The Second Circuit vacated the district court’s order and remanded the case for further proceedings, finding that while Eleanor had not sufficiently pleaded facts to state a claim to the property at issue, she has “significant constitutional rights potentially at stake” and “has a due process right to be heard” on her claim to the property. “[I]f Eleanor’s interest in Paul’s untainted property . . . vested before, and is therefore superior to, the government’s interest,” then due process requires that she be allowed to petition the court accordingly. Although Eleanor has been given another chance to show she is entitled to funds in her accounts, it will be difficult for her to gather and present evidence sufficient to prove that her accounts contain “untainted property” now, over nine years from when the property was seized. While it is true that Eleanor could not have brought her petition under section 853(n) until after the forfeiture order was entered, as she did, there are other steps she could have taken earlier to protect her interests.
For example, Eleanor and any White-Collar Wife whose property is seized pursuant to a post-indictment restraining order may file a Motion for Return of Property under Rule 41(g) of the Federal Rules of Criminal Procedure, long before a petition for determination of third-party interests can be filed under section 853(n). Rule 41(g) provides that a “person aggrieved by an unlawful search and seizure of property or by a deprivation of property may move for the property’s return.” The motion is to be filed in the district court where the property was seized, and “the court must receive evidence on any factual issue necessary to decide the motion.” In other words, even if the search was legal, a person who is deprived of her property may use a motion for return of property to ask for it back.
Filing a motion for return of property as early as possible in the criminal proceedings may reduce the amount ultimately due to the government because white-collar crimes have tax implications. All income, whether legal or illegal, must be reported to the Service. When someone is convicted of a white-collar crime, the next step is often an increase in tax due to the failure to report and pay tax on the proceeds of the crime. In addition to having to pay tax on the previously unreported income, someone convicted of a white-collar crime may also be responsible for a 75% fraud penalty on the amount of tax that was not reported due to the illegal activity. If property that is seized is not ultimately forfeited, it can be applied to a tax or other civil liability as of the date that the motion for return of property should have been granted. Because of the onerous penalties and interest that apply to unpaid tax liabilities, the sooner payments are applied, the better.
In East Higgins Road, the owner of seized cash filed a motion for return of property. The government argued that the cash was proceeds of tax evasion, but conceded that it was otherwise lawfully earned income. The Court of Appeals for the Seventh Circuit found that income earned from a lawful business is not the fruit of a crime—and therefore is not subject to forfeiture—even if the recipient failed to pay tax on that income. In that case, the taxpayer had directed the government to apply the seized cash to payment of his tax liabilities rather than return it to him shortly after the seizure. As a result, the court did not order the physical return of the cash, but rather found that the funds should be applied to the taxpayer’s tax liabilities “as of the date that a motion for return of property should have been granted.” If the funds had been subject to forfeiture, they essentially would have vanished into thin air because forfeited funds do not reduce tax liabilities or any other liabilities. Instead, by filing a motion for return of property, the taxpayer succeeded not only in getting the funds applied to his tax liabilities, but also in erasing significant penalties and interest that had accrued while the motion was being litigated. White-Collar Wives who have grounds to file a similar motion may net similar benefits.
Together with other accounts she claims should not be subject to forfeiture, Eleanor’s petition, filed in August of 2014, requests that a Goldman Sachs trading account number 4XDG (titled in her name and part of the post-indictment asset seizure) be returned to her. The fact that this account was owned by Eleanor and titled in her name was known early in the criminal proceedings. The government explained in a letter to the Court that it “conferred with counsel for the defendant, Paul M. Daugerdas, who expressed a preference for maintaining the status quo.” It isn’t clear from the docket entry whether Paul’s attorneys consulted Eleanor, as well as Paul, to understand her “preference” along with his, whether Paul’s attorneys were considering what was best for Eleanor or what was best for Paul, or whether Eleanor received the legal advice she needed to make an educated decision to give up her right to seek return of those funds at that point in time.
The amounts Eleanor alleged were deposited in her accounts prior to Paul’s indictment, which she argues in her petition belong to her, are in excess of $30 million. The petition alleges that $1 million alone was deposited into her Goldman Sachs account over a year before the indictment. Even if all of Paul’s accounts and assets were forfeited, if Eleanor had filed a successful motion for return of property with regard to that one account in 2009, she would be in a materially different position than she is today. This is not to say that Eleanor should have filed a motion for return of property back in 2009. There are many very good reasons why an attorney representing a White-Collar Wife would decide not to file a motion for return of property. Above all, no amount of property being returned is worth being indicted as a co-conspirator, and if there is any risk that asserting ownership over property would lead to that result, then it is not worth trying to get the property returned. But it is important for each White-Collar Wife in this position to make an informed and reasoned decision together with an experienced attorney who is looking out only for her interests.
Kathleen Manafort, the wife of recently indicted white-collar defendant Paul Manafort, presents another example of the unique problems White-Collar Wives face. Paul Manafort has been indicted for crimes that are subject to forfeiture. The indictments specify assets that are allegedly subject to forfeiture as the fruits of specific alleged crimes, and also declare an intent to seek forfeiture of substitute assets, as in Daugerdas. The government has alleged that foreign financial accounts that should have been, but were not, reported to the government are subject to forfeiture. Although Kathleen Manafort is not named in the indictment, her property is included in the list of “records to be seized” on the search and seizure warrant authorized by the court, including any and all foreign financial records.
United States persons who have a direct or indirect interest in foreign financial accounts over a certain amount must report those accounts to the government. Penalties for the failure to do so include significant monetary penalties and up to five years in prison. An attorney representing Kathleen Manafort would need to carefully weigh whether Kathleen has a separate interest in property that was seized, including bank records or bank accounts, before acting. Without question, the primary goal would be to protect Kathleen: arguing that she had an interest in undisclosed foreign financial accounts could potentially expose her to criminal charges and significant civil penalties. On the other hand, if domestic financial accounts of Kathleen’s were seized that contain funds that do not have anything to do with her husband’s allegedly illegal activity, then she may be able to bring a motion for return of property for those funds.
In addition to the issues surrounding asset seizure and forfeiture, White-Collar Wives face significant collateral consequences from their husbands’ battles with the government over funding costs of defense, plea negotiations, the financial statements that must be provided as part of a pre-sentencing investigation, civil tax issues that necessarily follow a conviction for a white-collar crime, and restitution for unpaid taxes. It is well settled that when a defendant pleads guilty to tax evasion and enters into a restitution agreement with the U.S. government, that agreement does not “preclude the IRS from assessing tax liabilities and civil penalties that differ from the restitution for the same period.” White-Collar Wives will have different defenses than their husbands to additional assessments, even if they filed tax returns jointly. In addition, an “innocent spouse” may be granted relief from joint and several liability of a portion of the tax allocable to the other spouse. This defense, however, often creates a clear conflict between the two spouses.
Given the rights and defenses available to White-Collar Wives that are not available to defendants, and the significant collateral consequences that families face when a family member is charged with a white-collar crime, white-collar attorneys should counsel their clients regarding the significant benefits of separate representation for their spouses. Particularly where, as in Daugerdas, assets that belong to the White-Collar Wife are seized and forfeited along with the defendant’s assets, attorneys who are engaged to represent the husband may not be able to advise the wife about her potential rights due to a conflict of interest. If a spouse does not obtain her own counsel, attorneys representing the defendant should not speak on the spouse’s behalf with the government or with the court for fear of creating an implied representation without getting a formal waiver of the potential conflict of interest.