Bankruptcy Settlement Provided No Protection from Criminal Forfeiture

June 15, 2017

A settlement with a bankruptcy trustee does not shelter proceeds of stolen property from criminal forfeiture, according to an opinion by District Judge Richard H. Kyle of St. Paul, Minn., written in the wake of the Thomas Petters Ponzi scheme.

A man was indicted and pleaded guilty, acknowledging that he earned more than $58 million from the fraud. Two years later, the district court entered a criminal forfeiture order that forfeited all of his property “derived from proceeds traceable to the” crime and ordered him to pay $58 million.

The government alleged that he used proceeds from the fraud to purchase a home in Florida that he transferred to his wife after his guilty plea. According to the government, the wife sold the home and used the proceeds in part to purchase a second Florida home.

The government sought a preliminary forfeiture order directing the wife to forfeit the second Florida home. The district court granted the government a preliminary order of forfeiture, finding a “nexus” between the crime and the second Florida home.

Meanwhile, the wife and her husband had made a settlement with the trustee of the Petters liquidating trust by placing a mortgage on the first Florida home in favor of the trustee. They satisfied the mortgage by selling the first home.

In the forfeiture proceeding directed at the second home, Judge Kyle rejected the wife’s contention that the second home was “cleansed” by the bankruptcy and was no longer proceeds of the fraud.

In his June 12 opinion, Judge Kyle said there was no authority for the wife’s argument. He rejected the “novel proposition that a bankruptcy settlement somehow cleanses tainted, otherwise forfeitable property.”

Judge Kyle also said that the rule sought by the wife would not “make sound policy, as forfeiture proceedings adjudicate interests distinct from bankruptcy proceedings.” He explained that the government pursues forfeitures on behalf of those who were defrauded. The bankruptcy proceedings, by contrast, settled disputes between the husband, the wife, and creditors, “unconcerned with whether any assets were traceable to the fraud.”

“Under these circumstances,” Judge Kyle said, “the court cannot hold that the bankruptcy proceedings preclude forfeiture.”

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