Mr. Sondak's law firm represented Republic, National Bank of Miami in an effort to preserve its mortgage on a property seized by the government because of alleged links to drug trafficking. Republic finally won its case.
Following are excerpts from an article about the case and its implications for lenders. Mr. Sondak and Stanley A. Beiley headed their firm's legal team.
For the past five years, banks have felt threatened by the federal government's efforts to forfeit mortgage liens on property that it had reason to believe was owned by narcotics traffickers. A recent decision of the U.S. Court of Appeals for the 11th Circuit has significantly reduced this threat and given banks needed protection from unwarranted attacks on their mortgages.
Republic National Bank of Miami made an $800,000 bridge loan to a Panamanian corporation, secured by a first mortgage on a luxury waterfront home it owned in Coral Gables, Fla.
Statute on Ill-Gotten Gains
Before the loan came due, the government brought action under a statute that permits it to seek forfeiture of property acquired with the proceeds of narcotics trafficking or used in any manner to facilitate the commission of a drug offense.
The issue in the cast was whether the bank's mortgage would be recognized as valid or forfeited along with title to the property.
This in turn depended on whether the bank knew that the property had been acquired with the proceeds of an illegal narcotics transaction. The opinion in the case, known as Miraflores. addresses the question of when a bank holding a mortgage is an "innocent" owner.
* On the law, the court held that a bank mortgage cannot be forfeited if the bank "should have known" it was dealing with drug dealers. Forfeiture is appropriate only if the bank had actual knowledge. Constructive knowledge is not the legal test.
* The court also rejected as insufficient to support a finding of actual knowledge "expert" opinion offered by the government that the loan was "unusual and unsound" and, therefore, did not conform to reasonable banking practices.
* Further, the court refused to place the burden on the bank to prove that it "took reasonable, available steps to ensure that it was not acquiring an interest in property acquired with drug proceeds.
The Miraflores decision instructs banks on how, factually, to protect themselves from government forfeiture attacks on their real estate loans.
* Asset-based mortgage loans have been a favorite target of government forfeiture cases for the past several years. The 11th circuit rejected the contention that there is something wrong with asset-based bridge loans, especially if bridge loans are part of a financial institution's past practices.
* The government had successfully urged in the district court that the bank did something wrong in accepting unaudited financial statements of the offshore corporate owner of the property.
The 11th circuit rejected this contention, holding that in South Florida, real estate is commonly owned by offshore corporations, and when real estate is the primary asset of an offshore corporation, "it was not necessary to have an audited statement showing profit and loss for the single-asset nonoperating corporation."
* The economic soundness of the loan was of vital importance to the 11th circuit conclusion that the bank was an innocent owner. The loan was guaranteed by a strong, well-known guarantor, and the appraisal on the property showed a solid loan-to-value ratio.
* Equally important to the 11th circuit was the persuasive evidence that the loan had been properly documented and carefully evaluated prior to funding. The court listed the documents and steps that were taken by the bank before the loan was closed.
The court additionally observed that the offering ticket presentation of the loan to the loan committee explained the purpose for the, loan as "temporary" until the property is sold.
The proof at the trial was that Republic followed sound banking practices in making this loan, and believed that it knew its customer to be related to a longtime reliable customer of the bank.