892 F.3d 545
2d Cir.2018Background
- Paul Daugerdas ran a large tax-fraud scheme through law firms, generating criminal proceeds; he was convicted and a preliminary forfeiture of $164,737,500 (including several bank accounts) was entered against him.
- Paul paid funds to himself from Jenkens & Gilchrist (J&G); those funds were later transferred, some gratuitously over years, into bank accounts titled to his wife, Eleanor.
- Paul argued during criminal proceedings that J&G had commingled tainted fees with untainted firm funds before paying him; courts found the Chicago-office pool consisted entirely of tainted fees and treated the accounts as proceeds traceable to the fraud.
- Eleanor, barred from intervening in the criminal forfeiture under § 853(k), later filed a § 853(n) petition claiming a third-party interest in the Accounts, arguing the firm irreversibly commingled funds so the Accounts are only forfeitable as substitute assets (not proceeds) and therefore cannot be seized from her.
- The district court dismissed Eleanor’s petition for lack of statutory standing and failure to state a claim, relying on prior findings that the Accounts were proceeds; the Second Circuit vacated and remanded, allowing Eleanor leave to replead because of potential due-process concerns.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Eleanor may maintain a § 853(n) petition asserting the Accounts are substitute assets because of irreversible commingling | Eleanor: J&G irreversibly commingled tainted fees with untainted funds before paying Paul, so the Accounts cannot be traced to proceeds and are only forfeitable as substitute assets; her interest predates any government interest in those substitute assets | Government: Prior findings and relation-back doctrine treat the Accounts as proceeds traceable to Paul’s fraud, so Eleanor’s post-offense interest is inferior and § 853(n) does not permit her claim | Court: Dismissal of current petition appropriate for failure to plausibly plead commingling, but remand and leave to replead granted because due-process concerns allow Eleanor to try to plead facts showing substitute-asset status |
| Whether § 853(n)(6)(A)’s temporal requirement (interest must be vested or superior "at the time of the commission of the acts which gave rise to the forfeiture") applies to substitute assets as well as proceeds | Eleanor: If her interest vested before any government interest in substitute assets, § 853(n) should permit her claim | Government: § 853(n) bars third parties whose interests arose after the offense; relation-back doctrine defeats Eleanor | Court: § 853(n)(6)(A) applies the same temporal test to substitute assets and proceeds (the relevant "acts" are the defendant’s offense conduct), so a third party generally must show an interest predating the criminal acts—but factual vesting may be contested |
| Whether prior adjudications in Paul’s criminal proceedings preclude Eleanor from litigating ownership (preclusion and standing) | Eleanor: She was statutorily barred from participating in the criminal proceedings; she should not be bound by findings made in proceedings she could not join | Government: Prior rulings that the accounts are proceeds foreclose relitigation and Eleanor lacks standing | Court: Statutory standing under § 853(n) would normally bar her claim, but due-process principles prevent holding her bound where she lacked an opportunity to be heard; she must be allowed to plead if she can plausibly allege preexisting rights |
| Whether due process requires an opportunity to be heard before forfeiture of property claimed by a third party | Eleanor: Seizing property from a third party who was barred from criminal proceedings violates due process if she had a vested interest | Government: Executive remedies (§ 853(i)) and prior criminal process suffice | Court: Due process requires a hearing if Eleanor can plausibly allege her interest vested before the government’s; executive remedies are not an adequate substitute for judicial process here |
Key Cases Cited
- United States v. Lester, 85 F.3d 1409 (9th Cir. 1996) (criminal forfeiture is an in personam judgment against a defendant)
- United States v. Porcelli, 865 F.2d 1352 (2d Cir. 1989) (forfeiture aims to recover ill-gotten gains but not legitimately acquired property)
- United States v. Capoccia, 503 F.3d 103 (2d Cir. 2007) (§ 853(c) relation-back vests government’s interest in proceeds upon commission of the offense)
- United States v. Voigt, 89 F.3d 1050 (3d Cir. 1996) (substitute-assets forfeiture functions like a general judgment against the defendant)
- United States v. Gotti, 155 F.3d 144 (2d Cir. 1998) (relation-back language controls pretrial restraint analysis)
- Honeycutt v. United States, 137 S. Ct. 1626 (2017) (§ 853(c) applies to tainted property only)
- United States v. Watts, 786 F.3d 152 (2d Cir. 2015) (§ 853(n)(6)(A) requires evaluating third-party interests as of the time of the offense when proceeds are at issue)
- Luis v. United States, 136 S. Ct. 1083 (2016) (plurality: limits on pretrial restraint of untainted assets)
- Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979) (due process bars binding a nonparty who had no opportunity to be heard)
- DSI Assocs. LLC v. United States, 496 F.3d 175 (2d Cir. 2007) (§ 853(n) provides exclusive judicial means for third-party claims; executive remedies under § 853(i) may be constitutionally insufficient)