The D.C. Circuit recently slapped down the government in a criminal forfeiture proceeding. In United States v. SunRise Academy, the D.C. Circuit reaffirmed the importance of allowing third parties a fair chance to challenge the government’s seizure of their assets in a criminal proceeding.
Former Attorney General Eric Holder announced just a few months ago that the Department of Justice would limit civil forfeitures to prevent the seizure of assets without proof of a link to serious wrongdoing.
It remains to be seen whether this new DOJ policy will actually limit civil asset forfeiture. Maybe it will become a trend.
But the federal government still uses criminal forfeiture aggressively. The SunRise opinion isn’t particularly groundbreaking, but it is gratifying to see a court prevent the government from using procedural tricks to avoid scrutiny of its forfeiture strategy.
The Underlying Charges
SunRise is a non-profit academy for special needs students in the District of Columbia. Students are not required to pay tuition to attend, but instead the District reimburses the academy for educating the students. It is by no means a small school, spanning over two campuses and educating over 150 students each semester. Reimbursing SunRise costs the District over $400,000 a month.
During an investigation related to various records kept by the school, the Office of the State Superintendent of Education uncovered a large amount of fraud surrounding transactions involving Charles Emor, Director and Board Member at SunRise.
The government contended that Mr. Emor withdrew funds directly from the school’s bank accounts to purchase luxury items, give money to family members, and pay the rent on his local townhouse.
The investigation also apparently revealed a fraudulent transaction involving a proposal with company called Core Ventures. The court of appeals called this Mr. Emor’s “most brazen fraud.”
The proposal explained that SunRise would loan approximately $2 million to Core so that it could build a coffee shop or vocational school on SunRise’s property. Beginning in 2009, another SunRise board member wired that amount to Core. There was no real documentation by the board regarding the details of the loan, including repayment obligations or consequences of default.
According to the government, Core did not build a coffee shop or vocational school. But—oddly enough—Core allegedly found the funds to buy a Lexus SUV for Mr. Emor.
Mr. Emor was eventually arrested and charged with 37 counts, including wire fraud. During his criminal proceedings, the prosecutor did not definitively identify the victim of Mr. Emor’s wrongdoing, so it was unclear whether it was the District or SunRise.
In the end, SunRise was not charged, and Mr. Emor pleaded guilty to one count in the indictment.
The Forfeiture Proceedings
As part of the criminal case, the government seized the money wired to Core, as well as the Lexus.
Under 28 U.S.C. §2461(c), criminal forfeiture is available to the government in cases of wire fraud. At the preliminary stage, the government is only required to show a nexus between the property to be seized and the alleged wire fraud to be in compliance with Rule 32.2(b)(1)(A).
SunRise was not permitted to participate in the preliminary hearing on forfeiture because 21 U.S.C. § 853(k) does not permit third parties to intervene in criminal proceedings. Only the defendant may participate.
At the preliminary hearing, the court found certain facts:
- SunRise did not own Core
- SunRise was Mr. Emor’s alter ego
- SunRise was not a victim of Mr. Emor’s fraud.
The second fact is particularly important to the story here.
During the preliminary forfeiture determination, the court will not consider any third-party rights to the property. That is because third parties will be able to pursue their interests in an ancillary proceeding under 21 U.S.C. § 853(n).
Section 853(n) reads:
Any person, other than the defendant, asserting a legal interest in property which has been ordered forfeited to the United States pursuant to this section may, within thirty days of the final publication of notice or his receipt of notice under paragraph (1), whichever is earlier, petition the court for a hearing to adjudicate the validity of his alleged interest in the property. The hearing shall be held before the court alone, without a jury.
Having been unable to press its claims to the seized assets during the preliminary forfeiture proceeding, SunRise then filed a third-party petition for return of the forfeited property, alleging its ownership interests in the property.
The government moved to dismiss, and the court granted the motion. The grounds for the lower court’s opinion, however, are nothing short of stunning.
After excluding SunRise from the preliminary forfeiture proceeding because it was not the defendant, the district court used the facts found during that preliminary hearing to prevent SunRise from seeking return of the seized assets. The lower court concluded that SunRise was Mr. Emor’s alter ego and thus could not seek return of the assets because only a party “other than the defendant” could do so.
The lower court also concluded that SunRise had not alleged sufficient facts showing that it had a secured interest in the seized funds.
The Appeal
The D.C. Circuit opinion summarizes SunRise’s primary argument:
On appeal, SunRise claimed that the district court erred when it dismissed its claim for lack of standing based on the factual findings from the preliminary forfeiture hearing that they were Emor’s alter ego, and therefore, not a party “other than the defendant.”
The opinion explains that in evaluating the government’s motion to dismiss, the lower court was permitted only to consider the facts alleged in the third-party’s pleadings.
By requiring courts to stick to the pleadings when determining whether a petitioner has failed to state a valid claim for relief, the pleadings-only rule fortifies the due process concerns associated with stripping third parties of property rights based on proceedings in which they had no prior opportunity to participate. . . .Thus, to the extent the district court relied on an alter ego finding drawn from outside the petition and made during a proceeding in which SunRise could not represent its own interests, the court erred.
The D.C. Circuit remanded because the district court had relied on facts found outside of the pleadings in the third party hearing.
The court of appeals remanded this case for determinations related to whether SunRise is a party “other than the defendant” that has a “legal interest” in the property. In doing so, the court made excellent use of a quote from Friends:
In an episode of the iconic 1990s television show Friends, Joey Tribbiani tries to dissuade Rachel Green from moving to Paris. Joey asks Rachel to flip a coin. If he wins the coin flip, she must agree to stay. Rachel flips the coin; Joey loses. When later recounting the story to Ross Gellar, a befuddled Joey says, “[w]ho loses fifty-seven coin tosses in a row?” Friends: The One with Rachel’s Going Away Party (NBC television broadcast Apr. 29, 2004). Before Ross can answer, Joey explains Rachel’s rules: “Heads, she wins; tails, I lose.” Id. The proceedings in this case have largely followed the same rules.
More Battles to Fight
The government apparently hoped that it could avoid any third-party challenge to its retention of the assets. The lower court effectively hamstrung SunRise—preventing it from participating in the proceeding where certain facts would be established, and then relying on those facts to reject SunRise’s claims in a later proceeding.
Although SunRise has a long battle ahead, this is still big win for it. We should all be happy to see one court willing to put the brakes on the government’s haste to keep seized property.