Civil Forfeiture of Corporately Owned Property

Federal statutes provide for forfeiture of real property used in conjunction with a variety of criminal activity. Although the primary focus of federal civil forfeiture statutes has been on drug-related offenses, the reach of these statutes now extends to a variety of other crimes. A recent Southern District case, however, raises an issue not explicitly resolved by the forfeiture statutes: when is the property of a corporate owner subject to forfeiture?

479 Tamarind Drive

In United States v. 479 Tamarind Drive (NYLJ 10/21/05, p. 24, col. 1), the federal government sought forfeiture of real property allegedly purchased to launder proceeds of a health care fraud conspiracy. The perpetrators of the alleged fraud  — husband and wife — were both indicted; wife was convicted while husband fled to Canada to avoid arrest. When the government sought forfeiture of the property, several claimants contested the forfeiture: the husband, two corporations that asserted ownership interests, and two shareholders in the corporate claimants.

In 479 Tamarind Drive itself, the court never reached or even discussed the government's right to forfeiture of corporate property. Instead, the court concluded that husband had no right to contest because he was a fugitive from justice, while the shareholders had no standing to contest because they held no ownership right in any specific property owned by the corporations. With respect to the corporate owners, the decisive issue was whether the corporations were barred by the fugitive disentitlement doctrine, codified in 28 USC sec. 2466. Under the statute, the corporation would be barred if its majority shareholder is a fugitive. Hence, the court deferred decision pending discovery on that issue. But suppose the husband did not own a majority interest in the corporate owners, and suppose further that the corporation or corporations owned all of the property, or shared ownership with the party who had committed the fraud. Would the corporate interest be subject to forfeiture?

The Innocent Owner Defense

18 USC sec. 983(d)(1) provides an “innocent owner” defense in civil forfeiture proceedings. The statute provides that “[a]n innocent owner's interest in property shall not be forfeited under any civil forfeiture statute.” The statute, section 983(d)(2), goes on to explain when an owner of property used for illegal purposes is innocent:

“With respect to a property interest in existence at the time the illegal conduct giving rise to forfeiture took place, the term “innocent owner” means an owner who: 1) did not know of the conduct giving rise to forfeiture; or 2) upon learning of the conduct giving rise to the forfeiture, did all that reasonably could be expected under the circumstances to terminate such use of the property.”

When the allegedly innocent owner is an individual (a sole owner, a co-tenant, or an individual owner of a security interest), the statutory framework is relatively straightforward: the individual claiming to be an innocent owner must establish his own lack of knowledge or appropriate conduct in order to avoid forfeiture. The statute explicitly places the burden of proof on the person seeking to avoid forfeiture.

When the government seeks forfeiture of property used in drug offenses, the innocent owner defense is most likely to be asserted by an individual; associates of drug dealers tend not to own property in the corporate form. But the civil forfeiture statutes extend beyond drugs. In particular, those statutes apply to property involved in a money laundering transaction (18 USC sec. 981; 18 USC sec. 1956-1957). Parties who engage in sophisticated money laundering schemes are substantially more likely to hold property in the corporate form.

Unfortunately, when the allegedly innocent owner of property used in a covered offesne is a corporation, section 983(d)'s language presents a problem to which it offers no solution: when do we impute knowledge or conduct to a corporation? Is knowledge by a single officer or director knowledge of the corporation? The statute is silent on that point. When to impute knowledge to a corporation is a thorny problem in dealing with corporate criminal liability, one that admits of no consistent answer.

The federal civil forfeiture statutes do address that problem in one context: the fugitive disentitlement statute. There, Congress provided explicitly that disentitlement applies to claims filed by a corporation if the majority shareholder, or the person filing the claim on behalf of the corporation, is a person who would be disqualified from pursuing the claim. 28 USC sec. 2466. Although the situations are not entirely parallel, one might at least infer that a corporation should not be able to assert an innocent owner defense when its majority shareholder cannot assert innocence. Beyond that, however, inferences are difficult to draw. The court in 479 Tamarind Drive did not come close to reaching the issue. Ultimately, the issue will require closer attention from the courts — or from Congress.

Federal statutes provide for forfeiture of real property used in conjunction with a variety of criminal activity. Although the primary focus of federal civil forfeiture statutes has been on drug-related offenses, the reach of these statutes now extends to a variety of other crimes. A recent Southern District case, however, raises an issue not explicitly resolved by the forfeiture statutes: when is the property of a corporate owner subject to forfeiture?

479 Tamarind Drive

In United States v. 479 Tamarind Drive (NYLJ 10/21/05, p. 24, col. 1), the federal government sought forfeiture of real property allegedly purchased to launder proceeds of a health care fraud conspiracy. The perpetrators of the alleged fraud  — husband and wife — were both indicted; wife was convicted while husband fled to Canada to avoid arrest. When the government sought forfeiture of the property, several claimants contested the forfeiture: the husband, two corporations that asserted ownership interests, and two shareholders in the corporate claimants.

In 479 Tamarind Drive itself, the court never reached or even discussed the government's right to forfeiture of corporate property. Instead, the court concluded that husband had no right to contest because he was a fugitive from justice, while the shareholders had no standing to contest because they held no ownership right in any specific property owned by the corporations. With respect to the corporate owners, the decisive issue was whether the corporations were barred by the fugitive disentitlement doctrine, codified in 28 USC sec. 2466. Under the statute, the corporation would be barred if its majority shareholder is a fugitive. Hence, the court deferred decision pending discovery on that issue. But suppose the husband did not own a majority interest in the corporate owners, and suppose further that the corporation or corporations owned all of the property, or shared ownership with the party who had committed the fraud. Would the corporate interest be subject to forfeiture?

The Innocent Owner Defense

18 USC sec. 983(d)(1) provides an “innocent owner” defense in civil forfeiture proceedings. The statute provides that “[a]n innocent owner's interest in property shall not be forfeited under any civil forfeiture statute.” The statute, section 983(d)(2), goes on to explain when an owner of property used for illegal purposes is innocent:

“With respect to a property interest in existence at the time the illegal conduct giving rise to forfeiture took place, the term “innocent owner” means an owner who: 1) did not know of the conduct giving rise to forfeiture; or 2) upon learning of the conduct giving rise to the forfeiture, did all that reasonably could be expected under the circumstances to terminate such use of the property.”

When the allegedly innocent owner is an individual (a sole owner, a co-tenant, or an individual owner of a security interest), the statutory framework is relatively straightforward: the individual claiming to be an innocent owner must establish his own lack of knowledge or appropriate conduct in order to avoid forfeiture. The statute explicitly places the burden of proof on the person seeking to avoid forfeiture.

When the government seeks forfeiture of property used in drug offenses, the innocent owner defense is most likely to be asserted by an individual; associates of drug dealers tend not to own property in the corporate form. But the civil forfeiture statutes extend beyond drugs. In particular, those statutes apply to property involved in a money laundering transaction (18 USC sec. 981; 18 USC sec. 1956-1957). Parties who engage in sophisticated money laundering schemes are substantially more likely to hold property in the corporate form.

Unfortunately, when the allegedly innocent owner of property used in a covered offesne is a corporation, section 983(d)'s language presents a problem to which it offers no solution: when do we impute knowledge or conduct to a corporation? Is knowledge by a single officer or director knowledge of the corporation? The statute is silent on that point. When to impute knowledge to a corporation is a thorny problem in dealing with corporate criminal liability, one that admits of no consistent answer.

The federal civil forfeiture statutes do address that problem in one context: the fugitive disentitlement statute. There, Congress provided explicitly that disentitlement applies to claims filed by a corporation if the majority shareholder, or the person filing the claim on behalf of the corporation, is a person who would be disqualified from pursuing the claim. 28 USC sec. 2466. Although the situations are not entirely parallel, one might at least infer that a corporation should not be able to assert an innocent owner defense when its majority shareholder cannot assert innocence. Beyond that, however, inferences are difficult to draw. The court in 479 Tamarind Drive did not come close to reaching the issue. Ultimately, the issue will require closer attention from the courts — or from Congress.