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United States v. $4

United States Court of Appeals, Fifth Circuit

August 22, 2019

UNITED STATES OF AMERICA, Plaintiff - Appellee
$4, 480, 466.16 in funds seized from Bank of America account ending in 2653 Defendant, RETAIL READY CAREER CENTER INCORPORATED, Claimant - Appellant

          Appeal from the United States District Court for the Northern District of Texas

          Before ELROD, WILLETT, and DUNCAN, Circuit Judges.

          STUART KYLE DUNCAN, Circuit Judge:

         In this civil forfeiture proceeding, the United States seized millions of dollars from a Texas vocational school, alleging the funds were the fruits of a scheme to fleece veterans. The school intervened as a claimant, denied the government's allegations, and counterclaimed for constitutional tort damages against the government for ruining its business. The district court dismissed the school's counterclaims as a matter of law. Finding no authority from our court on the issue, the district court adopted the First Circuit's view that claimants in an in rem forfeiture proceeding may never bring counterclaims. See United States v. One Lot of U.S. Currency ($68, 000), 927 F.2d 30, 34 (1st Cir. 1991) ("$68, 000"). On appeal, the school protests that this categorical rule barring all counterclaims in civil forfeiture proceedings is incorrect. We decline to address that question, however, because the school's specific counterclaims are barred for a more fundamental reason-sovereign immunity-and so the district court lacked subject matter jurisdiction over them. We therefore vacate the district court's judgment and remand with instructions to dismiss the school's counterclaims for lack of subject matter jurisdiction.


         Appellant Retail Ready Career Center ("RRCC") was a private school in Texas offering a six-week "boot camp style" course to train students as Heating, Ventilation, and Air Conditioning ("HVAC") technicians.[1] According to RRCC, "[m]ost" students were "veterans who pa[id] for the course using their earned GI Bill benefit," but "courses were open to other participants" as well. In 2017, the United States Department of Veterans Affairs ("VA") began investigating whether RRCC had falsely claimed to be in compliance with the "85-15" rule. This rule prohibits the VA from approving a veteran's enrollment in a course "for any period during which more than 85 percent of the students enrolled in the course are having all or part of their tuition, fees or other charges paid for them by the educational institution or by VA[.]" 38 C.F.R. § 21.4201. The rule's purpose is to "minimize the risk that veterans' benefits will be wasted on educational programs of little value . . . and to prevent charlatans from grabbing the veterans' education money." Cleland v. Nat'l Coll. of Bus., 435 U.S. 213, 219 (1978) (cleaned up).

         In September 2017, federal warrants were issued to seize the money in RRCC's bank accounts-over $4.6 million-as the alleged proceeds of federal law violations. See Fed. R. Civ. P., Supplemental Rule ("Supp. Rule") G(3)(b) (explaining "the court-on finding probable cause-must issue a warrant" to seize movable property not in government control).[2] In October 2017, the government filed a complaint in rem seeking forfeiture of the funds under various fraud and conspiracy statutes.[3] After receiving notice of that action, RRCC filed a verified claim to the seized property. See 18 U.S.C. § 983(a)(4)(A) (providing "[a]ny person claiming an interest in the seized property may file a claim asserting such person's interest in the property"); Supp. Rule G(5)(a) (setting out claim requirements). In its verified claim, RRCC alleged that the seizure occurred without prior notice or hearing; caused "an immediate and devastating effect on RRCC's business"; and forced RRCC to "close the school," dismiss employees without pay, and fly students home lest they be "stranded in Texas." RRCC also included two "constitutional counterclaims," which alleged the seizure violated the Fourth and Fifth Amendments and sought "damages to compensate [RRCC] for the destruction of its business."

         The government moved to dismiss RRCC's counterclaims under Federal Rule of Civil Procedure 12(b)(6). Relying principally on the First Circuit's decision in $68, 000, 927 F.2d 30, the government argued that "claimants in civil-forfeiture cases may not file counterclaims against the United States, as they are merely claimants, not the party against which the suit is directed." The district court noted the parties had not cited "any binding Fifth Circuit authority" on this question, but found "persuasive" the First Circuit's reasoning in $68, 000, [4] which had been followed by several district courts from other circuits.[5] The court therefore granted the government's motion to dismiss RRCC's counterclaims, "hold[ing] that, as a claimant in an in rem civil forfeiture action, RRCC cannot bring a counterclaim."

         Meanwhile, the government struggled to state an adequate claim against RRCC's funds under the forfeiture rules. The district court dismissed the government's first amended complaint, finding its allegations insufficiently specific. The second amended complaint met the same fate. See United States v. $4, 480, 466.16 In Funds Seized, No. 3:17-CV-2989-D, 2018 WL 4096340, at *3 (N.D. Tex. Aug. 28, 2018) (ruling allegations in second amended complaint were "insufficient to comply with Supp[lemental] R[ule] G(2)'s requirement that the complaint must 'state sufficiently detailed facts to support a reasonable belief that the government will be able to meet its burden of proof at trial'"); Supp. Rule G(2)(f). The parties continue to litigate that issue below.[6]

         The issues before us on appeal concern only the fate of RRCC's counterclaims. On June 12, 2018, the district court entered a final judgment dismissing RRCC's counterclaims under Federal Rule of Civil Procedure 54(b), which RRCC timely appealed. We have jurisdiction to review that Rule 54(b) judgment. See New Amsterdam Cas. Co. v. United States, 272 F.2d 754, 756 (5th Cir. 1959) (dismissal of counterclaim, when plaintiff's claim is still pending, is non-appealable "absent a certificate under Rule 54(b)").


         We review the district court's judgment dismissing RRCC's counterclaims de novo, "accepting all well-pleaded facts [in RRCC's counterclaims] as true and viewing those facts in the light most favorable to [RRCC]." SGK Props., LLC v. U.S. Bank Nat'l Ass'n, 881 F.3d 933, 943 (5th Cir. 2018) (quoting Stokes v. Gann, 498 F.3d 483, 484 (5th Cir. 2007)). We may affirm the district court's judgment "on any basis supported by the record." Total Gas & Power N. Am., Inc. v. FERC, 859 F.3d 325, 332 (5th Cir. 2017) (citing Taylor v. City of Shreveport, 798 F.3d 276, 279 (5th Cir. 2015); EEOC v. Simbaki, Ltd., 767 F.3d 475, 481 (5th Cir. 2014)); see also Lee v. Kemna, 534 U.S. 362, 391 (2002) ("[I]t is well settled that an appellate tribunal may affirm a trial court's judgment on any ground supported by the record.").


         On appeal, RRCC asks us to disclaim the district court's broad ruling that claimants in in rem civil forfeiture proceedings are barred, always and everywhere, from filing counterclaims. We decline to address that question, however, because RRCC's counterclaims are barred for a more fundamental reason: sovereign immunity.[7] As the government points out, the United States has not waived its sovereign immunity with respect to the particular claims asserted in RRCC's counterclaims-damages ...

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