the new rule is expressly limited “to any forfeiture

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 proceeding commenced on or after the date that is 120 days

after April 25, 2000.” See Notes to 28 U.S.C. § 2465.

Congress did not, as it might have, make the revision

retroactive. Hence, the new legislation is inapplicable to

the issue of interest in cases, like the instant one,

commenced prior to 120 days after April 25, 2000, the

effective date of the new law. The House Report from an

earlier version of the bill explained that the amendment was

justified because “[u]nder current law, even if a property

owner prevails in a forfeiture action, he will receive no

interest for the time period in which he lost use of his

property. [footnote citing Shaw] In cases where money or

other negotiable instruments were seized, or money awarded

a property owner, this is manifestly unfair.” The House

Report thus assumed that, prior to the new legislation,

there could be no recovery of interest.2 H.R. Rep. No. 105-

358(l), at 34 (1997).

In keeping with Shaw and with the views of the

Second, Eight and Tenth Circuits, supra, as well as with the

view expressed in the above House Report, we feel

2The House Report took this view notwithstanding that, at
the time if was written, only the Ninth Circuit had taken a
position on the pre-judgment interest question, and, as above
indicated, the Ninth Circuit had allowed interest.

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constrained to hold that sovereign immunity prevents

recovery of interest here. It seems unfortunate to reach

this result after Congress has revised the statute to

indicate its wish to waive sovereign immunity and allow

interest; but Congress did not make the revision

retroactive, and indeed, it indicated when enacting the

revision that it was doing so to change preexisting law that

was believed to bar interest awards in the very

circumstances now presented.

Larson complains about the government’s failure to

raise its sovereign immunity argument in the district court.

The government’s failure to do so, in addition to its

failure initially to compute accurately the interest

actually earned, resulted in a misdirection of resources in

the district court. Sovereign immunity, however, is a

jurisdictional defense that may be raised for the first time

in the court of appeals. Edelman v. Jordan, 415 U.S. 651,

677-78 (1974); Parker v. Universidad de Puerto Rico, 225

F.3d 1, 9 (1st Cir. 2000) (citing Edelman). An appellate

court may, indeed, raise the issue sua sponte, so the fact

that the government has not cross-appealed here is of no

consequence. See Roe v. Cheyenne Mountain Conf. Resort,

Inc., 124 F.3d 1221, 1227-28 (10th Cir. 1997) (jurisdictional

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argument may be heard without a cross appeal, even where the

argument would result in vacation of the judgment and the

partial relief awarded to the appellant); Sherman v.

Community Consol. Sch. Dist., 980 F.2d 437, 440 (7 th Cir.

1992) (appellee’s jurisdictional argument must be

considered, even where no cross appeal filed); see also 15A

Charles Alan Wright, Arthur R. Miller & Edward H. Cooper,

Federal Practice & Procedure § 3904 (2d ed. Supp. 2001) (“A

cross-appeal [] is not necessary to challenge the subject-

matter jurisdiction of the district court, under the

well–established rule that both district court and appellate

courts are obliged to raise such questions on their own

initiative.”). “Nothing can justify adjudication of a suit

in which . . . there is some [] obstacle to justiciability.”

Sherman, 980 F.2d at 440.

The judgment is vacated, and the matter is remanded

for entry of judgment in favor of the government.

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