In the December 2015 edition of The DRMA Voice (Supreme Court to Decide Whether Government can Freeze ‘Untainted’ Funds), I wrote about the U.S. Supreme Court oral argument this term in Luis v. United States, which framed – in stark relief – the tension between the government’s interest in preserving assets for victims of fraud and the defendant’s interest in legal representation. The government sought restitution in a criminal Medicare fraud case and, to preserve recovery in the event of conviction, sought an order freezing all the defendant’s assets – not only those that were the fruit of the fraud, but those that were not (so-called “untainted” assets). The district court granted the order over the defendant’s objection that without access to her untainted funds she would be unable to afford counsel of her choice in violation of her Sixth Amendment right to counsel. The 11th Circuit Court of Appeals affirmed.
While a defendant in a Federal Trade Commission (FTC) action doesn’t have the same Sixth Amendment rights that a criminal defendant does, there seemed to be the chance, based on the nature of Luis’ argument and the tenor of the justices’ questioning, that a decision in the plaintiff’s favor could establish a helpful precedent for FTC defendants facing requests to freeze their untainted assets that would also deny them the ability to hire an attorney. The predicate of the argument was not the Sixth Amendment per se, but the contention that until convicted, the only assets in which the government had a legitimate interest, and thus the right to preserve them for restitution, were those derived from the fraud. Several justices expressed sympathy with the “unfairness” of depriving a person of her rightful property before being found guilty, especially at the expense of legal representation. The question was whether the Court, if it held for Ms. Luis, would limit its decision to the Sixth Amendment context, which would mean little for FTC defendants – or go beyond.
The Supreme Court reversed the 11th Circuit, ruling for Ms. Luis but basing its decision squarely on a criminal defendant’s Sixth Amendment right to counsel, which trumped the government’s interest in preserving funds for restitution (which, while important, does not enjoy constitutional protection). Stating that “no one doubts the fundamental character of a criminal defendant’s Sixth Amendment right to the ‘Assistance of Counsel,’” the Court wrote:
The question presented is ‘[w]hether the pretrial restraint of a criminal defendant’s legitimate, untainted assets (those not traceable to a criminal offense) needed to retain counsel of choice violates the Fifth and Sixth Amendments.’ [w]e answer it, and our answer is that the pretrial restraint of legitimate, untainted assets needed to retain counsel of choice violates the Sixth Amendment. The nature and importance of the constitutional right taken together with the nature of the assets lead us to this conclusion.
While the strict holding of Luis, limited as it is to a constitutional right to counsel that is absent in a civil FTC proceeding, is of no utility to defendants contesting an FTC asset freeze, the legal analysis that the court employed in concluding that the “nature of the assets” matters, and that untainted assets are entitled to greater protection from pretrial restraint than are tainted assets, could be. The government argued that because all assets are subject to forfeiture if it wins, then upon a preliminary determination that it is likely to win, it had an interest in preserving all available assets for victims. In essence, tainted and untainted funds should be treated exactly the same not only at the post-conviction or post-judgment stage, but also at the pre-trial stage, before wrongdoing has been adjudged, regardless of the impact it would have on the accused’s ability to defend herself. Luis’ counter-argument was that until she is found guilty, the government’s interest in her property is limited to tainted assets and she retains full legal ownership and control of her untainted property.
The court sided with Luis, describing the difference between tainted and untainted property as the “difference between what is yours and what is mine.” As a matter of property law, it stated, the ownership interest of a defendant in tainted property is “imperfect. The robber’s loot belongs to the victim, not to the defendant …” and does so from the time of commission of the unlawful act. The wrongdoer has possession but not title. In that sense, the government, upon a finding of probable cause to believe the property was obtained illegally, has a “substantial” interest in preserving the property for forfeiture or restitution akin to that of a secured creditor in bankruptcy, “with a lien on the defendant’s tainted assets [which is] superior to that of most any other party.”
In contrast, property that is untainted “belongs to the defendant, pure and simple,” and the government’s interest in preserving it is no greater than an unsecured creditor’s interest in bankruptcy, which receives no preferential treatment. While such a creditor someday might collect from a debtor, it has no “present claim to, or interest in, the debtor’s property.” In short, while tainted property is rightfully “yours” (the government’s), regarding untainted assets, a defendant can at pretrial “reasonably claim that the property is still ‘mine,’ free and clear.” Surveying its precedents, the court found “no decision… authorizing unfettered, pretrial forfeiture of the defendant’s own ‘innocent’ property …”
The federal statute in Luis permitted restraint not only of ill-gotten gains but also of “property of equivalent value.” This was the lynchpin of the government’s claim to untainted funds. In contrast, the statute under which the FTC seeks asset freezes doesn’t speak of “property of equivalent value” to ill-gotten gains. In fact, the FTC statute doesn’t provide explicit asset freeze authority at all. At the agency’s bidding, judges have simply ordered freezes in the exercise of their broad equitable authority to grant “ancillary” relief when they issue an injunction.
The discretion of judges in FTC cases to freeze assets or not is vast. For defendants who have significant untainted assets to protect to pay for an FTC defense (or other vital needs), the distinction the Supreme Court draws between tainted and untainted property in Luis – and the logic behind it – provides new legal firepower for challenging FTC efforts to sweep those assets into a freeze order. As the judge weighs such a request, the defendant should ask him the same question the court posed inLuis: “How are defendants whose innocent assets are frozen in cases like these supposed to pay for a lawyer?” Even absent a constitutional right to counsel in FTC cases, the correct and just answer, in the exercise of the judge’s equitable authority, is that they cannot, without the ability to use those assets in which the FTC has no “present” claim.