Federal Forfeiture Overview for Claimants and Defense Counsel
Robert W. Biddle, Esq.
Nathans & Ripke LLP
Baltimore and Greenbelt, Maryland
Federal Asset Forfeiture: Introductory Comments for Claimants and Defense Counsel
Outside of the admiralty and tax areas, federal asset forfeiture proceedings are a relatively new creature, dating to the Racketeering Influence and Corrupt Organizations Act (RICO), passed in 1970, and, most significantly, to the Comprehensive Crime Control Act of 1984. The pioneering RICO statute permitted the federal government to seize assets which were proceeds of or facilitated violations of the RICO statute, which includes as underlying violations a large number of federal criminal offenses. Most significantly for prosecutors, the RICO asset forfeiture provisions permitted assets to be seized prior to trial. Executives of the Drexel Burnham Lambert investment bank became grimly aware of the power of these provisions in the late 1980's when the threat of a RICO asset freeze led to actions which essentially put the firm out of business.
Under the RICO statute, and the general forfeiture statutes as they have been amended since 1984, there are numerous narcotics and non-narcotics federal criminal violations which permit asset forfeiture. Mail and wire fraud that affects a financial institution, various environment/hazardous waste violations, various motor vehicle violations such as altering or removing a vehicle identification number, motor fuel excise tax violations, and many others are all federal predicates for civil and criminal forfeiture proceedings, in addition to the usual narcotics predicates. Thus, due to the scope of the asset forfeiture statutes, any property that is the proceeds of a variety of illegal conduct may be seized by the federal government.
The federal government may bring two types of asset forfeiture proceedings - civil or criminal. There are also administrative forfeiture actions, a type of civil action, that is probably the most common type of action a Maryland practitioner will encounter in his or her daily work.
Federal civil forfeiture proceedings are actions brought directly against particular types of properties, such a parcels of real estate, boats, airplanes, stores, factories, inventory or any type of real or personal property. The actions are entitled "The United States of America v. One Parcel of Real Property Located at..." or some similar name. In general, to prevail in such an action, the government must show probable cause that the property facilitated or was the proceeds of specified unlawful activity. To prevail against the government, the owner of the property, or a claimant, must rebut the government's showing of probable cause.
Administrative forfeiture proceedings are a type of civil forfeiture initiated and conducted by law enforcement agencies. Until an administrative forfeiture is contested, and sent to a U.S. Attorney for prosecution, the law enforcement agencies have great autonomy in handling administrative forfeitures.
In criminal forfeiture proceedings, the other type of federal asset forfeiture procedure, forfeiture is sought as part of a criminal proceeding against a particular person. Thus, unlike a federal civil forfeiture action, the criminal forfeiture proceeding is directly connected to a pending criminal prosecution.
Under civil or criminal forfeiture procedure, a claimant must either prove that he or she is an "innocent owner" in order to recover its interest in the property sought to be seized, or that the property was not involved in criminal activity. Generally, a claimant holding a financial interest in property sought to be seized must show that he or she had no knowledge of any criminal activity relating to the property or, alternatively, that if he or she had such knowledge, that he or she took all reasonable steps to halt such illegal activity.
In addition, if the property has been transferred to a third-party, under the criminal forfeiture laws the claimant must show that he or she was a bona fide purchaser for value of the property sought to be forfeited as well as showing that he or she was an innocent owner. Under the civil forfeiture laws, third-party owners may preserve property even absent proof that they are bona fide purchasers for value if they can show that they had no knowledge and were not involved in the criminal activity.
Ultimately, as part of a forfeiture proceeding, a claimant may seek to preserve its interest in property subject to forfeiture before a fact-finder, whether it be a judge or jury. Ultimately, to prevail the government must obtain a judgement from the court to liquidate or obtain undisputed ownership of property subject to forfeiture. In this process, the law presumes that the government has title to the property, and the claimants must show that they have a superior claim to the government to properties sought to be forfeited.
Counsel should be aware that the government, under criminal forfeiture procedures, may seek not only forfeiture of property which facilitated or was proceeds of illegal activity, the government may also attempt to seize property which merely constitutes "substitute assets." Essentially, the federal criminal forfeiture statute permits the government to seize assets which are not directly tainted by a defendant's illegal conduct if it can show that it has made diligent but unsuccessful efforts to locate that property which constituted the proceeds or facilitated the illegal activity in question.
Federal Administrative Asset Forfeitures
Federal administrative forfeitures are probably the most common type of asset forfeiture action private counsel will encounter in his or her practice. These are the almost routine grist for the federal forfeiture mill--the car or boat seized after contraband is found by agents, the plane seized on the ground following an interdiction flight, funds seized in a bank account deposited by an alleged narcotics trafficker.
Administrative proceedings are in rem civil actions. They may be brought without any judicial intervention. Although the Department of Justice does not administratively seize real property, currency and conveyances and other instrumentalities of crimes in value up to $500,000.00 can be seized and forfeited administratively. The statute governing administrative forfeitures is found at 19 U.S.C. 1602-1621. The DEA's and the FBI's regulations are at 21 C.F.R. 1316.71 et seq. The Postal Service's regulations are at 39 C.F.R. § 233.7.
The first step in administrative forfeiture proceedings is generally the physical seizure of the property by the Government. In case of vehicles seizures can occur in the course of routine traffic stops, search warrants, or the like. Currency can also be seized in similar fashion. The government will provide a party from whom such property is taken with some identification of the agency which has physically taken the property and the identity of an agent who can be contacted about the property. However, this notice does not constitute notice for the purpose of forfeiture; it is essentially a receipt that the property has been taken by the government pending its determination of what it will do with it.
Once the government has taken a car or currency, as a general matter no statute requires that a forfeiture action be initiated within a particular period of time. If a substantial period of time passes without any action by the government to start the forfeiture process, a due process challenge under the Constitution may arise. If the property is held in connection with some type of criminal investigation, the Government may attempt to hold it for a lengthy period of time before formal forfeiture proceedings are initiated.
Upon a determination by the seizing agency that forfeiture is appropriate, the agency must provide notice of the administrative forfeiture. 19 U.S.C. § 1607(a). The agency should provide personal notice to parties known to the Government to have an interest in the property, and in addition public notice should also be provided in USA Today or some other general circulation paper. Id.
The twenty day period to file a claim for the property begins to run from the date of the first publication of the notice of forfeiture. 19 U.S.C. § 1608. If a claim is not filed in accordance with the regulations, including a bond equaling 10% of the property's value, a claimant will in all likelihood be barred from disputing the forfeiture on the merits.
Accordingly, counsel should act immediately when a client's property is taken and before the government provides formal notice of the start of the forfeiture process. Counsel should contact the responsible agent, indicate the identity of the client, and request in writing that notice be given immediately to counsel once the forfeiture process is initiated. If these steps are not taken, written notice of the forfeiture may be sent to the wrong address, and public notice may overlooked. Counsel with more than a few outstanding seizures which have not ripened into formal forfeiture actions might consider regularly reviewing USA Today or another paper in which the administrative forfeiture may be announced to follow the status of the proceedings. This may assure that nothing is "overlooked."
A federal administrative forfeiture claim may be filed by the owner or someone with an interest in the property. Once a party files a claim they are considered a "claimant." A claim by an attorney on behalf of a claimant is not sufficient. The claim must be sworn under penalty of perjury. It must be accompanied by a bond in the amount of 10% of the property's value. If the forfeiture claim is successful, the bond will be returned. If it is unsuccessful, the government may keep the bond.
The claim must set forth facts which show that the claimant is entitled to some or all of the property, with a claim superior to the government's claim. By far the most common contention is that the owner of the property was an innocent owner and had no knowledge and gave no approval to any illegal use of the property. Claimants can also contend that the property itself was not involved in any illegal activity, and was not obtained through the use of illegally obtained assets.
As an alternative to a direct claim on a property, a claimant may seek remission or mitigation of forfeiture. 19 U.S.C. § 1618; 28 C.F.R. § 9.1 et seq. This is essentially a request for mercy from the seizing agency. There is no opportunity for judicial review. Essentially, the claimant waives any claim on the merits to the property, and sets forth facts which merit a return of its interest in the property. No bond is required to support a petition for mitigation or remission, although the claim must be under oath.
The claim process can be a perilous one for a client who also faces possible criminal charges relating to property. A prosecution for making a false statement can result from filing a false claim. The very act of filing a claim will bring attention to a client, and requires that the government investigate the claim. This in itself can be undesirable for some clients. A client's acquisition and use of property which has been administratively seized may be spotless but there may be other "skeletons in the closet" which would come out in an investigation of the forfeiture claim. These collateral consequences may in and of themselves be sufficient to discourage a claimant from going forward.
Once a claim is filed, the seizing agency must investigate the claim, and either return the property to the claimant, or forward the matter to the United States Attorney's Office for review and possible court action. With the exception of proceedings involving automobiles, boats, and aircraft, and the general five year limitations period, there are no statutory time requirements which are judicially enforceable governing this process. Thus, unless the property is a conveyance, several months can pass between the time a claim is filed and an investigative agency decides whether to return the property or forward a recommendation to the U.S. Attorney that a forfeiture action be initiated against the property.
Seizures of conveyances for drug violations are governed by specific deadlines requiring action by the Government. See 21 U.S.C. § 888; 21 C.F.R. § 1316.90 et seq. These deadlines, including a requirement that the seizing agency decide whether to continue the forfeiture process within 20 days of receipt of a bond and a petition for expedited action and the requirement that the Government must either file a Complaint against the property within 60 days of receiving a claim and bond or return the property, pertain to ships, planes and automobiles involved in drug violations. These requirements are triggered only after the Government decides to pursue a forfeiture and thus cannot be used to expedite action by the Government before it decides to start the formal forfeiture process. Furthermore, although no special request is required to trigger the 60 day deadline to file a complaint following receipt of a claim and bond, the 20 day requirement can be initiated only by specifically requesting that this expedited procedure be followed by filing a special application with either the U.S. Attorney or the seizing agency.
Sometimes it is possible to work out a disposition in an administrative forfeiture proceeding with a seizing agency before the matter is sent to a U.S. Attorney. Counsel may supply additional information beyond what was provided in a claim to convince the agents to return the property. In addition, in the process of settlement discussions the agents may provide information which could be used to a client's advantage in subsequent proceedings. Before a file is forwarded to the U.S. Attorney, often attorneys for the government are not involved in the negotiation process.
An additional opportunity for counsel arises once a file is received by a U.S. Attorney's Office. Although a matter may well languish at the U.S. Attorneys' Office for as long as it languished in an investigative agency, once a file is sent to the U.S. Attorney at least an Assistant will be assigned to the matter, with whom negotiations can be attempted.
If the U.S. Attorney decides to forfeit the property at issue in the administrative proceeding, either a conventional civil forfeiture suit will be filed or the property will be included within a criminal forfeiture indictment. The civil cases are generally captioned United States of America v. XYZ Property. If a criminal action is brought, the Government will try to forfeit the property in the process of convicting the owner of a particular type of felony violation (a forfeiture predicate) which would allow criminal forfeiture of the owner's property.
Representing Claimants In Federal Civil Asset Forfeiture Proceedings
Defending a Federal civil asset forfeiture can be one of the most challenging tasks faced by defense counsel. The stakes are often very high. Frequently, the Government seeks to forfeit all or nearly all of a client's assets, threatening in effect to take everything owned by the client except the shirt off his (or her) back and destroying a client's ability to pay retained counsel. An effective defense usually requires a vigorous attack on the facts relied upon by the Government. However, the threat of a criminal prosecution of the client is always present. A client may be prosecuted later for either (1) misconduct relating to the source of the funds used to obtain the property, (2) the use of the property, or (3) false statements made in the course of the civil forfeiture proceeding itself. Every instinct of defense counsel calls for the client to remain silent on the Government's factual assertions, yet the client must address those issues to mount an effective defense to the civil forfeiture proceeding. There are no easy answers to this dilemma. The procedural structure of an asset forfeiture proceeding sets the framework within which defense counsel responds to a civil forfeiture action. Understanding the procedural hoops through which the Government must jump to civilly forfeit property is a key component of the planning process.
The first step for the Government in a civil asset forfeiture case is generally to obtain possession of the property at issue. See, e.g., 21 U.S.C. § 881(b) (authorizing seizure of property without issuance of judicial process). If the Government has already obtained possession of the property in connection with a prior administrative forfeiture proceeding, see MCDAA Newsletter Nov/Dec 1996 at p.3, then no new steps need be taken by the Government to physically obtain possession of the property. In these circumstances the Government starts civil forfeiture by filing a complaint, obtaining a summons and warrant for the arrest of the property, and providing effective notice to interested parties. See Rule C of the Supplemental Rules for Certain Admiralty and Maritime Claims ("Supplemental Rules"). This process merely ratifies the Government's continued possession of the property already held by the Government under the administrative forfeiture procedures.
On the other hand, the Government may not possess the property at the time the civil forfeiture proceeding begins. The property may be real estate, which the Government does not seize and forfeit administratively, or it may be worth more than $500,000.00 in value, or there may be some other reason why the Government does not want to proceed administratively initially. In these instances, the Government can obtain physical possession of the property and seize it pending later forfeiture by using a search warrant. See 21 U.S.C. § 881(d); 18 U.S.C. 981(b); Federal Rule of Criminal Procedure 41.
Once a client learns of a seizure, counsel must immediately monitor the various deadlines for filing papers to protect the client's interest in the seized property. Under Supplemental Rule C, a claimant must file a formal claim "within 10 days after process has been executed" to assert an interest in the property subject to forfeiture. "The claim shall be verified on oath or solemn affirmation, and shall state the interest in the property by virtue of which the claimant demands its restitution and the right to defend the action." Id. Claims may be made by counsel on behalf of a client. Id. The claim must be filed even if the client has already filed a claim and bond in a prior administrative forfeiture proceeding involving the property.
An answer to the forfeiture complaint in rem also must be served "within 20 days after the filing of the claim." Id. The answer must comply with Federal Rule of Civil Procedure 8, which provides among other things that "[averments in a pleading . . . are admitted when not denied in the responsive pleading." The answer is also governed by Federal Rule of Civil Procedure 11, which has no counterpart in criminal practice. Rule 11 provides that counsel's signature on an answer certifies that "the denials of factual contentions are warranted on the evidence."
The Government may also require a claimant contesting forfeiture to answer its interrogatories when it answers the complaint. Supplemental Rule C. A claimant must personally answer interrogatories under oath, although the text may be drafted by counsel. Federal Rule of Civil Procedure 33. These interrogatories usually force a client to go on record with his or her account of the relevant events. Although discovery in the Federal Court in Maryland generally cannot begin until the Court issues a scheduling order following receipt of an answer, see Local Rule 104(4)(b), forfeiture actions are exempt from this requirement. See Local Rule 103(9)(a). Unless the prosecutor agrees to stay discovery or the Court agrees to intervene, a claimant often will have no choice but to answer the interrogatories or risk discovery sanctions including a possible default. See Federal Rule of Civil Procedure 37.
After the claim, answer, and any interrogatories are addressed, conventional civil discovery follows. A claimant can depose Government agents, informers, or cooperating witnesses under Federal Rules of Civil Procedure 30 and 45, but the Government can also depose a claimant. The Government has a statutory right to stay civil forfeiture proceedings, see 21 U.S.C. § 881(i), 18 U.S.C. § 981(g), but claimants have no similar statutory right to stay forfeiture proceeding even while criminal charges are pending.
Following discovery, the Government will frequently move for summary judgment under Federal Rule of Civil Procedure 56. To prevail, the Government must show there is no question of material fact (1) that there is probable cause to believe the property is subject to forfeiture and (2) that the claimant lacks evidence of an affirmative defense which would entitle him or her to judgment against the Government. Generally, to rebut the Government's showing of probable cause, the claimant must produce evidence sufficient to raise a question of fact for trial which if favorably resolved would entitle the claimant to judgment in his or her favor. Thus, the claimant must either show the absence of probable cause to forfeit the property or must present sufficient evidence to show that the fact finder at trial could find that the claimant had shown its entitlement to the property by a preponderance of the evidence. For example, if the Government alleges under 21 U.S.C. § 881(a)(7) that property was used to commit a narcotics offense, once the Government has shown probable cause to forfeit the property, the claimant must show that the fact finder could find by a preponderance of the evidence that "the property was not unlawfully used or that the claimant has a valid defense" to resist summary judgment for the Government. See United States v. 152 Char-Nor Manor Boulevard, Chestertown, Maryland, 922 F. Supp. 1064, 1067 (D. Md. 1996) (citing to United States v. 7715 Betsy Bruce Lane, 906 F.2d 110, 111 (4th Cir. 1990)). A claimant cannot rest on simple denials to resist the Government's motion for summary judgment: The claimant's "response by affidavits or as otherwise provided . . . must set forth specific facts showing that there is a genuine issue for trial." Federal Rule of Civil Procedure 56(e).
If a claimant successfully resists the Government's summary judgment motion, and discovery is complete, the case will be scheduled for trial. If the Government seized the property at sea, the claimant has no right to a jury trial. If the property was seized on land, a jury trial can be obtained if timely sought. See Federal Rule of Civil Procedure 38.
Representing Defendants and Third Party Claimants in Criminal Asset Forfeiture Proceedings Including Asset Freezes and Forfeitures
Criminal asset forfeitures have rapidly become a treasured weapon in the federal prosecutor's arsenal. With sometimes minimal additional effort beyond that required to take a case to trial, prosecutors can bypass the Guidelines provisions for fines and obtain huge money judgments against defendants based on theories of joint and several liability. Restraining orders, obtained ex parte prior to or in connection with an indictment, can have the collateral even if unintended effect of depriving a troublesome defendant of retained counsel. Trial counsel can be so focused on defending the changes on the merits that no time or effort remains to fight the forfeiture battle when the time comes for the jury to address the issue in the criminal trial, or for the court to address it later. The substitute asset provision allows the Government to forfeit assets which were not proceeds of unlawful activity so long as the Government can show that such assets connected to illegal activity are difficult to obtain. All in all, effectively defending federal criminal forfeitures is not for the faint of heart, especially because at the end of the case the Government may well seek payment of the fee paid to counsel for the defense as a tainted asset.
Criminal forfeitures in recent years have focused on narcotics traffickers. However, every year as part of the war on crime Congress seems to add to the already lengthy list of statutes which permit criminal forfeitures. Mail and wire fraud affecting financial institutions, money laundering, odometer tampering, and health care fraud are only a few of the kinds of charges which can lead to criminal forfeiture judgments. Thus, even if you have a federal criminal practice which does not involve many narcotics cases, you cannot be immune to the intricacies of forfeiture law.
Defense counsel may become involved in a criminal forfeiture action in two ways. First, as counsel to a defendant charged with a criminal offense and facing related forfeiture charges, or, second, as counsel to someone holding assets received from the criminal defendant. In the latter situation, the client would be a third party not charged as a defendant in the criminal case. The procedural issues faced by counsel differ considerably depending on the type of client you have.
A. Procedures and Background Applicable to Representing Defendants
And Third Party Claimants
Criminal forfeiture actions must be brought against persons or legal entities, not initially against the property to be forfeited itself, and compel forfeiture of assets held or formerly owned by such defendant person or entity. Thus, criminal forfeiture proceedings are in-personam actions and are inescapably connected to federal criminal prosecutions. They are governed by the Federal Rules of Criminal Procedure and the applicable customs forfeiture procedures. See 21 U.S.C. § 853(j); 18 U.S.C. § 1963(h).
Parties with claims to property sought to be forfeited are known as "claimants." A claimant may be a person or entity holding title to property or a creditor of the owner defendant. Thus, if the Government seeks to forfeit a defendant's assets, defense counsel may become a claimant to recover or preserve the fee received or to be received from the client. The general rule is that the burden is on the Government to show by a preponderance of the evidence that it is entitled to forfeit the defendant's property in a criminal forfeiture action. See United States v. Voigt, 89 F.3d, 1050, 1081-84 (3d Cir. 1996). However, third party claimants have the burden of showing their entitlement to property. 21 U.S.C. § 853(n)(6); 18 U.S.C. § 1963(l)(6).
Criminal forfeitures are authorized by 18 U.S.C. § 982 (the general criminal forfeiture statute), U.S.C. § 1963 (RICO), and 21 U.S.C. § 853 (narcotics). The procedures governing narcotics and all non-RICO criminal forfeiture actions are found in 21 U.S.C. § 853. Similar provisions for RICO are found in 18 U.S.C. § 1963 itself.
Unless a defendant's assets are restrained prior to indictment, criminal forfeiture actions begin with an allegation in an indictment. See Federal Rule of Criminal Procedure 7(c)(2) ("[no judgment of forfeiture may be entered in a criminal proceeding unless the indictment or the information shall allege the extent of the interest or property subject to forfeiture"). Thus, the Government must identify the defendant's assets sought to be forfeited in the indictment. Id. Similarly, a criminal forfeiture charge is a count of the indictment subject to a separate verdict by the jury. See Federal Rule of Criminal Procedure 31(e)( "a special verdict shall be returned as to the extent of the interest or property subject to forfeiture, if any").
In connection with the preparation or filing of an indictment, the Government is authorized to restrain or even seize assets pending entry of a judgment of forfeiture. 21 U.S.C. §§ 853(e) and (f), 18 U.S.C. § 1963(d). The Government is entitled to freeze assets by protective orders to protect its interest in property. Id. Accordingly, courts can "enter a restraining order or injunction, require the execution of a satisfactory performance bond, or take any other action to preserve the availability of property" either before or after an indictment is filed. Id. If restraint is sought prior to indictment, the Government is required to show the following:
(i) there is a substantial probability that the United States will prevail on the issue of forfeiture and that failure to enter the order will resulting the property being destroyed, removed from the jurisdiction of the court, or otherwise made unavailable for forfeiture; and
(ii) the need to preserve the availability of the property through the entry of the requested order outweighs the hardship on any party against whom the order is to be entered" Id.
Defendants are entitled to a hearing on notice if restraint is sought prior to indictment. Id. Pre-indictment restraining orders can last no longer than ninety days unless "extended by the court for good cause shown or unless an indictment . . . has been filed." Id.
The Government may restrain property prior to indictment without prior notice to a defendant if it "demonstrates that there is probable cause to believe that the property with respect to which the order is sought would, in the event of conviction, be subject to forfeiture . . . and that provision of notice will jeopardize the availability of the property for forfeiture." Id. A defendant is entitled to a hearing following entry of an ex parte order. Id.
Although not explicitly authorized in the statute, courts generally grant defendants a hearing to contest restraining orders even after the defendant is indicted, although normally courts will defer to the grand jury's probable cause finding and will not require the Government to make any additional showing of the merits of its case. See United States v. Harvey, 814 F.2d 905, 931 (4th Cir. 1987); United States v. Musson, 802 F.2d 384, 386-87 (10th Cir. 1986); United States v. O'Brien, 836 F. Supp. 438, 441 (S. D. Oh. 1993). The court is not required to conduct a mini-trial on the merits of the offense to decide a motion to lift or modify a restraining order.Id.
The Government is also entitled to seize property subject to forfeiture before obtaining a forfeiture judgment. "The Government may request the issuance of a warrant authorizing the seizure of property subject to forfeiture under this section in the same manner as provided for a search warrant. If the court determines that there is probable cause to believe that the property to be seized would, in the event of conviction, be subject to forfeiture and that an order under subsection (e) of this section may not be sufficient to assure the availability of the property for forfeiture, the court shall issue a warrant authorizing the seizure of such property." 21 U.S.C. § 853(f).
Unless it relies on the substitute asset provision, the Government must show a connection between the property sought to be forfeited and the crime to forfeit the property. The Government must show either that the property facilitated the crime or was a proceed of the crime. See United States v. Voigt, 89 F.3d 1050, 1087 (3d Cir. 1996) (discussing showing required of relationship between crime and proceeds of crime to obtain forfeiture); United States v. Two Tracts of Real Property, 998 F.2d 204, 210-214 (4th Cir. 1993) (civil forfeiture but similar principal: substantial connection between crime and real property not shown). The substitute asset provision does not require the Government to trace the facilitating property or the proceeds of the crime into particular assets, although it is required to show that it cannot readily obtain the original facilitating property or the proceeds of the crime. Id.
B. Special Issues Facing Third Party Claimants
The statute provides that after a judgment of forfeiture is entered, title to the illegally obtained property is retroactively presumed to vest in the Government, thus undermining the claims to the property of any third party. 21 U.S.C. § 853(c); 18 U.S.C. § 1963(c). However, during a criminal prosecution, third parties such as claimants to property cannot intervene prior to the entry of judgment against a defendant. See 21 U.S.C. § 853(k); 18 U.S.C. § 1963(l). Prior to entry of judgment against the defendant, a third party holding property received from a defendant which the Government alleges was used to commit a crime or is the proceeds of crime not entitled to notice of the Government's claim as such notice is not required until after judgment is entered against a defendant. 21 U.S.C. § 853(n); 18 U.S.C. § 1963(l)(1).
Once judgment is secured against the defendant, notice is required to third parties. Id. If at the time of entry of judgment property used to commit the crime or derived from the offense is held in the hands of third parties, the third party is required to file a petition with the court asserting its interest in the property. 21 U.S.C. § 853(n), 18 U.S.C. § 1963(l). Absent such a claim, the Government by default can forfeit the property held by the third party which originally was used to commit the crime or was derived from the offense. Id.
A third party is not entitled to a jury trial on its claim but is entitled to an evidentiary hearing before the Court. 21 U.S.C. § 853(n)(6), 18 U.S.C. § 1963(l)(2). In any hearing conducted by the Court on a third party claim, to prevail the third party claimant ("petitioner") must show either of the following by a preponderance of the evidence:
(A) the petitioner has a legal right, title, or interest in the property, and such right, title, or interest renders the order of forfeiture invalid in whole or in part because the right, title, or interest was vested in the petitioner rather than the defendant or was superior to any right, title, or interest of the defendant at the time of the commission of the acts which gave rise to the forfeiture of the property under this section; or
(B) the petitioner is a bona fide purchaser for value of the right, title, or interest in the property and was at the time of purchase reasonably without cause to believe that the property was subject to forfeiture under this section. 21 U.S.C. § 853(n)(6); 18 U.S.C. § 1963(l)(6).
The Government is entitled to take depositions to prepare for the third party hearing. 21 U.S.C. § 853(m); 18 U.S.C. § 1963(k). However, there is no similar statutory right for third party claimants or defendants to take such depositions.
Following a hearing, a court decides the competing claims of the Government and the third parties and then either modifies its original order of forfeiture entered after the criminal trial or plea to recognize the third party claims, or affirms its original order, granting the Government clear title to the property. 21 U.S.C. §§ 853(n); 18 U.S.C. § 1963(l).
Pre-Trial Restraint of Substitute Assets in the Fourth Circuit and Elsewhere
One of the most fearsome weapons in the federal forfeiture arsenal is the power to forfeit substitute assets. In federal criminal forfeiture actions, the Government may forfeit assets which are totally unrelated to an underlying crime, which were not proceeds of a crime, and were not used to facilitate a crime. However, the Government can forfeit those assets if it shows that it cannot readily obtain the proceeds of the crime or the property used to facilitate the crime. In many instances, third parties hold rights in these assets either directly as named owners, or through security interests and can lose those rights to the Government.
For example, under the federal narcotics forfeiture statute, 21 U.S.C. § 853, the Government is entitled to forfeit substitute assets up to an amount equivalent to the value of the assets used to commit the crime and which are proceeds of the crime. 21 U.S.C. § 853(p). Similar provisions are found in RICO, 18 U.S.C. § 1963, and in the general federal criminal forfeiture statute, 18 U.S.C. § 982, which cross-references the substitute asset provision in the narcotics forfeiture statute. 18 U.S.C. §§ 982(a)(6)(B), 982(b).
As an illustration of the power of the substitute asset provision, consider the case of a farmer charged with growing marijuana for a lengthy period of time on his property. Suppose that the farmer was part of a much larger conspiracy, but acted only as a supplier. Each of the defendants can be held jointly and severally liable for the full value of the proceeds of the marijuana operation. Thus, even if the farmer made only a nominal amount from the transactions, and confined the marijuana operation to a small parcel separate from his main parcel of land, the Government can under the substitute asset forfeiture provision attempt to forfeit all of his real property, even if its value far exceeds what he made through the growth of marijuana. If a trade creditor such as a federal agency, bank, or other third party has an interest in the farmer's real or personal property, the Government can attempt to void these interests through the criminal forfeiture action.
A similarly powerful tool is the Government's purported authority to restrain substitute assets prior to trial. In the marijuana example, pre-trial restraint of substitute assets would allow the Government to encumber all of the farmer's real and personal property prior to trial so that the Government could liquidate those assets after trial. The Government has frequently frozen substitute assets prior to trial in criminal cases brought in circuits which do not prohibit the practice. However, other than the Fourth Circuit, every circuit which has addressed this issue in a published decision has concluded that the Government lacks statutory authority to freeze such assets prior to trial. See United States v. Gotti, 155 F.3d 144 (2d. Cir. 1998); United States v. Riley, 78 F.3d 367 (8th Cir. 1996); United States v. Ripinsky, 20 F.3d 359 (9th Cir. 1994); In Re Assets of Martin, 1 F.3d 1351 (3d. Cir. 1993); United States v. Floyd, 992 F.2d 498 (5th Cir. 1993). Gotti and the many other circuits other than the Fourth which prohibit pre-trial restraint of substitute assets do so because they conclude the relevant statutes authorize post-trial forfeiture of substitute assets but do not authorize pre-trial restraint of substitute assets. RICO, the narcotics statute, and the general forfeiture statute all explicitly allow forfeiture of substitute assets. See 18 U.S.C. § 1963(m); 21 U.S.C. § 853(p); 18 U.S.C. 982(b). Similarly, the statutes explicitly allow pre-trial restraint or asset freezes of certain types of assets such as the proceeds of crime or property used to facilitate crimes. See 18 U.S.C. § 1963(a) - 1963(d); 21 U.S.C. § 853(a); 18 U.S.C. § 982(a). However, as Gotti and many other courts have noted, the statutory provisions allowing pre-trial restraint of assets do not list substitute assets as one of the enumerated category of assets which may be frozen prior to trial. See, e.g., Ripinsky, 20 F.3d at 363 (allowing pre-trial restraint of substitute assets would be "clearly contradictory to the plain statutory language").
Prior to the September 8, 1998, decision in Gotti, the Second Circuit was widely believed to be the only Circuit other than the Fourth Circuit to hold that the Government could restrain substitute assets prior to trial. The Second Circuit's 1988 decision in United States v. Regan, 858 F. 2d 115, was widely read to allow such restraint. However, strictly speaking, pre-trial restraint of substitute assets was not before the court in Regan and the Second Circuit's support for such restraint was dicta. See Gotti, 155 F.3d at 148.
In Gotti, the Government brought a forfeiture action pursuant to the criminal forfeiture RICO statute, 18 U.S.C. §1963(d)(1)(A), which is substantially identical to the narcotics forfeiture statute substitute asset provision, 21 U.S.C. § 853(p). The Gotti court discussed in detail and rejected the Fourth Circuit's analysis In Re Billman, 915 F.2d 916 (4th Cir. 1990), which is now the only Circuit Court decision allowing the pre-trial restraint of substitute assets. Although it agreed with the Fourth Circuit that Congress intended to deprive defendants of ill gotten gains, the Second Circuit found that where the statute plainly does not authorize pre-trial restraint of substitute assets, courts need not turn to legislative history or to the purpose of the statute for further guidance. The Second Circuit concluded that RICO "provides no authority for the restraints." 155 F.3d at 148. Gotti also concluded that "[nothing in the legislative history of Section 1963 requires a different result."Id. At 149.
The Second Circuit's decision in Gotti now leaves the Fourth Circuit as lonely holdout among the circuits allowing pre-trial restraint of substitute assets. Some circuits such as the First and Eleventh have not yet addressed the issue in a published decision. Why did the Fourth Circuit reach a conclusion that no other Circuit has? Billman was written by Senior Judge Butzner and joined by Retired Supreme Court Justice Powell sitting by designation and by Judge Hall. There is nothing in Billman and its facts which were particularly egregious requiring an alternate interpretation.
Billman grew out of a complex financial scheme engineered by Thomas Billman, then a fugitive financier. In a prosecution brought in the District of Maryland, the Government alleged that Billman and others embezzled $22 million from Maryland thrifts and hid the funds in Swiss bank accounts. The Government froze prior to trial $500,000.00 which Billman had sent to a co-conspirator in the United States. The Fourth Circuit upheld the freeze, finding that the RICO forfeiture provisions should be read broadly to allow an asset freeze prior to trial. Despite the Department of Justice's persistent efforts, no other circuit has been willing to read the forfeiture statutes in this fashion.
Possibly, the holding in Billman may have been driven by the absence of a readily available alternative remedy presented to the Court. At the time, 18 U.S.C. § 1345 did not explicitly allow pre-trial restraint of substitute assets in bank fraud cases, although it had been read to allow asset freezes in mail and wire fraud prosecutions. However, now this statute explicitly allows the pre-trial restraint of substitute assets in particular types of white collar cases such as health care or bank fraud. See 18 U.S.C. § 1345(a)(2)(B)(i). This statute, a companion to the mail and wire fraud statutes, explicitly allows the Government to restrain substitute assets prior to trial.
Looking to the future, the Department of Justice has not filed petitions for certiorari to the Supreme Court from any of the numerous decisions against it in prior substitute asset cases. There is no reason to think that its decision in Gotti will be any different. However, the Department may be considering a legislative fix. In a bill introduced earlier in this session of Congress, the Government sought to explicitly authorize pre-trial restraint of substitute assets. The Department of Justice may consider working with Congress to reach a legislative resolution of this issue.
A legislative fix for the Government would moot the judicial dispute over whether substitute assets can be frozen prior to trial. In the meantime, defense counsel in the Fourth Circuit should consider challenges to pre-trial restraint of substitute assets under the forfeiture statutes. Given the uniform rejection of the Fourth Circuit's reasoning by other courts, counsel may have an opportunity to seek reconsideration by the Fourth Circuit of its aberrant view of the statute.
Checklist of Constitutional Defenses for Defense Counsel
A. Right to Notice and Pre-Seizure Hearing
Review whether Government procedures complied with United States v. Good, 510 U.S. 43, 114 S. Ct. 492 (1993) which addresses an owner's right to a pre-seizure hearing in a forfeiture action. "[A] Good-violative seizure does not immunize the property from forfeiture." United States v. Marsh, 105 F.3d 927, 931 (1997). However, "the government must account for the profits or rent which it denied the claimant during the period of the illegal seizure." Id.
B. Excessive Fines and Eighth Amendment Defenses
Read together, United States v. Austin, 509 U.S. 602, 113 S. Ct. 2801 (1993), and United States v. Bajakajian, 524 U.S. 321, 118 S. Ct. 2028 (1998), and their progeny, support challenges to forfeitures based on the relationship between the value of the forfeiture and the severity of the underlying offense. Recent unpublished Fourth Circuit decisions have reviewed forfeitures under Bajakajian but upheld them as the court concluded that the forfeitures were not grossly disproportionate to the severity of the offense. See United States v. Gaston, 1999 U.S. App. LEXIS 6524 (4/9/99)(value of property forfeited close to Guideline fine range for offense); United States v. Shifflett, 1998 U.S. App. LEXIS 23908 (9/24/98).
C. Fourth Amendment
Evidence seized in violation of the Fourth Amendment cannot be used in federal forfeiture proceedings. See One 1958 Plymouth Sedan v. Pennsylvania, 380 U.S. 693 (1965). This precedent is under attack by Maryland Attorney General's office. See One 1995 Corvette v. Mayor and City Council of Baltimore, 353 Md. 114 (1999), prior proceedings 119 Md. App. 691 (1998).
D. Double Jeopardy/ Fifth Amendment
Although once promising, these challenges are now extremely difficult
in light of United States v. Ursery, 518 U.S. 267, 116 S. Ct. 2135 (1996) and Hudson v. United States, 522 U.S. 93, 118 S. Ct. 488 (1997). The Government may bring a civil forfeiture action before or after a criminal action involving the same property without fear of a successful double jeopardy challenge.
Federal Forfeiture of Attorneys Fees
With increasing frequency, the federal government has attempted to forfeit attorneys' fees which defense attorneys have received in the course of representing their clients. The most recent effort has been the seemingly almost never-ending pursuit of the former Moffitt, Zwerling firm in Alexandria, Virginia by the United States Attorney's Office for the Eastern District of Virginia. According to the Government, the firm, among other things, received payment of $86,800 in cash in a cracker or shoe box carton from a client, but failed to inquire in detail about the source of the funds despite stating it could not accept "funny money." United States v. Moffitt, Zwerling & Kemler, P.C., 83 F.3d 660, 663 (4th Cir. 1996), cert. denied, 519 U.S. 1101, (1997). Unfortunately, the pursuit of the former Moffitt, Zwerling firm is not unusual. Defense counsel should keep in mind that at any time their financial books and records relating to representation of a client could be subject to a subpoena, and, as a result of said subpoenas, and other aspects of a Government investigation, previously earned and received fees may be forfeited from counsel. Id. at 665 ("[We find no impropriety in the procedures employed by the government in this case to subject the fee to forfeiture"). This ever-present possibility of federal forfeiture claims directed against attorneys' fees requires adjustments in traditional ways of doing business for many attorneys.
The basis for forfeiture actions of attorneys' fees are the standard federal civil and criminal asset forfeiture statutes, found at 18 U.S.C. §§ 981 and 982 and 21 U.S.C. §§ 853 and 881. These statutes generally allow forfeiture of funds held by third-parties where the funds themselves are the proceeds of illegal activity, or facilitated such illegal activity, and where the party receiving said funds did or should have known of the illegal source or use of the funds. Id. at 665-66. On the same principle that an automobile dealer who sells an automobile to an admitted narcotics dealer may have his or her revenue and earnings from the sale of such car forfeited, despite the fact that the transaction involved a bona fide exchange of value, so too can attorneys' fees be pursued on the same principle.
The mere existence of a statutory mechanism to seize attorneys' fees would be generally ineffective in the absence of some means to discover what those fees are, and the details of the payment of the fees, including the basis for representation. The Government can develop this information in two ways: (1) by enticing a current or former client who wishes to obtain a benefit under the Federal Sentencing Guidelines § 5K1.1, to disclose alleged details of the retention of counsel and the fee transaction, and (2) by subpoenaing the attorney or the fee records directly. Both approaches can be pursued simultaneously, but the most significant point is that the fee records are not privileged. In Re Grand Jury Proceedings No. 92-4, 42 F.3d 876, 879 n.1 (4th Cir. 1994). It is difficult at best for counsel to refuse on Sixth Amendment and privilege grounds to disclose the identity of the client and the records relating to the way in which the fee was paid and the amounts. Id. ("attorney fee record subpoenas generally do not violate the attorney-client privilege").
Thus, in meeting with a client, defense counsel should keep in mind that the client could eventually become an adversary in the client's effort to obtain favor with the Government, and that records relating to receipt of fees, and the basis for the fees, may be discovered by the Government.
The possibility that their client might proverbially "dime them out" is still startling for many attorneys. The Government's interest in seizing attorneys' fees is relatively new, and in Maryland has not been a standard feature in every prosecutor's arsenal. However, caution under the circumstances is merited. Counsel can take a number of steps to protect against the possibility of forfeiture of attorneys' fees. These steps are as follows:
A. Do not receive payment of fees in cash.
The first and probably most important step to take is to decline payment of any fee in any amount in cash. Cash is impossible to trace. It is fungible. The receipt of cash payment in an amount greater than $10,000, whether in one payment or in a series of even vaguely related payments, may fall within the scope of the currency reporting requirements. These requirements require filing a form which discloses the source of your payment in cash and other details of your client.
In addition, payment in cash is a red flag for investigators. If your records are subpoenaed, and you have received large amounts of cash from a client, questions will be almost automatically raised about the source of the funds. If your client later chooses to "cooperate" with the Government, and says that you received the payment with knowledge that it came from an illegal source, receipt of payment in cash will make it harder for you to disprove such a claim. If, however, you received payment by a financial instrument, especially one drawn on a bank account, you may well have greater protection.
Many attorneys have become accustomed to being paid in cash, especially for small matters only in the value of $4,000 to $5,000. However, small payments in cash are no assurance and offer no protection from possible inquiries, especially if you have a "good client" who regularly hires you to handle $4,000 or $5,000 matters and always pays you in cash.
Keep in mind that payment in cash is not an absolute bar to forfeiture of your fees. If a client offers you cash, and other suspicious circumstances are present, and you require the client to return with a proper financial instrument, an argument can be made, depending on the facts, that you knew of the improper source for the funds, and simply advised the client to pay you in a less suspicious way. However, it is probably harder to prove the circumstantial case than it is to prove a case derived from a direct payment in cash. At the very least, if an attorney has a written policy in his or her fee agreement that he or she never takes payment in cash, the attorney can defend against any later claim that payment by a financial instrument was improperly ordered because payment was made only pursuant to original retainer agreement.
B. Assure that your client has a legitimate source of income, or that the third-party paying the fee has a legitimate source of income.
The second most important step to protecting your fee is to verify in some way that the source of your fee has a legitimate source of income. See Moffitt, 83 F.3d at 666 ("[The firm's partners tiptoed around the most pertinent questions. They did not ask [the client] what legitimate sources of income he had...[They avoided asking [the client] where he obtained the $103,800 in cash to pay his legal fee"). The forfeiture cases against lawyers that are easiest to make are those where a substantial amount of cash is paid to an attorney by a client who has no significant legitimate source of income. As noted above, the payment in cash is a red flag. Payment in a substantial amount of cash by a client who has no visible lawful source of income is particularly suspect.
The requirement for a legitimate source of income applies irrespective of whether payment is made in cash or not. Part of the challenge for the Government in prosecuting forfeiture cases is tracing funds generated from illegal activities into the hands of third-parties such as lawyers. Even if a client is guilty of some illegal activity which generates unlawful funds, if the client has a significant source of legitimate income, the tracing process for the Government can be particularly difficult. This is made immeasurably easier if the client who pays the fee has no legitimate way to justify generation of the income paid for the fee.
The important question is how to verify the fee. There are attorneys who will demand to see a certified copy of the client's tax returns. This would probably be an effective defense in a forfeiture action. However, as a practical matter, it is unlikely to build trust with a client or encourage business. Defense counsel's role is not to conduct an IRS audit of the potential client's finances before accepting a fee.
At most, the law requires counsel to take reasonable steps to verify the source of funds. This could be done unobtrusively by asking as part of the initial interview for a W-2 or proof of other income. If this step is too hostile, the potential client could be asked to provide employment references, or at the very least identify his or her employer, dates of employment, amounts earned, and the like. This is all helpful background in any kind of criminal representation because it can be useful in negotiating with the prosecutor on bail, negotiating a non-criminal disposition, or addressing other matters.
Be sure as part of this process to memorialize in your file any notes regarding what your client has said to you about the source of his or her income. This could be of great assistance later if the client chooses to "cooperate."
C. Use a written retainer agreement that provides you some degree of protection on the source of your fee.
There are probably more criminal defense attorneys who do not use written retainer agreements than who are paid in cash. However, the failure to use a written retainer agreement with protective language will make it easier for the Government to forfeit your fee.
To be sure, a written retainer agreement may be discoverable, especially those portions that do not relate to the specific scope of the representation. However, representations in a retainer agreement about the source of funds paid to the attorney can help protect the attorney in later litigation. Send the client a letter, with a space at the bottom for the client to sign and return it to you, memorializing the retainer agreement. Include in the retainer agreement a representation that the funds come from a lawful source, and are not derived directly or indirectly from any illegal activity. If a subpoena is served on counsel, and production of these fee records is eventually ordered by a court, a written agreement with these provisions could help show that counsel was serious about his or her responsibilities to avoid payment from an unlawful source.
Incidentally, you can also use a written retainer agreement for many other purposes such as protecting yourself in case there is a dispute over the services that were provided, grounds for and procedures to be followed upon termination of representation, scope of representation, including whether the representation covers appeals or not, and the like.
D. Evaluate any criminal case for its forfeiture potential before accepting representation.
Be careful whenever you take on a criminal case, especially one involving an alleged narcotics offense. Review when you accept the representation the possibility the Government may be going after legal fees. You may consider the prosecutor's reputation, and whether the indictment (if it has reached that stage) contains a criminal forfeiture charge. Cases which have a high potential for forfeiture claims should be reviewed particularly carefully. Moffitt, 83 F.3d at 671 ("The law firm in this case was dealing with a client who already had most of his assets seized as the result of a major drug trafficking investigation"). Counsel may be engaged in a high-risk process if he or she receives payment in cash in such cases.
There is a difference of opinion as to whether counsel should raise the issue of forfeiture of fees with a federal prosecutor when entering a case. Some attorneys believe that it is prudent, particularly in the high-risk cases. Others believe that it will raise questions in a prosecutor's mind, and that no response under the circumstances can be relied on, especially because of the changes that can occur during the course of an investigation in staffing, investigative priorities, and other issues beyond the control of defense counsel.
The best approach is to use your own best judgment in deciding whether to raise forfeiture of attorney's fees with the federal prosecutor. If you know the Assistant well, the office has a reputation for reasonableness, and the client's situation has not raised any of the red flags noted above, you could consider taking the case without raising any forfeiture inquiry whatsoever.
However, if you know that your adversary has a track record on forfeiture, and that by raising the issue you will not tell the prosecutor anything he or she doesn't already know, confronting the issue may not be a bad idea. It could save a lot of difficulties (and legal fees) later.
E. Keep careful track of the books and records of your business so that you can trace receipt of funds.
It is good business practice to keep track of the use of your fee receipts for any number of reasons. However, given federal asset forfeiture prosecutions, it is a particularly good idea to be able to trace your use of funds. For example, if you have a case that raises some forfeiture issues, you might consider placing your substantial initial retainer in an escrow account, to be drawn down only as actual fees and expenses are incurred. This way, if questions are raised later, before the retainer is exhausted, you will have funds available to make payment to the Government which might be much more difficult to make under other circumstances.
There is no certain way to avoid the possibility of litigation over attorneys' fees. However, if you keep these basic pointers in mind, you should be able to minimize the risk of forfeiture. If nothing else, do not receive payment of fee in cash!