A Criminal Defendant Cannot Forfeit Property He Never Received

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On June 5th, the United States Supreme Court held in Honeycutt v. United States that a criminal defendant is not jointly and severally liable for property his co-conspirator derived from the crime, and that he only can be ordered to forfeit property he actually obtained from the crime.  Although the decision was unanimous (with Justice Gorsuch abstaining), the outcome was far from preordained.

Until 2015, courts applying the forfeiture statute, 21 U.S.C. § 853, had uniformly held that co-conspirators are jointly and severally liable for amounts received pursuant to the conspiracy.  That rule was adopted by nine circuits.  However, in 2015, the D.C. Circuit split with its sister circuits in United States v. Cano Flores, rejecting joint and several liability for co-conspirators.    The district court in Honeycutt sided with the D.C. Circuit, but the Sixth Circuit reversed, following the overwhelming majority view of the other Courts of Appeal.

The result in Honeycutt, and the underlying analysis and related policy arguments, may have implications in other government enforcement contexts, including in securities cases. Further, the result appears to obligate the government to perform some degree of a tracing analysis to tie individual defendants to specific tainted funds – an analysis which might be difficult in complex fact patterns involving multiple defendants and the use of multiple entities or financial accounts.

Background

The case involved two brothers, Terry and Tony Honeycutt. Tony owned a hardware store and his brother Terry managed sales and inventory for the store.  After observing several “edgy looking folks” purchasing an iodine-based water purification product called Polar Pure, Terry contacted local police to ask whether the product could be used to manufacture methamphetamine.  The police told him that it could.  Nonetheless, Terry Honeycutt and the store continued to sell Polar Pure, grossing roughly $400,000 from the sale of over 20,000 bottles of Polar Pure over the course of three years.

The DEA investigated the sales, and a grand jury indicted the brothers on various federal drug crimes related to the sales. The government sought forfeiture judgments against each brother in the amount of the store’s profits from selling Polar Pure—$269,751.98.  Tony pleaded guilty, and agreed to forfeit $200,000.  Terry went to trial, and was convicted on 11 charges, including conspiring to and knowingly distributing iodine in violation of several federal drug laws.

Although Terry had no “controlling interest” in the store and the Polar Pure sales did not benefit him personally, the government sought to recover the remaining profits ($69,751.98) from Terry under the theory that as a co-conspirator he was joint and severally liable with his brother. Terry argued that he should not have to forfeit the store’s profits because he never received any of the profits.  All of the profits went to his brother who owned the store.

The district court declined to order Terry Honeycutt to forfeit any of the store’s profits. The court acknowledged that Honeycutt was “involved in a criminal conspiracy” but concluded that he did not “personally” profit from the illegal conspiracy.

The Sixth Circuit reversed the district court’s forfeiture ruling. It concluded that Honeycutt was jointly and severally liable for the conspiracy’s profits, regardless of whether he ever received those profits.  The Sixth Circuit noted the circuit split created by the D.C. Circuit’s decision in Cano-Flores but found it unnecessary to evaluate the reasoning in that case because it was bound by a prior Sixth Circuit decision that imposed joint and several liability under another forfeiture statute that it found indistinguishable from 21 U.S.C. § 853.

Petitioner’s Statutory Arguments

The text of § 853(a)(1) (under which the government sought forfeiture), reads:   “Any person convicted of a violation of this subchapter or subchapter II of this chapter punishable by imprisonment for more than one year shall forfeit to the United States . . . – (1) any property constituting, or deriving from, any proceeds the person obtained, directly or indirectly, as a result of such violation.”  (emphasis added).  Petitioner argued that the statutory language should end the inquiry:  Terry did not “obtain” the profits from selling Polar Pure; his brother did.

Petitioner also pointed to several other provisions in § 853 that, he argued, make clear that the statute’s purpose is to forfeit tainted property.  Imposing joint and several liability would contravene that intent, instead requiring co-conspirators to forfeit their own, untainted property.  For example, § 853(c) provides for the vesting of forfeitable property in the United States, and, Petitioner argued, “Title can only vest in actual property obtained from the crime.” Further, §  853(p) contains a substitute property provision, allowing the government to forfeit money from a defendant’s general assets if tainted property “cannot be located,” or has been “transferred” or “commingled.”

Petitioner’s Policy Arguments

Petitioner also raised several policy arguments. First, he pointed to civil in rem forfeitures as the predecessor of criminal forfeiture. In rem forfeitures target guilty property, and, Petitioner argued, Congress did not alter that fundamental principle in enacting the criminal forfeiture statutes.

Furthermore, Petitioner argued that joint and several liability would subvert forfeiture’s remedial purposes. Instead of depriving criminals of their ill-gotten gains, imposing joint and several liability on co-conspirators who did not receive the ill-gotten gains would allow the conspirator who did receive those gains to retain them.

Imposing joint and several liability would also run contrary to forfeiture’s punitive goals. While typical criminal fines consider a defendant’s culpability and the fine’s burden on the defendant, imposing joint and several liability would not consider these factors.

Moreover, Petitioner argued that joint and several liability does not belong in the criminal context – it is a tort concept whose policy justification is that a tort victim should be able to recover his full losses from any defendant. In the criminal context, forfeited property does not revert to the victims, but instead goes to the government.  And, in torts there is a right to contribution, allowing less culpable defendants to pass liability to more culpable ones.  But this safeguard does not exist in the criminal context.

Moreover, Petitioner argued that joint and several liability does not belong in the criminal context – it is a tort concept whose policy justification is that a tort victim should be able to recover his full losses from any defendant. In the criminal context, forfeited property does not revert to the victims, but instead goes to the government.  And, in torts there is a right to contribution, allowing less culpable defendants to pass liability to more culpable ones.  But this safeguard does not exist in the criminal context.

The Petitioner also argued that imposing joint and several liability could cause several constitutional violations, such as imposition of excessive fines under the Eighth Amendment, and Sixth Amendment violations, since “pretrial constraint of . . . untainted assets needed to retain counsel of choice violates the Sixth Amendment” under Luis v. United States.

Government’s Main Claims: Pinkerton Liability and Policy

The government based its arguments largely on the theory underpinning co-conspirator liability, rather than on forfeiture concepts.  As stated by the government, “[a] conspiracy is a partnership in crime in which the conspirators are legally responsible for each other’s foreseeable actions in furtherance of their common plan.”

The Pinkerton theory of liability provides that all conspirators may be convicted of the substantive offense committed by a member of the conspiracy, as long as the offense was reasonably foreseeable and committed “in furtherance of the conspiracy.”  The government also cited several other examples of co-conspirators’ actions implicating each other, concluding that “[t]he principle that a conspiracy is a partnership in which the members act as each other’s agents thus runs throughout the law’s treatment of conspirators.”  Thus, the government argued that, applying these principles to forfeiture provisions under § 853 “dictates that, when the traceable proceeds of the conspiracy are unavailable, a conspirator’s liability to forfeit an equivalent sum is not limited to the amount of proceeds the government can prove he obtained personally.  Instead, as courts have long recognized, each conspirator is jointly and severally liable for the amount of proceeds foreseeably obtained by the conspiracy as a whole—without regard to how the conspirators divided those proceeds amongst themselves.”

The government contested Petitioner’s policy arguments, arguing that § 853 does not limit itself to recovering tainted property.  The government argued that where tainted property is unavailable, § 853 provides for recovery of substitute assets or criminal fines.  Furthermore, rather than subverting criminal forfeiture’s goal of depriving criminals of their ill-gotten gains, imposing joint and several liability would further that goal by preventing co-conspirators from hiding assets among all participants in the conspiracy.  And, the government suggested that the Eighth Amendment’s Excessive Fines Clause would provide a safeguard against “outlier” cases in which “a defendant played a truly minor role in a conspiracy that [foreseeably] generated vast proceeds.”

The Court’s Holding

The Court held that 21 U.S.C. § 853(a) does not provide for joint and several liability, and that a criminal defendant can only be ordered to forfeit property he actually obtained as a result of the crime.

The Court’s analysis initially focused on the text of § 853(a).  The Court found that the statute explicitly only refers to “tainted property,” that is “property flowing from” or “used in” the crime itself.  And that the statute defines forfeitable property “solely in terms of personal possession or use,” by limiting forfeiture to property the defendant “obtained” as the result of the crime.  The Court reasoned that neither the dictionary nor common usage of the word “obtain” supports “the conclusion that an individual ‘obtains’ property that was acquired by someone else.”  The Court buttressed the conclusion that a criminal defendant cannot forfeit property he did not personally receive by showing that joint and several liability was inconsistent with other provisions in § 853.  Of particular interest, the Court observed that joint and several liability would render futile § 853(p), which allows for the forfeiture of substitute property when the defendant has dissipated or otherwise disposed of the tainted property. More specifically, the Court reasoned that § 853(p) – which reflects that Congress contemplated situations in which the tainted property would be beyond the government’s reach – allows for forfeiture “only from the defendant who initially acquired the property and who bears responsibility for its dissipation. Permitting the Government to force other co-conspirators to turn over untainted substitute property would allow the Government to circumvent Congress’ carefully constructed statutory scheme[.]”

The Court rejected the government’s argument that Congress “must be presumed” to have enacted § 853 with the implicit understanding that conspiracy liability dictates that co-conspirators are legally responsible for each other’s foreseeable actions. The Court found that the plain text and structure of § 853 demonstrate that Congress did not intend to impose Pinkerton liability in this context.

What May Honeycutt Mean for Other Areas of the Law?

In SEC v. Contorinis, the Second Circuit found in 2014 that the tipper in an insider trading case, Joseph Contorinis, was required to disgorge all the profits he generated, rather than simply the profits he personally realized.  Contorinis, an investment bank executive, acquired material nonpublic information about a transaction involving Albertson’s.  Contorinis used this information to trade in one of the investment bank’s funds to make unlawful profits of $7,304,738.  However, Contorinis only personally realized $427,875 in compensation from this windfall for his firm.

Contorinis was indicted and convicted after trial of securities fraud and conspiracy to commit securities fraud. Initially, Contorinis was ordered to forfeit the full amount of money he made for the fund and the losses he was able to avoid, totaling more than $12 million.  On appeal, the Second Circuit held that Contorinis could not be ordered to forfeit proceeds that went to an innocent party and that he never personally possessed.  Ultimately, Contorinis was ordered to forfeit $427,875.

The SEC brought a civil complaint against Contorinis and sought disgorgement of the unlawful profits he made for the investment bank’s fund. The district court agreed with the SEC that Contorinis should disgorge this full amount and Contorinis appealed to the Second Circuit arguing that ordering him to disgorge the entire amount gained through his insider trading “is a misapplication of the disgorgement principle.”

The Second Circuit rejected Contorinis’ claim. The Second Circuit began its analysis by noting that in past insider trading cases that Court had held: “[a] tippee’s gains are attributable to the tipper, regardless whether benefit accrues to the tipper.”  The Second Circuit found that it is entirely appropriate in the insider trading context to hold a tipper responsible for a tippee’s gains, because there are circumstances, like this one, where a tipper tips intending for that person to benefit.  The Second Circuit also distinguished civil disgorgement from criminal forfeiture on the grounds that “disgorgement is an equitable remedy that prevents unjust enrichment, and criminal forfeiture a statutory legal penalty imposed as punishment.”

Because the decision in Honeycutt is largely based on the statutory language of 21 U.S.C. § 853, it may not have much applicability to other contexts like civil insider trading.  But the policy arguments against joint and several liability made in this case are certainly applicable.  It will be interesting to see whether courts will give arguments by civil defendants like Contorinis more sway in the future.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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