Posted: November 10, 2015

No Forfeiture of Substitute Property Without Showing That Offense Property Unrecoverable

In United States v. Espada, 10 CR 00985-1 (EDNY, Sept. 2, 2015), Judge Frederic Block explored competing claims to the pension benefits of convicted former state senator Pedro Espada, in the context of the Government’s effort to forfeit the pension. The Government sought forfeiture of the pension as “substitute assets,” that is, assets not connected to the offense for which Espada was convicted. In order to forfeit substitute assets the Government must show that, in essence, offense assets are not available for forfeiture, and once that showing is made, the court “is required to enter a preliminary order forfeiting the substitute property without regard to any third-party interests in the property.” Slip op. 7, 9. Following Judge Block’s entry of a preliminary order of forfeiture, Espada’s wife filed a petition claiming an interest in the pension as his beneficiary. Under the forfeiture statutes, title to offense assets vests in the United States upon commission of the crime, a principle known as the “relation back” provision. Slip op. 8. The relation back provision, however, “does not specify when the government acquires an interest in substitute property.” Id. (emphasis in original). Thus, the Court had to decide whose interest in the pension vested first, the Government’s or Mrs. Espada’s.

The Court concluded that under state law, Mrs. Espada’s interest vested when her beneficiary’s interest became irrevocable in January 2011. Slip op. 11. Determining when the Government’s interest vested, however, was “a question of some complexity,” since the relation back provision does not say “when the government’s interest in substitute property vests and the Second Circuit has yet to address this precise question.” Slip op. 13. The Court drew on case law surrounding pre-trial restraints of substitute assets under the forfeiture statutes, the majority of which holds that the pre-trial restraints available for use against offense property cannot be applied to substitute assets. Slip op. 14-18. The Second Circuit so held in construing the forfeiture provisions of the RICO statute—which “are identical in all material respects to those of the criminal forfeiture statute,” Slip op. 16—in United States v. Gotti, 155 F.3d 144 (2d Cir. 1998). Slip op. 17.

Based on the text of the forfeiture statute and the case law, Judge Block concluded that the Government cannot acquire an interest in substitute property until it has demonstrated that it cannot obtain offense property for forfeiture. Accordingly, the Government’s interest in Espada’s pension vested only on January 23, 2014, “when the Court entered a preliminary order forfeiting his pension as substitute property.” Slip op. 22. Since Mrs. Espada’s interest vested first, the Court granted summary judgment in Mrs. Espada’s favor, stating that it would issue an amended forfeiture order reflecting her interest in the pension. Slip op. 23.

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