• U.S. Government’s Right to Criminal Forfeiture of Assets Pitted against Competing Interests of Bankruptcy Trustee of Criminal Defendant’s Law Firm
  • February 14, 2013 | Authors: Elizabeth J. Austin; Irve J. Goldman; Jessica Grossarth; H. William Shure
  • Law Firms: Pullman & Comley, LLC - Stamford Office ; Pullman & Comley, LLC - Bridgeport Office
  • The well-publicized Ponzi scheme perpetrated by Scott Rothstein, a disgraced and formerly high-profile attorney in South Florida, has given rise to a battle between the federal government’s right to seize assets under the criminal forfeiture statue, 21 U.S.C. §853, and a bankruptcy trustee’s right to claim those assets for all creditors. In U.S. v. Rothstein, 2010 WL 2730749 (S.D. Fla. July 9, 2010), the government, pursuant to a preliminary order of forfeiture, seized all funds in the accounts of Rothstein’s law firm, Rothstein Rosenfeldt Adler, P.A. (“RRA”), all other property involved in Rothstein’s RICO and money laundering conspiracies and all property derived from his mail and wire fraud offenses. This property included real property and miscellaneous assets which the Chapter 11 trustee of RRA claimed were purchased by Rothstein with RRA funds and thus were held in a constructive trust for the benefit of RRA’s bankruptcy estate and creditors.

    Under 28 U.S.C. §853(a), property that is subject to criminal forfeiture is any property constituting, or derived from, any proceeds the criminal defendant obtained as a result of his crimes or any of the criminal defendant’s property used or intended to be used to commit or facilitate commission of the crimes. Under 28 U.S.C. §853(c), any property described in subsections (a) vests in the United States upon commission of the act giving rise to the forfeiture.

    A third party claiming an interest in the forfeited property may, however, petition the court to claim a superior right to it as compared to the interest of the defendant at the time of the commission of the crime. 28 U.S.C. §853(n). RRA’s bankruptcy trustee claimed such an interest in the RMA accounts and in the other properties seized on the basis that they were obtained with RMA’s money, and therefore were held in a constructive trust for RRA.

    The district court acknowledged that a constructive trust can serve as a superior legal interest and thus can serve as grounds for invalidating a criminal forfeiture. It further acknowledged that the trustee adequately alleged the elements of a constructive trust, but refused to impose one because the trustee had an adequate remedy at law, viz., participating in the restitution process that would be overseen by the district court in dolling out the forfeited property to the appropriate parties. As to the RMA accounts, the district court held that the trustee’s competing claim was colorable and would be subject to further evidentiary proceedings.

    The trustee appealed the adverse ruling to the Eleventh Circuit, which heard oral argument on December 6. According to reports, the most contentious arguments focused on the right of the bankruptcy court to administer assets for the benefit of all creditors and whether the district court usurped the automatic stay by its rulings. A related issue raised was whether the government had police powers to seize assets of wrongdoers like Rothstein and thus was exempt from the automatic stay under §362(b)(1) of the Bankruptcy Code, which allows for “the commencement or continuation of a criminal action or proceeding against the debtor” notwithstanding the automatic stay. It has been held by at least one circuit court that “because criminal forfeiture is part and parcel of a criminal case ... , it falls squarely within this exemption.” U.S. v. Erpenbeck, 682 F. 3d 472, 481 (6th Cir. 2012). It remains to be seen whether the Eleventh Circuit will adopt this view.