10th Circuit rules “substitute assets” are not subject to pre-trial restraint

Endnotes:

1. Pursuant to 21 U.S.C. § 853(p).

2. The Court noted:
One court has ruled the government does have such authority despite the lack of explicit authorization in § 853(c). See United States v. McHan, 345 F.3d 262, 270-72 (4th Cir. 2003) (concluding a broad reading of the language of § 853(o), which instructs that the criminal forfeiture statute should be liberally construed to effectuate the statute’s purpose, permits the government to claim a relation-back interest in substitute property).

3.  The Court noted:
The Fourth Circuit is the only federal court of appeals to conclude the statute permits pre-trial restraint of substitute assets. See United States v. McKinney (In re Assets of Billman), 915 F.2d 916, 921 (4th Cir., 1990) (permitting pre-trial restraint of assets under RICO's protective order provision). In re Assets of Billman relies for support on the necessity of "liberally constru[ing]" the RICO forfeiture provisions. 915 F.2d at 921 (quoting Russello v. United States, 464 U.S. 16, 26-27 (1983)). All other courts of appeals to consider the issue have ruled substitute assets are not subject to pre-trial restraint. See United States v. Gotti, 155 F.3d 144, 148-49 (2d Cir. 1998); United States v. Field, 62 F.3d 359, 364-65 (9th Cir. 1994); In re Assets of Martin, 1 F.3d 1351, 1359-61 (3d Cir. 1993); United States v. Floyd, 992 F.2d 498, 500-02 (5th Cir., 1993).

4. United States v. Dana Jarvis, 06-2264 (10th Cir., filed August 28, 2007).

Copy of article:

Congratulations to attorney Jody Neal-Post on this important victory in which the Tenth Circuit Court of Appeals joins five other Circuits holding that government may not restrain “substitute assets” prior to a criminal conviction and order of forfeiture!  Jody serves as Secretary on FEAR’s Board of Directors, and frequently contributes to FEAR-List Bulletins, as well as FEAR’s Brief Bank II.

10th Circuit rules “substitute assets” are not subject to pre-trial restraint:

Government may not use lis pendens statute for pre-trial restraint of property that neither comprises the fruits of, nor is connected to, the defendant’s alleged crime.
by Judy Osburn

The indictment accusing Dana Jarvis and twenty other co-defendants of conspiracy to distribute 1000 kilograms of marijuana and related money laundering and continuing criminal enterprise charges also contained a criminal forfeiture allegation stating that, upon conviction of one or more of the offenses, all defendants would be jointly and severally liable for a money judgment of $158.4 million.

The indictment listed bank accounts, several parcels of real property, vehicles, seized currency and a liquor license as “forfeitable property” connected to the defendants’ criminal conduct. The indictment also listed two pieces of real property (purchased by Mr. Jarvis before the alleged conspiracy ever took place) among the “substitute assets” to be forfeited in the event other property connected to, or derived from, the alleged drug crimes could not be located.1 

While 21 U.S.C. § 853(e) allows the United States to seek a restraining order or injunction to preserve the availability of property the government alleges to be subject to criminal forfeiture in the event of a conviction, the section does not explicitly provide for pre-trial restraint of § 853(p) substitute property. Rather than attempting to use the criminal forfeiture statute to seek a federal protective order on Jarvis’ two properties, the United States recorded notices of lis pendens – a common practice to notify potential buyers or lenders about pending litigation contesting title to real  property.

The notices of lis pendens included the language, “the property located in Mora County, New Mexico, was criminally indicted in this case and the United States is seeking the forfeiture of all that lot or parcel of land, together with its buildings, appurtenances, improvements, fixtures, attachments, and easements thereon.”

In January 2006 Jarvis moved the district court to release the two Mora County properties, contending that no legal basis existed for the restraint of substitute assets without a conviction and forfeiture order. The United States’ restraint of the two properties (neither of which had any connection to criminal activity) prevented Jarvis from hiring the counsel of his choice and deprived him of his Sixth Amendment right. Therefore, Jarvis argued, a due process hearing was required before the United States could effectively freeze these assets.

The government responded by arguing that “a lis pendens is not a legal restraint, but merely functions as constructive notice to prospective purchasers,” and that even if a lis pendens were a restraint, the United States may restrain substitute assets that have no connection with an alleged crime “in light of the guidance in § 853(o) that the criminal forfeiture statute be liberally construed to effect its objectives.” 

The district court bought into the governments’ arguments, concluding that filing a lis pendens does not constitute a restraint of property within the meaning of § 853.  Defying the logical consequences of a public notice that title to real property is pending litigation and the owner may be in the process of losing his right to own, sell or borrow against that property, the lower court determined that a lis pendens did not interfere with any legal incidents of property ownership such as “the right of sale” and unrestricted use and enjoyment.

Therefore, the lower court held that a lis pendens “did not constitute a property deprivation triggering due process concerns.” It also rejected Jarvis’ argument that substitute assets, which by nature never had any connection with, nor could be traceable to criminal activity, are not subject to restraint prior to a criminal conviction and order of forfeiture.

Jarvis moved the court to reconsider, pointing out the distinction between forfeitable property under § 853(a), which may be restrained pending criminal trial, and substitute property under § 853(p), for which Congress did not specify pre-trial restraint powers for the government. He further argued that New Mexico law specifically classifies a lis pendens as a restraint, which cannot apply to substitute property until a court has issued an order of forfeiture and the government is unable to satisfy the order with property forfeitable under § 853(a).

After an August 2006 evidentiary hearing, which included testimony by a realtor on the ill-effect of a lis pendens notice on a seller’s practical ability to sell or borrow against his land, the lower court rejected the motion for reconsideration with a single sentence, concluding that Jarvis had not presented any new arguments for release of his funds.

On September 1, 2006, the court appointed Jody Neal-Post as Jarvis’ forfeiture counsel. On interlocutory appeal Ms. Neal-Post raised the argument that government may not use a notice of  lis pendens to restrain property in an in personam criminal forfeiture action where the real property itself is not the subject of litigation. Because the issue before the appellate court was “purely legal in nature and the relevant statutory language and case law dictate a certain result,” the appeals panel determined this is one of the unusual cases in which it is proper for the appeals court to decide an issue that had not been presented to the lower court.

After both parties fully briefed and argued this issue to the appeals court, the panel determined that existing case law provided a certainty of proper resolution.  The Tenth Circuit concluded in a published opinion filed August 28 that to be eligible to file a lis pendens notice, “the party recording the notice must assert a present claim to the property’s title or have some other present interest in the subject property.” Circuit Judge Murphy wrote for the panel that a lis pendens notice is intended to preserve property rights in existence at the time litigation commences, but does not create new or additional property rights. Additionally, under New Mexico law, a lis pendens cannot be filed in “anticipation of a money judgment.”

Assets “constituting, or derived from, any proceeds” of the defendant’s criminal action and property “used, or intended to be used” in the commission of facilitation of the defendant’s criminal action “shall” be forfeited upon conviction. By virtue of the statute’s relation-back provision, the United States obtains a vested “right, title, and interest” in such tainted § 853(a) property superior to that of third parties “upon the commissions of the act giving rise to forfeiture.” The government, furthermore, has the ability to seek a protective order to restrain tainted assets prior to trial in order to ensure the availability of the tainted property in the event of the defendant’s conviction.

In contrast, the statute treats the United States’ interest in substitute property–property that neither comprises the fruits of nor is connected to the defendant’s alleged crime–differently than it treats the government’s interest in § 853(a) tainted property. Pursuant to § 853(p), the forfeiture of substitute property cannot occur until after the defendant’s conviction and a determination by the trial court that the defendant’s act or omission resulted in the court’s inability to reach § 853(a) assets. Both the relation-back and protective order provisions of § 853 are silent as to § 853(p) substitute property. Unlike the pre-conviction interest the government may claim in tainted § 853(a) property, § 853(c) thus does not explicitly authorize the United States to claim any pre-conviction right, title, or interest in § 853(p) substitute property.2  Furthermore, all but one federal court of appeals to address the issue has determined the legislative silence regarding substitute property in § 853(e) precludes pre-conviction restraint of substitute property.3 The statute, therefore, imposes specific preconditions on the government’s ability to claim title to the defendant’s substitute property, preconditions which can only be satisfied once the defendant has been convicted.4

The Tenth Circuit Court of Appeals joins the Second, Third, Fifth, Eighth and Ninth Circuits in holding that substitute assets are not subject to pre-trial restraint. The Fourth Circuit is the only federal court of appeals to conclude that § 853 permits pre-trial restraint of substitute assets. (Click here to read Endnotes.)