November 28, 2022

Volume XII, Number 332


D.C. Circuit Says “Heads I Win, Tails You Lose” Is Maybe Not the Best Set of Rules for Criminal Forfeiture

If you’re a federal prosecutor, you have a lot of tools at your disposal.  Crimes waiting to be indicted are abundant.  If you’re having trouble getting a defendant sentenced as a career offender, you can see if he fits as a “de facto career offender” instead.  I mean, it’s not sanctioned by statute, but the Fourth Circuit loves that sort of thing.  But manipulating court proceedings to keep a party from mounting a challenge to criminal forfeiture isn’t really one of those tools.  The D.C. Circuit just told us as much in United States v. Emor, a case issued last week.

SunRise Academy

Here’s what happened.  SunRise Academy was founded in 1999 by Charles Emor as a private, nonprofit school serving special needs children in Washington, D.C.  SunRise had a board of directors that included Emor, his family members, and others.  SunRise grew into a substantial operation, with 150 students each semester and a solid financial endowment.  In 2007, the city issued SunRise a Certificate of Approval to provide educational services to special needs students.  That certificate brought consequences, and in 2009, D.C. Public Schools decided to investigate whether SunRise had fully implemented its policies.  A year later, the school system issued a report and revoked SunRise’s certificate after finding inaccurate daily attendance reports and fabricated student records designed to receive payment from the city for services not actually rendered.

Charles Emor and the Charges against Him

And that was not all.  Between 2006 and 2010, Emor used his authority as a SunRise director and board member to withdraw funds from SunRise’s bank accounts.  He then used those funds to buy a Lexus SUV and other luxury items for himself, provide money to his family members, and pay the rent on his townhouse.

The government eventually caught Emor, arresting him and seizing the Lexus and over $2 million in the account of Core Ventures, a for-profit company that had contracted to build a coffee shop or vocational school on SunRise property.  Federal prosecutors initially charged Emor with 37 counts, including mail and wire fraud and various other federal and D.C. Code violations.  (Prosecutors in D.C. have jurisdiction over city statutes, too.)  The government also provided notice it was seeking forfeiture of Core’s property.

An important question early on was, who had Emor allegedly defrauded?  In some counts, the government alleged that Emor committed mail and wire fraud, through SunRise, in a scheme to defraud the city.  The district court eventually dismissed these counts over the government’s objection.  But prosecutors also described Emor’s scheme as one to defraud SunRise.  These charges included several wire fraud counts involving wire transfers from SunRise to Core.  Emor ultimately reached a plea deal with the government, which agreed to drop all but one count of wire fraud alleging that Emor had devised a scheme to obtain money “from SunRise’s bank accounts.”  Importantly, though, prosecutors “consciously and deliberately” (as the court of appeals said) declined to identify the victim of Emor’s fraud, and the district court deferred a determination of the victim’s identity until the preliminary forfeiture hearing.

The government never charged SunRise with wrongdoing.  Instead, SunRise moved under Federal Rule of Criminal Procedure 41 for the return of its property, claiming that it owned the $2 million and the Lexus.  The district court denied the motion, holding that 21 U.S.C. § 853(k) prohibits third parties from intervening in criminal proceedings, other than a third party proceeding under 21 U.S.C. § 853(n).

How Criminal Forfeiture Works

Under 28 U.S.C. § 2461(c), “criminal forfeiture is available for general . . . wire fraud violations.”  United States v. Day, 524 F.3d 1361, 1376 (D.C. Cir. 2008).  The procedures set forth in 21 U.S.C. § 853 – except for subsection (d) – apply “to all stages of a criminal forfeiture proceeding.”  28 U.S.C. § 2461(c).

At the preliminary order of forfeiture stage, “[i]f the government seeks forfeiture of specific property, the court must determine whether the government has established the requisite nexus between the property and the offense.”  Fed. R. Crim. P. 32.2(b)(1)(A).  The court is required to make its determination “without regard to any third party’s interest in the property.”  Fed. R. Crim. P. 32.2(b)(2)(A).  By statute, in fact, no third party may “intervene” in the criminal forfeiture proceeding.  21 U.S.C. § 853(k)(1).

The sole forum for a third party to address its interest in forfeited property is through a third party ancillary proceeding.  See id. § 853(n).  Any third party, “other than the defendant,” may petition for an ancillary proceeding if it can assert a “legal interest” in the forfeited property.  Id. § 853(n)(2).  The third party must file a petition setting forth the “nature and extent” of its interest in the property, the “time and circumstances” when the petitioner acquired that interest, any supporting facts, and the requested relief.  Id. § 853(n)(3).

After receiving a petition, a court may “dismiss the petition for lack of standing” or for “failure to state a claim.”  Fed. R. Crim. P. 32.2(c)(1)(A).  For purposes of deciding any motion to dismiss, the facts set forth in the petition are assumed to be true.”  Id.

Meanwhile, a third-party petitioner seeking relief from a preliminary order of criminal forfeiture must satisfy one of two conditions.  A petitioner must either show a legal interest in the forfeitable property vested in petitioner rather than the defendant or show its interest was superior to the criminal defendant’s at “the time of the commission of the acts which gave rise to the forfeiture.”  21 U.S.C. § 853(n)(6)(A).  If the petitioner’s interest arose after the crime, the petitioner must show it was a “bona fide purchaser for value” of the property, who was reasonably without cause to believe that the property was subject to forfeiture” at the time of purchase.  Id. § 853(n)(6)(B).

Procedure in the SunRise/Emor Case

By declining to identify a victim of Emor’s fraud as part of his plea agreement, prosecutors prevented SunRise from acting as that victim and seeking restitution under 18 U.S.C. § 3663A(c)(1)(A)(ii).

After that gambit came a threshold question:  Were SunRise and Emor the same legal person?  If so, Rule 32.2(b)(2)(A) and Section 853(k)(1) should have presented no bar to SunRise’s participation in the preliminary forfeiture hearing.  After all, only third parties are to be kept out.  Here, the district court found that SunRise was Emor’s alter ego but still prevented it from participating in the hearing.  If not, a third party ancillary proceeding would be the proper vehicle under Section 853(n).

SunRise filed just such a petition claiming ownership in the forfeited property and requesting a hearing to determine its interest.  In its petition, SunRise alleged an embezzlement theory, claiming the “Forfeited Property at all times remained the property of SunRise Academy,” and that “Mr. Emor’s embezzlement from SunRise occurred at the time of each transfer from SunRise to Core.”  In its opposition to the government’s motion to dismiss, SunRise again referred to Emor’s “embezzle[ment]” of the $2 million dollars and claimed SunRise owned the funds transferred to Core at the time of “the alleged illegal taking by Mr. Emor . . . .”  So if SunRise were able to prove Emor stole or embezzled the funds SunRise sent to Core to build the coffee shop, SunRise could establish possession of legal title or a superior legal interest at “the time of the commission of the acts which gave rise to the forfeiture.”  21 U.S.C. § 853(n)(6)(A).

But SunRise was already stuck.  The government moved to dismiss SunRise’s petition for lack of standing.  The district court found no reason to revisit the alter ego finding from the preliminary forfeiture hearing, and held that SunRise lacked standing.   To recap, SunRise could not participate in the original hearing partly because it was Emor’s alter ego.  And it had no standing to pursue the later third-party claim because it was determined to be Emor’s alter ego at a hearing in which it wasn’t allowed to participate.

Quoting a Friends episode from a decade ago, the court of appeals called this the “Heads, she wins; tails, I lose” approach and reversed.

If you’re in a situation like this, know the rules and procedure and try to prevent this from happening on the front end.  The D.C. Circuit has just put some more arrows in your quiver.

Copyright © 2022, Brooks, Pierce, McLendon, Humphrey & Leonard LLPNational Law Review, Volume V, Number 132

About this Author

David Smyth, Brooks Pierce, Government Investigations, Banking Litigation

David Smyth has a wide-ranging enforcement and litigation practice that focuses on representation of individuals and corporations facing action by federal and state authorities.  David also conducts internal corporate investigations and advises companies on compliance with federal and state securities laws and other laws and regulations.  David has handled cases in three of the SEC’s regional offices and its Home Office in Washington, D.C.  David has also led the defense of investigations by the CFTC, CFPB, and federal criminal prosecutors.  Throughout these matters,...

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