The United States and numerous states have, in the past decade, escalated their efforts to take the profits out of crime by using civil and criminal asset forfeiture remedies against drug dealers, white-collar criminals, and other persons who seek to reap great profits from their illegal activities. Some of these persons have tried to commandeer federal bankruptcy law to protect their ill-gotten gains.³ Their efforts have met with mixed results.

 

To an extent, parallel criminal forfeiture and civil bankruptcy cases involve the same issues as most run-of-the-mill parallel proceedings.⁴ Invariably, some unique questions arise when a person is—or parties are—simultaneously involved in both a bankruptcy and either civil or criminal asset forfeiture. The potential problems that can arise when a person with assets subject to forfeiture declares bankruptcy run the gamit from whether the property subject to the forfeiture proceedings is part of the bankruptcy estate, to whether the forfeiture case is stayed until after completion of the bankruptcy case, to whether the forfeiture case should be decided by the bankruptcy or non-bankruptcy forum. This article will introduce attorneys to the law in these areas.

General Overview of Federal Asset Forfeiture Law

According to one authority, more than 200 federal statutes contain forfeiture provisions of some type. The most frequently used federal forfeiture statutes deal with three areas: (1) drug crimes, (2) white-collar crimes and (3) obscenity and child exploitation. Discussion in this article will focus on forfeitures related to drug crimes and white-collar crimes.

Section 853 of Title 21, U.S. Code, sets forth the statutory scheme for criminal forfeiture in cases involving federal drug offenses. Subsection (a) of this statute requires any person convicted of violating specific drug offenses (such as possession of certain controlled substances with intent to distribute, or conspiracy to do so) to forfeit to the United States "any proceeds constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of such violation,"⁵ as well as "any of the person's property used, or intended to be used, in any manner or part, to commit, or to facilitate the commission of, such violation...."⁶ The statutory definition of property potentially subject to forfeiture is broad and includes "real property, including things growing on, affixed to and found in land," and "tangible and intangible personal property, including rights, privileges, interests, claims and securities."⁷ Section 853(d) creates a "rebuttable presumption" in favor of forfeiture that applies in select situations. It provides:

There is a rebuttable presumption at trial that any property of a person convicted of a felony under this subchapter or subchapter II of this chapter is subject to forfeiture under this section if the United States establishes by a preponderance of the evidence that—

(1) such property was acquired by such person during the period of the violation...or within a reasonable time after such period; and
(2) there was no likely source for such property other than the violation.

Section 853(e) allows federal courts, upon application of the United States, to enter a restraining order or injunction or take other action to preserve the availability of property for forfeiture. Such order can be entered, for cause shown and with certain limits, both before⁸ and after⁹ an indictment or information has been filed. If a restraining order "may not be sufficient to assure the availability of the property for forfeiture," the court may, if requested, issue a warrant authorizing the seizure of the property. Section 853(p) authorizes the court to order the forfeiture of substitute assets if the property subject to forfeiture, as a result of any acts or omissions of the defendant, cannot be located, has been transferred, is beyond the court's jurisdiction or has been commingled with other property and cannot be divided without difficulty." Civil forfeiture of property derived from, or used to commit, drug offenses is also possible under 21 U.S.C. §881.

Chapter 46 of Title 18 also contains forfeiture provisions. Section 981 sets forth the provisions governing civil forfeiture. Essentially, it allows the United States to forfeit, through civil action, property that would be forfeitable under a variety of criminal forfeiture provisions. Section 982 is a criminal forfeiture statute. It provides that the court, when sentencing a person convicted of money laundering, shall order that the defendant forfeit to the United States "any property, real or personal, involved in such offense, or any property traceable to such property." Section 982(a)(2) sets forth 34 crimes for which the federal government may forfeit "any property constituting or derived from proceeds the person obtained directly or indirectly, as the result of such violation." Section 982(a)(3) involves forfeiture of property derived from specific crimes against certain federal financial institutions, while §982(a)(5) involves gross proceeds of crimes involving motor vehicle theft or fraud under certain statutes. Other types of offenses that give rise to forfeiture under §982 include certain immigration offenses¹⁰ and health care fraud.¹¹ With one exception, the procedures for forfeiture under §982 are governed by the rules set forth in §853.

Property of the Estate. The threshold question involved in parallel bankruptcy and forfeiture proceedings is whether property forfeited on the eve of bankruptcy, or during the course of a bankruptcy, is ever, or ever can be, property of the estate. Section 541(a) of the Bankruptcy Code provides that all legal or equitable interests of the debtor become property of a bankruptcy estate upon the filing of a petition.

If the debtor declares bankruptcy after the jury has returned a special verdict of forfeiture in the criminal case or the court has entered a final order of forfeiture in a civil case, the case law establishes that the debtor had no interest in property subject to forfeiture at the commencement of the bankruptcy case, and none of the directly forfeitable assets become part of the bankruptcy estate under 11 U.S.C. §541(a)(1).

In United States v. Pelullo,¹² the Third Circuit was called upon to decide what effect a debtor's decision to file chapter 11 had on the judicial sale of his residence pursuant to a criminal forfeiture order. When his effort to have the district court stay the sale of his home proved uneventful, the debtor decided to file chapter 11 to invoke the benefits of the automatic stay to stop the sale.¹³ The U.S. Marshal's Service proceeded to sell the property anyway, and obtained a retroactive restraining order prohibiting the debtor from using chapter 11 to thwart the forfeiture. On appeal, the court noted that the forfeiture order was entered on Sept. 14, 1995, and the chapter 11 was filed on Nov. 17, 1995, some two months later. As a matter of law, the court concluded, the forfeiture order, when entered, divested the debtor of any interest in the property. Thus, he no longer had any interest in the property when he filed chapter 11, and the stay did not apply.

If the debtor declares bankruptcy before the property has been ordered forfeited, the question of what interests the bankruptcy estate or United States has in the property varies and is more difficult to answer. If the district court has entered a pre-trial restraining order prohibiting the debtor from transferring or alienating the property, the "[p]roperty seized prior to conviction is in a state of limbo."¹⁴ "It is settled law that the debtor cannot use the turnover provisions to...demand assets whose title is in dispute."¹⁵ A court-issued restraining or protective order typically authorizes the United States to assert control over the asset or assets at issue, thereby preventing a debtor from alienating, concealing, dissipating or doing anything to impact the potential forfeiture adversely. Also, if the government has executed criminal seizure warrants, it, and not the debtor, has possessory rights in property. Thus, while the debtor's interest may, at this juncture, be property of the estate,¹⁶ the debtor can use the Bankruptcy Code to trump or reverse the protective orders or other process issued by the district court.

Once a debtor files bankruptcy, the pre-petition right to challenge the forfeitability of assets in judicial proceeding passes into the bankruptcy estate.¹⁷ In a chapter 7 context, this means the panel trustee, and not the debtor, has the authority to challenge the forfeiture. In a chapter 11 or 12 proceeding, the debtor-in-possession (DIP) would ordinarily have standing to exercise any challenge to the forfeiture, unless a trustee is appointed.

If the government prevails in the forfeiture action, its title relates back to the date the crime that formed the basis of the forfeiture was committed.¹⁸ Thus, if the bankruptcy was pending at the time the forfeiture was ordered, and the crime occurred pre-petition, the bankruptcy estate will be divested of its interest in such property.¹⁹ If the bankruptcy is pending and the defendant prevails in the forfeiture action, then the property at issue becomes part of the bankruptcy estate.

In cases involving substitute assets in a criminal forfeiture, it is unclear when the government's interest in substitute assets vests, so applicability of the relation-back doctrine is unclear.

If the debtor declares bankruptcy before initiation of forfeiture action or execution of any pre-trial restraint, the defendant retains full legal and equitable rights in property because the government has not yet executed a pretrial restraining order or seizure warrant. Nevertheless, if the forfeiture is completed while the bankruptcy is pending, the estate may actually be divested of its interest in property because of the relation-back doctrine.²⁰

The relation-back doctrine and its impact was clearly articulated by the U.S. Supreme Court in United States v. Stowell:²¹

By the settled doctrine of this court, whenever a statute enacts that upon the commission of a certain act specific property used in or connected with that act shall be forfeited, the forfeiture takes effect immediately upon the commission of the act; the right to the property then vests in the United States, although [its] title is not perfected until judicial condemnation; the forfeiture constitutes a statutory transfer of the right to the United States at the time the offense is committed; and the condemnation, when obtained, relates back to that time, and avoids all intermediate sales and alienations, even to purchasers in good faith.

The relation-back doctrine applies to both civil²² and criminal²³ forfeitures.

The Automatic Stay. The filing of a bankruptcy causes an "automatic stay" to go into effect that enjoins any persons from taking further legal action—and other collection-type activities—against the debtor or property of the estate.²⁴ Because they are in personam, criminal asset-forfeiture proceedings (and any restraining orders/ seizure warrants) are criminal actions against the debtor exempted from the automatic stay under §362(b)(1).²⁵

The question of whether the automatic stay bars the continuation of civil asset-forfeiture proceedings is not as clear as the question of whether criminal asset-forfeiture cases can be impeded by the filing of voluntary bankruptcy petitions. Civil forfeiture is in rem, and is not an action against the debtor. Thus, a civil forfeiture does not fall within the scope of §362(b)(1).²⁶ Arguably, such proceedings may fall within the scope of §362(a)(3), which bars any act to obtain possession or control of estate property. The majority view, however, is that a civil forfeiture action falls within the police power exception to the automatic stay set forth in §362(b)(4).²⁷

The Bankruptcy Appellate Panel (BAP) for the Ninth Circuit recently had occasion to directly answer the question of how the automatic stay applies to civil forfeiture proceedings. In In re Chapman,²⁸ the United States brought a civil action against the home of Darryl Chapman because it claimed it had been used to manufacture and distribute marijuana. Before a ruling was rendered, Chapman filed a petition for chapter 7 relief. In deciding what authority the trustee had to sell the property, the bankruptcy court ruled that the automatic stay applied, the police power exception did not apply, and the government would have to file a proof of claim for its forfeiture claim. On appeal, the BAP concluded that the civil forfeiture action was excepted from the stay as an exercise of the government's police or regulatory power, and it reversed.

In deciding the case, the court noted that there are two tests for determining whether the "police or regulatory power" exception to the stay applies to a given proceeding. They are:

The Public Policy Test: This standard distinguishes between proceedings that effectuate public policy and those that adjudicate private rights. If the purpose underlying the law the government is attempting to enforce is primarily to further public policy concern, the action is exempt.
Pecuniary Interest Test: This standard's focus is on the motivation for the government's actions. If the motive is primarily pecuniary, the action is not exempt. If, however, the motivation for the action is public safety or welfare concerns, then the action is exempt.

The Chapman court observed that "the forfeiture of real property is a necessary law enforcement tool in combating the trafficking of illegal drugs. The drug policies implemented by Congress have been designed to protect the health, safety and general welfare of the American people."²⁹ The "public policy test" was satisfied because the "government's primary motive...is to protect the public welfare from the ravages of illegal drugs."³⁰ The "pecuniary purpose test" was satisfied "because the government's primary motive is to punish the debtor and enforce a policy that is meant to deter not only the debtor but others that might be tempted to traffic illegal drugs."³¹ The court specifically recognized that as a result of its ruling, when all is said and done, the property at issue might not be part of the estate because of the relation-back doctrine. "[I]f that happens," the BAP explained, "it is because that is the appropriate result under the law."³² Other courts have reached similar conclusions concerning the scope of the police power exception to the stay.³³

Some courts have focused on the "relation-back doctrine" as a rationale for holding the automatic stay inapplicable. These courts have reasoned that if they did not except the forfeiture action from the automatic stay, the government could not obtain a declaration of title needed to perfect its vested title, and operation of relation-back doctrine would be thwarted.³⁴

Jurisdiction. It could be argued that the bankruptcy court has some jurisdiction over forfeiture matters related to a bankruptcy case. It would take a considerable stretch of federal statutory authority for a bankruptcy court to exercise jurisdiction over a federal criminal case, assuming that the bankruptcy court could do so without contravening the limits of Article III of the Constitution.³⁵ The question may appear to be somewhat closer in the case of civil forfeiture proceedings.

Bankruptcy courts do not have original jurisdiction over any bankruptcy cases. Section 1334(a) of Title 28, U.S. Code, vests district courts with "original and exclusive jurisdiction of all cases under title 11." Section 1334(b) gives the district courts "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11" (emphasis added). Bankruptcy courts exist as "units" of the U.S. District Court. 28 U.S.C. §151. Section 157(b) of Title 28 allows "[e]ach district court [to] provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district." The district courts can only delegate under §157(b) the jurisdiction they have been given under §1334. In the case of "arising under" or "related to" jurisdiction, Congress limited the authority set forth in §1334 to "civil proceedings." Section 3231 of Title 18 gives district courts "original" and "exclusive" jurisdiction over all offenses against the laws of the United States and does not contain a provision allowing them to delegate their criminal jurisdiction to district courts. Criminal forfeiture is imposed as part of the sentence on a convicted person.³⁶ Section 982(a)(1) and the district courts are authorized to enter orders related to criminal forfeiture. See §§853(l), 982(b)(1) (making §853 applicable to §982 forfeitures).

A civil forfeiture proceeding related to a bankruptcy is, arguably, a civil action and within the "arising under" or "related to" bankruptcy jurisdiction that district courts may delegate to their bankruptcy units. However, the jurisdiction analysis does not end with §§1334 and 157. Section 1355(a) of Title 28 confers original jurisdiction over actions or proceedings for the recovery or enforcement of any forfeiture on the district courts. Section 1355 does not contain any provisions authorizing the district courts to delegate their jurisdiction over forfeitures to a bankruptcy court. In fact, §1355(b) specifically provides that forfeiture actions and proceedings may be brought in "the district court for the district in which any of the acts or omissions giving rise to the forfeiture occurred."

The lack of authority to delegate the civil forfeiture jurisdiction discussed above is not the only argument weighing against the exercise by bankruptcy courts of authority over forfeiture matters. As discussed above, the majority view is that the automatic stay does not apply to civil forfeiture proceedings. Consequently, bankruptcy law allows civil forfeiture proceedings in federal court to continue unabated. Section 1441 allows parties to remove certain state court actions to federal court, but there is no procedural mechanism that authorizes a party to remove a forfeiture proceeding from the district court to its bankruptcy unit. At best, the district court may be able to refer bankruptcy questions that arise in a forfeiture to the bankruptcy court for proposed findings of fact and conclusions of law pursuant to 28 U.S.C. §157(c)(1). The findings and conclusion are, if objected to, subject to de novo review by the district court.

Finally, it should be noted that there is some authority for the proposition that a court cannot be divested of jurisdiction over property by another court. "The court first assuming jurisdiction over property may maintain and exercise that jurisdiction to the exclusion of another court."³⁷ If this principle has constitutional significance, as it might in the case where the courts of two different sovereigns are involved, then the statutory authority of the bankruptcy court over any of the debtor's property, wherever located, may be ineffective. The rule would seem to have little significance where both actions are pending in different parts of the federal court system, except it may give rise for a motion to transfer venue.

Conclusion

The space available precludes a detailed analysis of many of the complexities of, and potential conflicts between, asset forfeiture and bankruptcy law. The foregoing overview and observations should, however, serve notice to practitioners confronted with cases where these two worlds collide that a knowledge of both, not just a knowledge of one, is required to professionally represent a client in such matters.

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Footnotes

¹ The author received his J.D. (1989) from Washington University and his M.A. (1986, Sociology) and B.A. (1984, Journalism) from Eastern Illinois University. He was a former chair of the South Dakota Bankruptcy Fraud Task Force (1992-2001) and a former law clerk to Hon. Frank W. Koger, U.S. Bankruptcy Judge (W.D. Mo.). Return to article

² The views expressed in this article are solely those of the author and should not be attributed to the U.S. Department of Justice, the U.S. Attorney for the Southern District of Iowa, or any other person or entity associated with him. Return to article

³ See, e.g., In re James, 940 F.2d 46 (3rd Cir. 1991) (state forfeiture action comes within the police power exception to the automatic stay); Boricua Motors Leasing Corp. v. Commonwealth of Puerto Rico, 154 B.R. 834 (D. P.R. 1993) (state forfeiture action comes within the police power exception to the automatic stay); Matter of Smith, 176 B.R. 221 (Bankr. N.D. Ala. 1995) (state forfeiture action comes within the police power exception to the automatic stay). Return to article

⁴ See, e.g., Pollack, Hon. Milton, Parallel Civil and Criminal Proceedings, 129 F.R.D. 201 (1990); Miller, Celeste K., "Parallel Proceedings Relating to Bankruptcy," 25 Cal. Bankr. J. 166 (2000) (Special Crime and Fraud Issue); Eckers, Randy S., "Unjust Justice In Parallel Proceedings: Preventing Circumvention Of Criminal Discovery," 27 Hofstra L. Rev. 109 (1998); Staton, Georgia A., and Scatena, Renee J., "Parallel Proceedings—A Discovery Minefield," 34-Jul Ariz. Att'y 17 Arizona Attorney (1998); Novak, Edward F., "Parallel Proceedings And Double Jeopardy Implications," 28-Nov. Ariz. Att'y 21 Arizona Attorney (1991); Neafsey, Ed, and Bonanno, Edward R., "Parallel Proceedings And The Fifth Amendment's Double Jeopardy Clause," 7 Fordham Envtl. L.J. 719 (1996) (Fordham Environmental Law Journal Symposium) Note; "Using Equitable Powers to Coordinate Parallel Civil and Criminal Proceedings," 98 Harv. L. Rev. 1023 (1985); Sturc, John H., and Sorcher, Alan E., "Parallel Proceedings: The Acquisition and Use of Information by Regulators and Prosecutors," 692 PLI/Corp. 479 (1990); 30 Am. Crim. L. Rev. 1179. Return to article

⁵ 21 U.S.C. §853(a)(1). Return to article

⁶ 21 U.S.C. §853(a)(2). Return to article

⁷ 21 U.S.C. §853(b). Return to article

⁸ 21 U.S.C. §853(e)(1)(B), 21 U.S.C. §853(e)(2). Return to article

⁹ 21 U.S.C. §853(e)(1)(A). Return to article

¹⁰ 18 U.S.C. §982(a)(6). Return to article

¹¹ 18 U.S.C. §982(a)(7). Return to article

¹² 178 F.3d 196 (3rd Cir. 1999). Return to article

¹³ See, generally, 11 U.S.C. §362. Return to article

¹⁴ In re Thena, 190 B.R. 407 (D. Ore. 1995). Return to article

¹⁵ United States v. Inslaw Inc., 932 F.2d 1467, 1472 (D.C. Cir. 1991) (citing In re Charter Co., 913 F.2d 1575, 1579 (11th Cir. 1990)), cert. denied, 502 U.S. 1048 (1992). Return to article

¹⁶ See Thena, 190 B.R. at 407 (chapter 11 expressly contemplates inclusion of property not in debtor's possession at time of filing) (quoting §542). Return to article

¹⁷ Thena, 190 B.R. at 407; In re Kurth Ranch, 122 B.R. 759 (Bankr. D. Mont. 1991); In re Reid, 60 B.R. 301, 305 (Bankr. D. Md. 1986). Return to article

¹⁸ See Boricua Motors Leasing Corp. v. Commonwealth, 154 B.R. 834, 835-36 (D. P.R. 1993) (title to vehicle vested irrevocably in government upon debtor's failure to challenge forfeiture); Return to article

¹⁹ See, e.g., United States v. 92 Buena Vista Avenue, 507 U.S. 111, 125-126 (1993) (when forfeiture order is entered, United States obtains title back to time of criminal act, absent any applicable "innocent owner" defenses). Return to article

²⁰ See In re Ryan, 15 B.R. 514, 517-18 (Bankr. D. Md. 1981) (Ryan I). Return to article

²¹ 133 U.S. 1, 16-17 (1890). Return to article

²² Id. Return to article

²³ See

²⁴ 11 U.S.C. §362(a).;  Return to article

²⁵ United States v. Troxler Hosiery Co. Inc., 41 B.R. 457, 460 (M.D.N.C. 1984) (holding the government's enforcement of a criminal fine and costs imposed on debtor in pre-petition criminal contempt proceeding excepted from automatic stay), aff'd., 796 F.2d 723 (4th Cir. 1986), Cert. denied, 480 U.S. 930 (1987); see, also, In re Sims, 101 B.R. 52 (Bankr. W.D. Wis. 1989) (debtor's incarceration for failing to pay fine imposed in lieu of jail term was merely "continuation of criminal action or proceeding" not subject to stay); In re Gilliam, 67 B.R. 83 (Bankr. M.D. tenn. 1986) (no stay of action to revoke debtor's probation); In re Anoai, 61 B.R. 918 (Bankr D. Conn. 1986) (criminal contempt proceedings against debtors not subject to automatic stay.). Return to article

²⁶ In re Bridge, 90 B.R. 839 (Bankr. E.D. Mich. 1988) (in dicta). Return to article

²⁷ In re Brewer,209 B.R. 575, 577 (Bankr. S.D. Fla. 1996). Return to article

²⁸ 264 B.R. 565 (9th Cir. BAP 2001).; Return to article

²⁹ 264 B.R. at 570.; Return to article

³⁰ Id.; Return to article

³¹ Id.; Return to article

³² 262 B.R. at 572.; Return to article

³³ In re James, 940 F.2d. 46, 51 (3rd Cir. 1991); In re Smith, 176 B.R. 221 (Bankr. N.D. Ala. 1995); Boricua Motors, 154 B.R. at 834 (stay inapplicable to post-petition forfeiture action); See, also, In re Mickman, 144 B.R. 259, 260-62 (E.D. Pa. 1992) (Civil fraud injunction action under 18 U.S.C. §1345 exempt from stay under §362(b)(4). Return to article

³⁴ See Grooms, 1997 WL 578752 (W.D. Va. 1997). Return to article

³⁵ Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982). Return to article

³⁶ Libretti v. United States, 516 U.S. 29 (1995) (criminal forfeiture is a part of a sentence and is punishment). Return to article

³⁷ Gross v. Weingarten, 217 F.3d 208 (4th Cir. 2000); see, also, Penn Casualty Co. v. Pennsylvania, 294 U.S. 189 (1935); United States v. One 1986 Chevrolet Van, 927 F.2d 39 (1st Cir. 1991); United States v. One Chevrolet C-20 Van, 924 F.2d 120 (7th Cir. 1991). Return to article