The federal government’s forfeiture power is unprecedented. In United States v. Bajakajian, 524 U.S. 324 (1998), the Supreme Court made the first chink in the Government’s forfeiture power. It held that forfeitures are subject to the excessive fine provision of the Eighth Amendment. On March 30, 2016, the Court made the second chink in the forfeiture power in Luis v United States, 578 U.S. ___ (2016), where it held that a district court can’t freeze untainted funds needed by a criminal defendant to pay counsel to represent her in a criminal case.
The petitioner, Sala Luis, was charged with multiple counts of health care fraud, bribery and kickbacks as a result of which she allegedly received approximately $45 million. She had spent virtually all of her ill-gotten gains. She had $2 million in funds that were not used in the commission of the offense or obtained as a result of the offense (the “untainted funds”). Under 18 USC 1345, the Government moved for an order freezing the untainted funds pre-trial. Sec. 1345 provides that where a criminal defendant is charged with health care or bank law violations, a court can freeze pretrial 1) property obtained as a result of the crime, 2) property traceable to the crime, and 3) other property of equivalent value. The district court granted the motion over the defendant’s assertion that she needed the funds to retain counsel. The Eleventh Circuit affirmed.
The issue before the Supreme Court was whether the pretrial restraint of a criminal defendant’s untainted funds, which are needed to retain counsel, violates the Fifth and Sixth Amendments. The Court held that it did.
The plurality decision weighed the interests of the Government in having funds available to pay criminal penalties and restitution against the defendant’s right to counsel guaranteed by the Sixth Amendment.
The Court began by discussing the importance of the right to counsel guaranteed by the Sixth Amendment: it is a “fundamental” right that is the “great engine by which an innocent man can make the truth of his innocence visible.” Its importance had led to the Court requiring the Government to provide counsel to an indigent defendant accused of “all but the least serious crimes.” A deprivation of the right to counsel is a structural error that requires reversal without recourse to harmless error analysis. “Given the necessarily close working relationship between lawyer and client, the need for confidence and the critical importance of trust, neither is it surprising that the Court has held that the Sixth Amendment grants a defendant ‘a fair opportunity to secure counsel of his own choice.’”
The Court distinguished earlier cases where it held that funds that a criminal defendant intended to use to pay attorney fees were forfeit on the ground that in those cases the funds were “tainted” in that they were either the proceeds of a criminal act or used further a criminal act. In Ms. Luis’ case, the Government admitted that the funds did not bear any such taint.
The plurality summed up three primary considerations that underlay its decision: 1) the competing interests are the “fundamental” right to counsel vs. the Government’s interest in securing its punishment of choice, 2) the common law tradition that supports the Court’s view and 3) adopting the Government’s position would erode the right to counsel “to a greater extent than we have so far indicated,” and would be especially harmful to innocent defendants. Finally, the court noted that if there is a dispute over whether funds are “tainted” or “untainted” the courts have developed tracing rules to determine whether funds are tainted.
Justice Thomas in a concurring decision cast the deciding vote in the case. He rejected the plurality’s “balancing” of the interests of the Government against the Sixth Amendment right to counsel. In his view, the Sixth Amendment, in light of its common-law background, required that the Government not be allowed to freeze “untainted” funds that a criminal defendant needed to pay attorney fees. To hold otherwise could render the Sixth Amendment right to counsel in a criminal case nugatory.
Both Luis and Bajakajian involve situations in which the property the Government seeks to freeze or hold forfeit was not derived from or to be used in furtherance of criminal activity. The Government has in recent years been active in seizing funds and bank accounts of small legal businesses and their owners often on the ground that the business owner violated banking regulations. The two cases highlight the Supreme Court’s concern over the Government’s use of the forfeiture power to grab property that was neither derived from criminal activities nor used to further criminal activities.
ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – email@example.com or 310.281.3200 Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com