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ASSET FORFEITURE AND EQUITABLE DISTRIBUTION
© 1995 National Legal Research Group, Inc.
The past 10 years have witnessed a dramatic upswing in asset forfeiture proceedings. Numerous broadly worded federal statutes authorize the government to seize and retain property involved in criminal offenses, and a growing number of state laws likewise provide expansive statutory authority for forfeiture of tainted assets.
Why do family lawyers need to know about forfeiture? By being aware of state and federal grounds for forfeiture and by using client interviews and discovery mechanisms to investigate the source of assets, counsel can attempt to make sure that the client winds up with assets that are not forfeitable. During this process, counsel may garner information that would help the client defend against forfeiture if the government ever does file forfeiture proceedings against assets awarded to the client.
In some cases, a spouse's indictment or conviction is the event that prompts the other spouse to seek counsel about a divorce. In this scenario, it is especially important for counsel to consider the possibility of subsequent forfeiture proceedings when investigating the facts and negotiating a property settlement.
In most divorce cases, however, there will be no obvious reason to suspect any grounds for forfeiture. Still, counsel may want to routinely evaluate whether any such grounds exist, particularly when the couple seems to have acquired more property than would seem to be possible through their obvious sources of income.
Part I of this article provides an overview of federal and state asset forfeiture schemes. Part II examines forfeiture issues in the context of spousal property ownership. Part III discusses the implications of the increasing number of asset forfeitures for divorcing spouses.
This article is intended only as an overview of asset forfeiture and its impact on spousal property rights; for more in-depth discussion, counsel should consult the leading treatise, D. Smith, Prosecution and Defense of Forfeiture Cases (1985-1992 & Supp. 1994).
I. Overview of Federal and State Asset Forfeiture
Federal Asset Forfeiture - Civil In Rem Proceedings. In civil forfeiture proceedings, the property itself is the defendant, on the theory that it is tainted by the underlying unlawful activity. Hence, these proceedings are in rem. Civil in rem forfeitures greatly outnumber criminal forfeitures (discussed below).
The United States Code contains more than 200 civil in rem forfeiture statutes. The most well-known and widely used are the statutes authorizing forfeiture based on drug crimes and money laundering. Under the provisions of the Controlled Substances Act, 21 U.S.C. S 881, the federal government may forfeit conveyances and real property used to facilitate a drug crime, as well as the profits of illegal drug crime, including anything of value unlawfully exchanged for a controlled substance and all proceeds traceable to such an exchange. As for money laundering, the most widely used statute is 18 U.S.C. S 981, which provides very broad forfeiture for civil forfeiture. Under S 981(a)(1)(A), "[a]ny property, real or personal, involved in a transaction or attempted transaction" in violation of 18 U.S.C. SS 1956 and 1957 (money laundering), or in violation of 31 U.S.C. SS 5313(a) (currency reporting requirements) or 5324(a) (structuring to avoid currency reporting requirements) is subject to forfeiture. Sections 1956 and 1957 prohibit laundering of monetary instruments and engaging in monetary transactions relating to a wide array of "specified unlawful activity." Other federal statutes authorize civil forfeiture of assets involved in a wide variety of crimes, such as violations of internal revenue laws (26 U.S.C. SS 7301-7303), illegal gambling (18 U.S.C. S 1855(d)), and violations of customs laws (19 U.S.C. SS 1602 et seq.).
The procedures outlined in the customs forfeiture statutes also apply in civil forfeiture proceedings under other statutes. These procedures are set out in 19 U.S.C. SS 1602-21 (the Tariff Act of 1930), and the Supplemental Rules for Certain Admiralty and Maritime Claims , located after the general Rules of Civil Procedure in the United States Code . To say the least, these procedures are complex and arcane, and they generally favor the government.
The proceeding usually begins with the seizure of the asset, and the government retains control of the asset while the proceeding is underway. Property with a value of less than $500,000 may be forfeited administratively without any court action, unless the owner (termed the "claimant") files a claim and cost bond, signifying a desire to contest the forfeiture in court, within 20 days of the first publication of the notice of intent to forfeit. See 19 U.S.C. S 1609. The claimant may also file a petition for remission or mitigation of the forfeiture. 19 U.S.C. S 1618.
If the owner files a claim and cost bond, or if the property is too valuable to forfeit administratively, the government must initiate a judicial forfeiture action by filing a civil complaint for forfeiture. See Supplemental Rule C. A claimant who wants to contest the judicial forfeiture must file a claim within 10 days after execution of process, and must serve an answer within 20 days after the filing of the claim. Id.
The discovery provisions of the Federal Rules of Civil Procedure apply in civil forfeiture actions. See United States v. One 1987 BMW , 985 F.2d 655 (1st Cir. 1993). To prove its right to forfeiture, the government need only establish probable cause linking the property to the illicit activity. 19 U.S.C. S 1615. If it makes that fairly easy showing, the burden shifts to the claimant who must show, by a preponderance of the evidence, that the property should not be forfeited. The defense most frequently raised and litigated is the so-called "innocent owner" defense (discussed below in Part II). Some recent cases reflect deep concern among federal judges about the potential abuse and unfairness of civil forfeiture statutes. Through several decisions in civil forfeiture cases beginning in 1993, the United States Supreme Court severely limited the federal government's forfeiture powers. Significantly, the Court held that the eighth amendment's excessive fines clause applies to forfeitures of property used to facilitate or commit a drug crime, Austin v. United States , 113 S. Ct. 2801 (1993), and the Court's analysis makes it clear that the clause applies to some other categories of civil forfeiture as well. The Court also held that due process usually requires notice and an opportunity to be heard before the government seizes real property under federal civil forfeiture statutes. United States v. James Daniel Good Real Property , 114 S. Ct. 492 (1993). Most importantly, a credible argument can be made, based on Austin v. United States, supra , and other Supreme Court cases, that the government violates the double jeopardy clause when it seeks both to forfeit assets in civil proceedings and to punish the owner criminally for the same offense. See United States v. $405,089.23 United States Currency , 33 F.3d 1210 (9th Cir. 1994).
Federal Asset Forfeiture - Criminal Proceedings. Criminal forfeiture statutes are far fewer in number than civil forfeiture statutes. The major ones are:
- RICO (Racketeer Influenced and Corrupt Organizations) forfeitures - 18 U.S.C. S 1963(a) provides for forfeiture of three classes of assets in the case of a person convicted of 18 U.S.C. S 1962 (operate or invest in racketeering enterprise): any property interest a person has acquired or maintained in violation of S 1962; any property interest affording a source of influence over any enterprise which has been operated in violation of S 1962; and any proceeds from violations of S 1962.
- CCE (Continuing Criminal Enterprise) forfeitures - 21 U.S.C. S 853(a) provides for forfeiture of three classes of assets of a person convicted of a felony in violation of 21 U.S.C. SS 802 et seq. (controlled substances): proceeds of the illegal activity; property used to commit or facilitate the illegal activity; and, in the case of a CCE violation (21 U.S.C. S 848), property affording a source of control over the continuing criminal enterprise.
- Money laundering forfeitures - 18 U.S.C. S 982 authorizes forfeiture of property involved in or traceable to specified money laundering offenses and a vast array of other federal crimes, once the owner has been convicted of the crime.
Each of these statutes includes a provision authorizing the forfeiture of substitute assets - that is, assets not connected to or traceable to the criminal activity - if the tainted assets themselves are not available. But the substitute assets provision applies only to property "of the defendant" and thus does not allow the government to forfeit untainted assets that once belonged to the defendant but were subsequently transferred to a third party. See 18 U.S.C. S 1963(m); 21 U.S.C. S 853(p). Consequently, untainted assets transferred to a spouse are not forfeitable on a substitute assets theory. Criminal forfeiture proceedings are in personam; the indictment itself is the vehicle for seeking forfeiture, and the forfeiture occurs only if the defendant is convicted of the underlying offense. The government must seek a pretrial restraining order if it wants to obtain a freeze of the defendant's assets before conviction. The criminal forfeiture statutes contain detailed provisions about the applicable procedures.
The government usually seeks asset forfeiture in civil in rem proceedings rather than in criminal in personam proceedings. As noted above, however, recent Supreme Court cases have raised questions about the constitutionality of the government's practice of pursuing forfeiture separately from a criminal prosecution for the same offense. Hence, some observers expect the government to rely much more on criminal forfeiture proceedings, at least until the Supreme Court resolves the double jeopardy issue.
State Forfeiture. All states have statutes on the books authorizing civil forfeiture; these vary widely in what crimes give rise to forfeiture and what procedures apply. Some have very detailed statutes and authorize forfeiture for a broad range of crimes; others set out a minimal framework and limit forfeiture to drug crimes. A smaller number of states have enacted criminal forfeiture statutes. One recently published treatise makes an effort to group states with similar forfeiture statutes and compare their case law on various issues. S. Kessler, Civil and Criminal Forfeiture . Most states, at the least, have a statute authorizing civil forfeiture for drug crimes. The National Conference of Commissioners on Uniform State Laws in 1994 approved comprehensive changes in the forfeiture provisions of the Uniform Controlled Substances Act, which now authorize both civil and criminal forfeiture. The Act includes numerous procedural reforms and is expected to be very influential.
States with unique approaches to asset forfeiture include Arizona ( Ariz. Rev. Stat. SS 13-4301 through 13-4315); California ( Cal. Health & Safety Code SS 11469 et seq.); Florida ( Fla. Stat. Ann. SS 932.701 et seq.); and New Jersey ( N.J. Stat. Ann. SS 2C:64-1 et seq.).
State forfeitures have generally provided a less attractive option for state and local law enforcement agencies than forfeiture under federal law. For one thing, federal law provides more expansive forfeiture authority than the laws of many states. Moreover, state and local agencies receive a large share of the money from federal forfeitures that result from the state or local agencies' investigations or seizures.
Third-Party Property Interests. The major federal criminal and civil forfeiture statutes include protection for innocent third parties with an ownership interest in the property.
The criminal forfeiture statutes provide a defense for bona fide purchasers for value, as well as parties whose vested legal interests in the property were superior to those of the defendant at the time of the acts giving rise to the forfeiture. The third party may block post-trial forfeiture if he establishes in a special post-trial petition and hearing his superior right or bona fide status by a preponderance of the evidence. 18 U.S.C. S 1963(c),(l); 21 U.S.C. S 853(c),(n). The criminal forfeiture statutes authorize relief for third parties who have interests in the property at the time of the criminal activity, regardless of whether they have knowledge of the activity. D. Smith, supra , 14.08 at 14-62.1; see United States v. De Ortiz , 910 F.2d 376, 383 (7th Cir. 1990). For parties who received their property interests from the defendant after the criminal activity, relief is limited to bona fide purchasers for value who did not have reason to believe the property was subject to forfeiture at the time they acquired the property.
See 18 U.S.C. S 1963(c) ("reasonably without cause to believe that the property was subject to forfeiture"); 21 U.S.C. S 853(c) (same).
The innocent owner defense included in the major federal civil forfeiture laws protects a larger class of transferees than those protected by criminal forfeiture statutes. See United States v. Parcel of Land Known as 92 Buena Vista Avenue , 113 S. Ct. 1126 (1993) (donees can qualify as innocent owners under 21 U.S.C. S 881(a)(6) (forfeiture of drug proceeds). The wording of the innocent ownership provision varies somewhat from statute to statute, but generally the third party must show only that he or she did not have actual knowledge of the illegal activity. E.g., United States v. One Single Family Residence Located at 6960 Miraflores Avenue , 995 F.2d 1558 (11th Cir. 1993). Some courts, however, treat "willful blindness" regarding the criminal activity as equivalent to actual knowledge of it. E.g., United States v. One 1980 Red Ferrari , 827 F.2d 477 (9th Cir. 1987).
Some of the federal civil forfeiture statutes exempt third parties "without knowledge or consent." When such a statute applies, some courts have held that a claimant can defeat forfeiture by establishing either lack of knowledge or lack of consent. E.g., United States v. Parcel of Real Property Known as Grubb Road , 886 F.2d 618 (3d Cir. 1989). Under this view, a claimant with actual knowledge is, nevertheless, considered an innocent owner if he did not consent to the unlawful act or use. Under another view, however, claimants must prove both a lack of knowledge and a lack of consent. E.g., United States v. One Parcel of Land Known as Lot 111-B , 902 F.2d 1443 (9th Cir. 1990). Some courts also hold that in order to meet the lack of consent requirement, the claimant must prove that he did all that was reasonable to prevent the unlawful use of the property. See United States v. One Parcel of Real Estate , 963 F.2d 1496 (11th Cir. 1992). Another important and unsettled issue is at what point knowledge becomes significant. Does the third party lose the innocent owner defense if he acquires knowledge of the unlawful act after the act but before acquiring the property? A federal district court held that a claimant cannot assert an innocent ownership defense if the claimant had actual knowledge or reasonably should have known of the underlying criminal activity by the time of the conveyance. United States v. One Parcel of Real Estate Located at 6640 S.W. 48th Street , 831 F. Supp. 1578 (S.D. Fla. 1993). The Third Circuit, however, rejected that approach and held that a claimant who acquired property after the illegal act will be an innocent owner notwithstanding any knowledge or willful blindness he may have had at the time of acquiring the property, as long as he did not consent to the illegal use of the property. United States v. One 1973 Rolls Royce , 43 F.3d 794 (3d Cir. 1994). This issue will be crucial for divorce clients who learn of their spouse's criminal conduct after the illegal activity but before they receive tainted assets in a property settlement.
II. Forfeiture of Spouse's Property
Impact of State Property Law in Forfeiture Proceedings. In the case where the government seeks to forfeit assets while the parties are still married, counsel's first step should be to assess what property rights the client may have under state law. See United States v. One Single Family Residence , 894 F.2d 1511 (11th Cir. 1990) (appropriate to apply state law to determine interest of innocent owner).
In a criminal forfeiture case, the Seventh Circuit scrutinized Wisconsin law and found that the wife of a convicted drug king-pin had not established a legal interest under marital property law in a corporation owned by her husband. United States v. Marx , 844 F.2d 1303 (7th Cir. 1988). The case is important because the court recognized that state marital property law is controlling and that a present marital property interest existing under state law at the time of the unlawful activity is not forfeitable.
In asserting a property interest in the corporation, the wife relied on Wisconsin's Marital Property Act, which states that marital property is a form of community property and that all property is presumed to be marital property in which each spouse has a present undivided one-half interest. However, all of the husband's drug activities occurred before the effective date of the Marital Property Act. Since the forfeiture statute in question, 21 U.S.C. S 853(n)(6)(A), required the court to determine the claimant's property interest at the time of the commission of the unlawful acts underlying the forfeiture, the prior Wisconsin statute applied. That statute recognized a spousal interest in property titled in the other spouse's name only upon a judgment of annulment, divorce, or legal separation. Since the wife and husband were married at the time of his drug crimes, and were still married, the wife could not claim an interest in his corporation under marital property law. The court remanded, however, for evidentiary determinations on the wife's constructive trust and resulting trust theories.
In another criminal forfeiture case, the Fourth Circuit held that a dentist's wife had no standing to contest the forfeiture of her husband's office based on her interest in the property under South Carolina's Equitable Apportionment Act. United States v. Schifferli , 895 F.2d 987 (4th Cir. 1990). The statute provided that during marriage a spouse acquires a vested special equity and ownership right in the marital property; however, "marital property" does not exist until the date of filing or commencement of marital litigation. Since the wife had not filed marital litigation, she was held to have no interest in her husband's property sufficient to obtain standing.
Where the spouses hold the property in a tenancy by the entirety, this form of ownership may insulate the property from execution on a civil judgment against only one spouse until destruction of the tenancy by death or divorce. See United States v. Certain Real Property at 2525 Leroy Lane , 910 F.2d 343 (6th Cir. 1990); United States v. 44133 Duchess Drive , 863 F. Supp. 492 (E.D. Mich. 1994) (where wife proved innocent owner defense, and she and her husband held home in tenancy by entirety, summary judgment forfeiting husband's interest must be set aside, although court noted that government might be able to file a lis pendens or obtain a creditor's lien so as to acquire the husband's interest at some future time if the tenancy ended).
A homestead exemption may insulate residential real property from civil judgment under state law. See Butterworth v. Caggiano , 605 So. 2d 56 (Fla. 1992) (state constitutional homestead exemption protects homestead property from state forfeiture laws). The Eleventh Circuit held, however, that the federal statute authorizing forfeiture of real property for drug crimes preempts a state homestead exemption. United States v. Lot 5, Fox Grove, Alachua County, Florida , 23 F.3d 359 (11th Cir. 1994); accord United States v. One Parcel of Property Located at 1606 Butterfield Road , 786 F. Supp. 1497 (N.D. Iowa 1991).
Spouses as Innocent Owners in Civil Forfeiture Proceedings. When the government files civil forfeiture proceedings seeking to forfeit property based on one spouse's unlawful activities, the other spouse's ability to establish the innocent owner defense depends largely on the exact standard which the district court will apply to evaluate innocence. The disagreement among courts on issues relating to knowledge and consent becomes particularly significant when the person claiming innocent ownership is the spouse of the person who allegedly committed the criminal conduct. One significant issue is whether a spouse who knows of the illegal conduct but does not consent to it can qualify as an innocent owner; another important issue is whether the spouse must demonstrate that he or she has done all that a spouse could reasonably be expected to do to prevent the illegal use of the property. Yet another issue is whether the spouse can prove the innocent owner defense if he or she learned of the illegal use or source of the property after the crime but before the transaction - such as a property settlement agreement - in which he or she acquired the asset from the other spouse. For a recent discussion of innocent ownership and spouses, with an overview of the split among courts on the knowledge and consent issues, see United States v. 44133 Duchess Drive, supra (holding that wife did not have knowledge that her home was used to facilitate husband's drug crimes and that she did not consent to any such illicit use).
Spouses Who Contest Criminal Forfeiture Proceedings.As discussed above, state marital property law controls the determination, in a federal criminal forfeiture case, of what interest a spouse has in the property which the government seeks to forfeit. United States v. Marx, supra ; United States v. Schifferli, supra . Consequently, state marital property law determines whether the spouse should be viewed as a party having an interest in the property at the time of the criminal activity - in which case knowledge of the criminal activity does not bar relief from forfeiture - or whether the spouse should be viewed as a transferee from the other spouse - in which case the spouse must show that he or she was a bona fide purchaser who lacked reason to believe that the property was subject to forfeiture at the time of acquiring an interest in the property.
Marital Privilege. An issue in the context of forfeiture proceedings during marriage is the applicability of the marital privilege. A federal district court held that a wife waives her right to claim the spousal communication privilege when she files a claim in a civil forfeiture proceeding contesting the government's assertion that the marital home was acquired by her husband with drug trafficking proceeds. United States v. Premises Known as 281 Syosset Woodbury Road , 862 F. Supp. 847 (E.D.N.Y. 1994).
Implications for Divorcing Spouses
The federal and state governments' increasing use of asset forfeiture as a tool in their war on crime means that spouses will be drawn into forfeiture issues in increasing numbers. Hence, counsel in a divorce proceeding should at least consider whether any of the couple's property may be subject to forfeiture. In particular, counsel's antennae should go up when the couple appears to have accumulated property far beyond their legitimate sources of income.
In at least those suspicious cases, counsel should consider questioning the client to evaluate whether forfeiture may be a possibility at some point in the future. For example, has either spouse engaged in illegal drug activity? illegal gambling? violated internal revenue laws? committed other crimes? If so, what property was used in the unlawful activity? Was unlawfully acquired money used to purchase marital assets?
In addition, at least in those suspicious cases, counsel should attempt to trace the source of funds for each marital asset, with the goal of determining which assets may be insulated from forfeiture by virtue of having been purchased with untainted funds and not having been used to commit or facilitate a crime. This financial information accumulated about the source of assets may be helpful in any later forfeiture proceeding to assist the client in proving that the assets he or she received in the property settlement are not subject to forfeiture.
What about directly questioning the other spouse about illegal conduct? The other spouse will very likely deny criminal conduct and deny that any marital assets were acquired with the proceeds of a crime or used to commit or facilitate a crime. Such answers might help bolster the client's innocent ownership claim in any subsequent forfeiture proceedings. On the other hand, in the unlikely event that the other spouse admits criminal wrongdoing, the client might have a more difficult time establishing an innocent ownership defense for assets subsequently transferred to him or her as part of a property settlement.
Forfeiture of Attorney's Fees. Criminal defense lawyers face the very real possibility that attorney's fees paid to them may be subject to forfeiture if the money constitutes the proceeds of a crime. See Caplin & Drysdale, Chartered v. United States , 109 S. Ct. 2646 (1989); United States v. Monsanto , 109 S. Ct. 2657 (1989). These lawyers may have a duty to inquire about the source of the fees paid to them if they want to be able to show that they are bona fide purchasers for value in a later proceeding for forfeiture of the fees. See In re Moffitt, Zwerling & Kemler P.C. , 846 F. Supp. 463 (E.D. Va. 1994) (after client was convicted, court agreed with government that fees paid for criminal defense were forfeitable because the law firm lacked reasonable cause to believe that the money was not derived from illegality). Theoretically, lawyers in the divorce context could likewise face fee forfeiture if they have reason to believe that the fees paid to them are derived from a criminal offense. For example, in the unusual situation where either spouse is under criminal investigation or has been indicted or convicted of a crime by the time the divorce lawyer is retained, this would arguably place a duty on the lawyer to inquire about the source of the fees.
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