Business structuring in asset forfeiture and restitution cases
Part I: Not every legal sector treats legal designations the same.
One of the trickiest concepts for clients to grasp is that legal precepts are not always universally applicable to all areas of law. For example, in many states if a person receives a deferred disposition for a misdemeanor, such as possession of marijuana or a family violence assault, that person will be told that the case will not be “on his record.” However, a “deferred disposition,” while not a legal conviction, may be treated as a conviction in many scenarios. For example, the person’s arrest could still be public information or, even worse, in certain situations that disposition may still be usable to enhance future misdemeanors to felonies. Not to mention, certain deferred dispositions could be used as a basis to prohibit the person’s right to possess firearms. Obviously, federal law does not treat state law the same or, even more puzzling, a state’s department of motor vehicles may treat a case as a conviction even though a state court in that same state may find that there is no conviction.
In the end, not every legal sector treats legal designations identically.
While this may seem to be a problem that is isolated to street crime cases, such an assumption would be incorrect. In fact, white-collar cases run into the same type of dilemma.
For example, many state and federal courts provide protection for homesteads and qualified retirement plans in bankruptcy proceedings or honor divorce settlements transferring ownership of marital assets to one spouse or the other. However, business structuring strategies don’t always apply to asset forfeiture or federal restitution cases. Put a different way, while a private civil creditor may not be able to go after a homestead to satisfy a debt, the federal government does not have such a bar when it comes to asset forfeiture, restitution, or even collections pertaining to an IRS debt.
Restitution is the legal process where a prosecuting agency seeks a court to order repayment of the costs of a crime to victims. Further, in the federal system, fines and restitution are subject to aggressive collection powers under the Mandatory Victim Restitution Act under 18 USC 3663, 3663A, and 3664. For example, if a person is convicted of Medicaid Fraud, Tax Evasion, or Wire Fraud, that person is likely to owe restitution to either a private company, a private citizen, or, as is the case for tax evasion and Medicaid fraud, a federal agency.
Forfeiture, on the other hand, is a legal process where prosecutors seek the transfer of private property to the government on the basis that the property is connected to a crime. For example, if a person is transporting criminal proceeds, such as drug money, to the West Coast and is pulled over during that trip, the money may be seized and forfeiture proceedings will commence. If the money is found to be either facilitating property or an instrumentality of an offense, or if it is shown to be proceeds of a prior drug deal, a prosecutor may ask a court for the money to be forfeited to the government.
So what does this mean in an asset protection context? That is, what rights do individuals, companies, and spouses have when it comes to prosecutorial efforts to collect restitution or forfeit property?
To begin, it is important to understand who stands in the position of the creditor. For example, in a bankruptcy various entities are likely to be creditors. It is possible that credit card companies, lending companies (a vehicle financing institution or a bank), or even individuals who are owed money, may all be creditors in a bankruptcy proceeding. However, homesteads and retirement accounts could not be used in satisfaction of those debts.
In contrast, there is no barrier to the forfeiture of such assets nor is there any law preventing such assets being used to satisfy a federal fine or restitution obligation.
For example, if a person submits multiple false claims to Medicaid and is convicted of Medicaid Fraud under 42 USC 1320(a)-7b that person is going to owe restitution to the U.S. government. That means that the government can chase that person for 20 years after release from prison and is not barred from going after homesteads, retirement accounts, or even wages to satisfy it.
It’s also important to understand that such restitution orders are typically ordered to be joint and several. This means that every defendant owes the entirety of the judgment. So taking the example above, if the Medicaid Fraud involved 12 culprits and a loss amount of $12,000,0000 then, if liability is joint and several, each defendant owes the full $12,000,000. This is not meant to suggest that the government will be able to collect $144,000,000 but it does mean that if defendants 1 and 2 pay $2,000,0000 each the government will still try to collect the remaining $8,000,000 from all 12 defendants.
If you’ve noticed a potential for inequity you are correct. Defendant 1 could contribute $10,000,000 and Defendant 2 could contribute $2,000,000 and, you guessed it, defendants 3-12 are off the hook paying $0 each. Keep in mind that joint and several liability does not distinguish defendants by role in an offense or culpability. And make no mistake, the government doesn’t care if the guiltiest pay or if the least culpable pay. They just use joint and several liability to get the money from anyone they can.
What may be even more surprising is that spouses can be subject to these judgments. Say that the wife of the Medicaid fraudster described above lives in a community property state. Her wages could be garnished up to 25% of disposable income. By the way, ‘disposable’ simply means wages that are left after federal taxes, FICA and income tax, are removed.
The government relies on the fact that any asset of a defendant is subject to restitution collection activities. Since marital or community property belongs to both spouses then the government has any right to collect from the spouse’s wages.
It is not uncommon for the government to go after 401ks, IRA’s, 529 plans, or any asset of either spouse regardless of whether one of the spouses participated, or was even aware, of the offense.
What is the Innocent Owner Defense?
With respect to forfeiture, third parties have limited protection regarding facilitating property they own under the innocent owner defenses provided under 18 USC 983 and Texas Code of Criminal Procedure Article 59. It’s important to understand, however, that no person has a right to criminal proceeds. This means the defense only applies to property used to commit a crime. It does not shield assets purchased with proceeds of a crime.
To successfully mount an innocent owner defense the claimant/respondent/owner must establish that he or she was unaware of the criminal activity.
For example, if parents own a sedan that their college-age son uses to deal pot then the state or federal government may seize it and commence forfeiture proceedings. The question then becomes whether the parents knew of their son’s activities. They will see if the son had ever been arrested before or how obvious his dealing activity was. If the government feels the parents were on notice then they’ll fight the innocent owner defense claim.