Supreme Court Limits the Government's Ability to Freeze Untainted Funds Pre-Conviction

On March 30, 2016, in Luis v. United States, the Supreme Court issued an opinion that could have far reaching effects on both asset forfeiture law and a criminal defendant’s ability to hire counsel in fraud cases. The Court concluded that the pretrial restraint of legitimate, untainted assets needed to retain counsel violates the Sixth Amendment. This opinion is extremely significant in light of the government’s increasing use of asset freezes of untainted funds prior to conviction.

Luis owned and operated two businesses which provided healthcare to homebound patients. The government filed a civil action, relying on 18 U.S.C. §1345, to restrain $45 million of her assets, including substitute assets that were not directly linked to the offense conduct. Under §1345, those assets can include: (1) property obtained as a result of the crime; (2) property traceable to the crime; and (3) other property of equivalent value. The trial court granted a temporary restraining order followed by a preliminary injunction in favor of the government because it found that the government had established probable cause under §1345. The government presented testimony that the businesses paid kickbacks to nurses who recruited patients, who were also paid kickbacks. The government agent also testified that Medicare was billed for services that were not provided and/or were not necessary.

On appeal, Luis challenged the freezing of her assets falling within the third category under §1345 - property that was untainted or related to the crime and belonged fully to the defendant. The defendant argued that the freeze imposed by the trial court violated the Sixth Amendment because it prevented her from paying her attorney.

Conversely, the government asserted that there are important interests supporting the asset freeze. The government argued it was important that funds will be available to help pay statutory penalties, including forfeiture of untainted assets and restitution, should the government secure convictions. The government further argued that defendants would be rewarded if they spent all the illegally obtained assets but kept the clean assets. Finally, the government asserted that an appointed attorney is not less effective than privately retained counsel.

In rejecting the government’s arguments, the Court emphasized the fundamental character of a criminal defendant’s Sixth Amendment right to the assistance of counsel. The Court further emphasized that the property at issue is untainted. The Court distinguished its prior opinions in Caplin & Drysdale, 491 U.S. 617 (1989) and Monsanto, 491 U.S. at 600 (1989), in which the Court authorized the seizure of tainted assets. The Court went on to compare this situation to a bankruptcy proceeding. The Court stated that in a bankruptcy case, the government would at most be an unsecured creditor, which someday might collect from a debtor’s general assets. The Court further discussed that courts regularly use tracing rules in cases involving fraud and other issues. This situation is no different. Therefore, the Court held that the defendant had a Sixth Amendment right to use her untainted property to pay reasonable fees for defense counsel.

This opinion will have a significant impact in criminal cases. The government frequently moves to freeze assets pre-conviction, and those assets often include untainted funds. Such asset freezes not only affect the defendant’s ability to hire counsel and prepare a thorough defense, but also, to pay routine living expenses. The Court’s conclusion that the pretrial restraint of legitimate, untainted assets needed to retain counsel violates the Sixth Amendment will shape asset forfeiture law not only under the statute at issue in this case, but likely other federal fraud cases as well.