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.)