Forfeiture of Joint Ownership Property

Author: LegalEase Solutions

QUESTION PRESENTED 

  1. Whether the wife is liable for the forfeiture order entered against her husband and, if so,
  2. Whether the obligation passes to her after his death;
  3. Can the Federal Government seize her home in satisfaction of the forfeiture lien? If so, is there any protection she can raise in a bankruptcy proceeding?

 

SHORT ANSWER

             Commonly, in cases of forfeiture of joint ownership property, the state may forfeit only the ownership interest of the non-innocent owner. The innocent owner is entitled to receive a share of the proceeds of the forfeiture sale. But forfeiture of property may be civil or criminal. Criminal forfeiture is a form of punishment, separate and apart from any restitutive measures imposed during sentencing, whereascivil forfeiture brings a civil action against the property itself as an ‘in rem’ proceeding. Thus, criminal forfeiture is an ‘in personem’ proceeding and civil forfeiture is an ‘in rem’ proceeding. Under this circumstance, the wife may argue for the “innocent owner” exception.

With regard to the bankruptcy proceedings, the wife may invoke the homestead exemption which was created to protect a homeowner against seizure of his or her dwelling to satisfy a money judgment.

RESEARCH FINDINGS

Innocent Owner-In General

“In the case of joint ownership of assets, the state may forfeit only the ownership interest of the non-innocent owner.” In re Forfeiture of $1,159,420, 194 Mich. App. 134, 148, 486 N.W.2d 326, 334 (1992). Also, “the innocent co-owner will not be at risk of losing his or her interest . . . the innocent owner will receive a share of the proceeds of the forfeiture sale (less administrative expenses) corresponding to his or her proportionate interest.” Prop. Clerk of Police Dep’t of City of New York v. Harris, 34 A.D.3d 215, 217, 825 N.Y.S.2d 442, 444 (2006) aff’d, 9 N.Y.3d 237, 878 N.E.2d 1004 (2007).

In Prop. Clerk of Police Dep’t of City of New York v. Harris, 9 N.Y.3d 237, 878 N.E.2d 1004 (2007), the New York City Police Department (NYPD) officers impounded a vehicle during a forfeiture proceeding and the innocent co-owner was given an opportunity to demonstrate that his or her present possessory interest in a seized vehicle outweighs the City’s interest in continuing impoundment. The court observed that, “an innocent co-owner may prove an entitlement to a share of auction proceeds, but be unable to obtain release of a seized vehicle.” Id. at. 1012.

Criminal Forfeiture

Generally, “[f]orfeiture in criminal proceedings under 18 U.S.C. § 981 is an in personam proceeding. The forfeiture serves no remedial purpose, is designed to punish the offender, and cannot be imposed upon innocent owners.” United States v. Contorinis, 692 F.3d 136, 146 (2d Cir. 2012). Moreover, “[criminal] forfeiture serves no remedial purpose, is designed to punish the offender, and cannot be imposed upon innocent owners.” United States v. Peters, 732 F.3d 93, 98-99 (2d Cir. 2013) cert. denied, 134 S. Ct. 2740, 189 L. Ed. 2d 776 (2014) and  cert. denied, 134 S. Ct. 2740, 189 L. Ed. 2d 776 (2014).

The relevant statute provides that:

  • 981. Civil forfeiture

(C) Any property, real or personal, which constitutes or is derived from proceeds traceable to a violation of section 215, 471, 472, 473, 474, 476, 477, 478, 479, 480, 481, 485, 486, 487, 488, 501, 502, 510, 542, 545, 656, 657, 670, 842, 844, 1005, 1006, 1007, 1014, 1028, 1029, 1030, 1032, or 1344 of this title or any offense constituting “specified unlawful activity” (as defined in section 1956(c)(7) of this title), or a conspiracy to commit such offense.

18 U.S.C.A. § 981

“Criminal forfeiture under section 982 is a form of punishment, separate and apart from any restitutive measures imposed during sentencing.” United States v. Peters, 732 F.3d 93, 98-99 (2d Cir. 2013) cert. denied, 134 S. Ct. 2740, 189 L. Ed. 2d 776 (2014) and  cert. denied, 134 S. Ct. 2740, 189 L. Ed. 2d 776 (2014). “ Forfeiture of money under section 982, unlike restitution, constitutes punishment, because the statute directs the court to order it as an additional sanction when imposing sentence on a person convicted of the relevant offense.” Id.

“Criminal forfeiture focuses on the disgorgement by a defendant of his ill-gotten gains. Thus, the calculation of a forfeiture amount in criminal cases is usually based on the defendant’s actual gain.” United States v. Contorinis, 692 F.3d 136, 146-47 (2d Cir. 2012). “[R]estitution is calculated  based on the victim’s loss, while forfeiture is based on the offender’s gain.” Id. “‘With the forfeiture laws, we can separate the criminal from his profits … thus removing the incentive others may have to commit similar crimes tomorrow.’” Id. (quoting Stefan Cassella, Assistant Chief, Asset Forfeiture and Money Laundering Section, Criminal Division, U.S. Department of Justice in testimony before the committee); District courts have echoed this view by concluding that “a defendant may be ordered to forfeit all monies received by him as a result of the fraud.” Id.

In United States v. Contorinis, 692 F.3d 136 (2d Cir. 2012), where the issue was whether the district court erred in ordering appellant to forfeit, the court held that the defendant cannot be ordered to forfeit profits that he never received or possessed. Id. at 148. The court also found that the funds was never entitled to the defendant and the proceeds sought by the government were on funds which the defendant lacked control and thereby broadly accepted the principle that forfeiture is calculated based on a defendant’s gains. Id. at 147.

“The calculation of forfeiture amounts is not an exact science.” United States v. Treacy, 639 F.3d 32, 48 (2d Cir. 2011). A court is permitted to use general points of reference as a starting point for calculating the losses or gains from fraudulent transactions and may make reasonable extrapolations from the evidence established by a preponderance of the evidence at the sentencing proceeding.” Id. “[T]he court ‘need not establish the loss with precision but rather need only make a reasonable estimate of the loss, given the available information.” United States v. Carboni, 204 F.3d 39, 46 (2d Cir.2000).

“The Government sought forfeiture under 18 U.S.C. § 981(a)(1)(C), which authorizes forfeiture of “[a]ny property … which constitutes or is derived from proceeds traceable to” a multitude of criminal offenses including securities fraud.” United States v. Treacy, 639 F.3d 32, 48 (2d Cir. 2011). “Because criminal forfeiture is viewed as part of the sentencing process, the government need prove facts supporting forfeiture only by a preponderance of the evidence.” Id.

 Civil Forfeiture

Forfeiture of funds or property can be either civil or criminal. “In civil forfeiture, the United States brings a civil action against the property itself as an in rem proceeding—“[i]t is the property which is proceeded against, and … held guilty and condemned as though it were conscious instead of inanimate and insentient.” United States v. Contorinis, 692 F.3d 136, 146 (2d Cir. 2012).“In civil forfeiture proceedings, the burden often rests on the claimant, who may be an innocent third party, to prove that the property is not subject to forfeiture. The claimant’s culpability is also often irrelevant.” Id.

However, “[t]o prevent forfeiture, a claimant may either rebut the government’s proof of a substantial connection or raise an innocent owner defense under CAFRA[Civil Asset Forfeiture Reform Act].”  von Hofe v. United States, 492 F.3d 175, 180 (2d Cir. 2007). “An innocent owner is a claimant who did not know of the conduct giving rise to forfeiture; or 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.” Id. “ CAFRA[Civil Asset Forfeiture Reform Act] requires a claimant prove by a preponderance of the evidence that he or she is an innocent owner. Id.

But,“[t]he limits on what property can be forfeited as a result of what wrongdoing for example, what it means to “use” property in crime for purposes of forfeiture law are not clear. Bennis v. Michigan, 516 U.S. 442, 455(1996). “[W]here a constitutional challenge by an innocent owner is concerned, to apply those limits rather strictly, adhering to historical standards for determining whether specific property is an “instrumentality” of crime.” Id.

“To establish standing to challenge an order of forfeiture under § 853(n), a petitioner must demonstrate that he has a legal interest in [the forfeited] property. The extent of a petitioner’s interest in the forfeited property is determined in accordance with state law.” United States v. Watts, No. 13-911-CR, 2015 WL 1963468, at *7 (2d Cir. May 4, 2015). “Where the petitioner has no valid interest in the property under state law, the inquiry ends, and the claim fails for lack of standing.” Id.

In the instant case, the forfeiture order grew out of an order to pay restitution. This order was part of the penalty and sentence from a criminal conviction under 18 U.S.C. §1349, §1343, and §1348. Accordingly, the forfeiture rules could be argued either way: the forfeiture itself in this case was not part of the criminal sentence or penalty, therefore the wife could argue that the “innocent owner” exception should apply should the government seek to seize her house, owner jointly with her husband. The government could argue that the forfeiture, though not part of the actual sentence, flowed as a natural consequence from husband’s criminal conduct and failure to pay restitution, which was a part of his sentence. It is a question which set of rules and exceptions will apply.

Homestead Exemption

“[T]he “homestead exemption” (CPLR 5206[b] ) was created to protect a homeowner against seizure of his or her dwelling to satisfy a money judgment.” Gen. Elec. Capital Bus. Asset Funding Corp. v. Hakakian, 300 A.D.2d 486, 487, 751 N.Y.S.2d 570, 571 (2002).

Upon commencement of a bankruptcy case, all the debtor’s legal or equitable interests in property become part of the bankruptcy estate. Although the bankruptcy estate is expansive, certain assets may be exempted from the reach of creditors. Exemptions are crucial to facilitating the debtor’s fresh start, and thus [e]xemption statutes are to be construed liberally in favor of the debtor.

In re Issa, 501 B.R. 223, 225-26 (Bankr. S.D.N.Y. 2013).

“The purpose of the homestead exemption is to protect a debtor-homeowner from losing the family home due to economic hardship.” Id. at 226. “In order to claim a homestead exemption under New York law, a debtor must show “actual physical occupancy on a regular basis” and an intent to reside permanently.” Id. at 223.

Civil practice Law and Rules[CPLR] § 5206 was immediately changed to provide that “a homestead not exceeding fifty thousand dollars in value above liens and encumbrances, owned and occupied as a principal residence, is exempt from application to the satisfaction of a money judgment, unless the judgment was recovered wholly for the purchase price thereof.” In re Calloway, 423 B.R. 627, 629 (Bankr. W.D.N.Y. 2010) aff’d sub nom. 1256 Hertel Ave. Associates, LLC v. Calloway, 514 B.R. 371 (W.D.N.Y. 2012) aff’d, 761 F.3d 252 (2d Cir. 2014).

These allowed exemptions generally include any property that is exempt under state law, 11 U.S.C. § 522(b)(3)(A), as well as “any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law.

In re Martiny, 378 B.R. 52, 53 (Bankr. W.D.N.Y. 2007).

New York law also provides “a homestead exemption for real property not exceeding fifty thousand dollars in value above liens and encumbrances, owned and occupied as a principal residence.” In re Martinez, 392 B.R. 530, 531 (Bankr. E.D.N.Y. 2008). “The Trustee has the burden of proving that the exemption is not properly claimed. In order to be entitled to a homestead exemption, N.Y. C.P.L.R. § 5206 requires evidence of two things: an ownership interest in real property and residency by the Debtor in that property.” Id.

In Carman v. European Am. Bank & Trust Co., 78 N.Y.2d 1066, 581 N.E.2d 1345 (1991), in a bankruptcy proceeding wherein the plaintiff’s entire equity interest in the property to which the lien attached was exempted pursuant to CPLR 5206, the “homestead exemption”. The defendant failed to object to the claimed exemption and thus the exemption was allowed by the bankruptcy court. Id. at 1348.

A debtor may perform two functions:

(1) exempt from the debtor’s bankruptcy estate nonconsensually encumbered equity in the debtor’s principal residence of a value of up to $10,0009; and

(2) avoid judicial liens upon the debtor’s non-consensually encumbered equity in a principal residence to the extent these judicial liens impair the Homestead Exemption.

In re Giordano, 177 B.R. 451, 455 (Bankr. E.D.N.Y. 1995)

“[I]f a debtor possesses equity in a principal residence, that equity, not exceeding $10,000, is exempt from the satisfaction of money judgments and, in the event of bankruptcy, is exempt from property of the debtor’s bankruptcy estate.” In re Giordano, 177 B.R. 451, 455 (Bankr. E.D.N.Y. 1995). But, if, alternatively, “a debtor possesses no equity in a principal residence above consensual liens, no equity is available for the satisfaction of money judgments and, in the event of bankruptcy, none of the residence is exempt from the bankruptcy estate.” Id.

CONCLUSION

Based on the foregoing, it can be concluded that the wife can likely invoke the “innocent owner” defense to forfeiture of her interest in the house; even if she cannot, she can invoke “homestead exemption” proceeding that protects a homeowner against seizure of his or her dwelling for up to $50,000 in equity to satisfy a money judgment wherein such exemption acts as a protection in a bankruptcy proceeding.