102A
AMERICAN BAR ASSOCIATION
ADOPTED BY THE HOUSE OF DELEGATES
FEBRUARY 10, 2014
RESOLUTION
RESOLVED, That the American Bar Association urges executive, judicial and legislative governmental bodies at the federal, state, and territorial levels to engage in actions designed to reduce unnecessary tension, expense and litigation and to foster inter-court, inter and intra-agency, and inter-party cooperation and coordination in cases where parallel actions or proceedings arise under both (i) bankruptcy or insolvency law and (ii) asset forfeiture or analogous regulatory enforcement law.
FURTHER RESOLVED, That these actions by governmental bodies should include, as appropriate to those bodies’ respective charges and missions:
(1) education and training;
(2) development and implementation of policies, procedures, guidelines and protocols for:
(a) internal processes within those governmental bodies;
(b) interaction with other governmental bodies; and
(c) interaction with other external parties and entities, including creditors, victims, class representatives, holders of interests and others with an interest in parallel proceedings arising under both bankruptcy or insolvency law and asset forfeiture or analogous regulatory enforcement law;
(3) enactment of appropriate statutory amendments;
(4) adoption of appropriate evidentiary and procedural rules; and
(5) negotiation of appropriate international, cross-border and multi-lateral agreements, including Mutual Legal Assistance Treaties.
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102A
REPORT
This Resolution is designed to reduce uncertainty and to minimize expense, litigation and wasted resources resulting from conflicts between asset forfeiture proceedings and bankruptcy proceedings involving the same parties or assets. It does so by encouraging the development of protocols and processes to foster cooperation among the courts, parties, agencies and entities involved in parallel proceedings that involve both bankruptcy (or analogous insolvency proceedings) and asset forfeiture (or analogous regulatory enforcement proceedings).
A. Context
The tensions arising from the interaction of bankruptcy proceedings and asset forfeiture proceedings form the basis for this Resolution. For simplicity, this Report discusses those tensions in the context of financial fraud, which is the primary arena in which these tensions have become apparent in recent years. These tensions may, however, arise in any situation in which an entity or its assets are subject to both (i) a domestic or cross-border bankruptcy or insolvency proceeding, including receiverships, assignments for the benefit of creditors, and liquidation proceedings under the Securities Investor Protection Act, and (ii) a regulatory enforcement action that includes criminal or civil asset forfeiture by any governmental entity including the Department of Justice, Securities and Exchange Commission, or other federal, state, territorial, foreign, or international governmental entity (for example, under 18 U.S.C. §§ 981, 982, 1963 and 21 U.S.C § 853; 28 U.S.C. § 2461).
Fraud, Crime and Bankruptcy
In the wake of the great recession, a substantial number of high profile parallel criminal prosecutions and individual and business bankruptcies have arisen from allegedly fraudulent financial or securities schemes. Examples include the nationally infamous cases involving Madoff (New York), Adelphia / Rigas (Pennsylvania), Petters / Lancelot (Minnesota), Dreier (New York) and Rothstein (Florida), and the more locally shocking cases of Monroe Beachy (Ohio), Lydia Cladek (Florida), Samantha Delay-Wison (Anchorage), and Nick Cosmo / Agape (Long Island).
Until fairly recently (within the past decade, most notably), the intersection between criminal law and bankruptcy law in cases of fraud was relatively routine and non-controversial.
Criminal law approaches fraud, in its many forms, as a crime – an act that harms society and calls for public vindication. Criminal law prosecutes the fraudster, and perhaps sentences him/her to prison and likely to restitution. Despite the possibility of a restitution order, criminal law has had no direct impact on the fraudster’s assets and little impact on the fallout caused by the collapse of the fraudster’s enterprise until recently. These matters were left to other law, including contract, tort, collection and bankruptcy law.
To bankruptcy law, fraud is simply one item on a lengthy list of ways to create debt. If a fraudster, or his business, files bankruptcy, bankruptcy law treats the fraudster and the entities harmed by fraud in accordance with bankruptcy’s fundamental objectives. Commonly synthesized as the “twin pillars” of modern bankruptcy law, these are: (i) the right to a “fresh start” for the “honest but unfortunate” individual debtor or financial rehabilitation for the business debtor, and (ii) creditors’ rights to restorative and distributive justice, expressed in terms of collective enforcement, maximization of value, and equitable distribution. If a fraudster files bankruptcy, bankruptcy law denies discharge to the dishonest debtor and / or the fraudulently incurred debt, and generally permits criminal prosecution or regulatory enforcement action to proceed unrestricted by the “automatic stay,” which halts most actions against a debtor in bankruptcy. (11 U.S.C. §§ 362 (b)(1), 523(a)(2), (a)(4), (c), 727, 1141(d).) Bankruptcy law’s comprehensive processes for asset collection (11 U.S.C. §§ 540 – 549), claims resolution (11 U.S.C. §§ 521 – 523), and distribution (11 U.S.C. §§ 503, 727, 1129), provide detailed systems for addressing the complex interactions among diverse interests affected by the collapse of the enterprise. These systems include provisions addressing the rights and obligations arising out of criminal or other regulatory enforcement proceedings, such as restitution and injunctive relief. Analogous, comprehensive processes define insolvency proceedings under other federal, state, foreign, and international law.
Critical Developments in Criminal Law and Regulatory Enforcement
Two significant developments have brought criminal law (and other regulatory enforcement law) into the realm of asset collection and distribution in new ways that put it on a collision course with bankruptcy law. Analogous changes occurred roughly simultaneously under other regulatory enforcement law.
First, during the past several decades, criminal law has embraced the notion of victims’ rights. In this regard, restitution orders have become standard in many federal sentences, including in fraud cases. Restitution does not, however, give the government power to seize a defendant’s assets and “restore” or “remit” them to “victims.” This is where the second development, regarding forfeiture, comes into play.
Forfeiture allows the government to seize property that was involved in, facilitated, or is the proceeds of a wide array of crimes. In 2000, and again in 2006, Congress expanded criminal forfeiture to include a lengthy list of federal crimes, including an extensive array of frauds. Today, the government routinely seizes property as a mandatory component of many federal sentences. (18 U.S.C. §§ 981, 982, 1963; 21 U.S.C § 853; 28 U.S.C. § 2461.) When coupled with restitution, remission and restoration, forfeiture allows the government to take a defendant’s assets and use them to compensate victims. Criminal forfeiture, together with analogous civil enforcement provisions, today require the government to fashion reasoned means of distributing literally billions of dollars of ill-gotten gains.
These changes have altered the landscape because forfeiture no longer operates solely in discrete situations in which a fairly straightforward process is used to gather illicitly obtained property and returns it to its rightful owner, or uses its value to compensate the victims of a crime. When fraud infiltrates a business’ operations, it is not uncommon for the business itself and one or more of its principals to be subject to forfeiture and voluntary or involuntary bankruptcy proceedings.
In a typical bankruptcy case, the Bankruptcy Code, first, attempts to gather all of the debtor’s property in one forum for equitable distribution. In this regard, bankruptcy law differs from forfeiture law, at least in theory, because forfeiture is limited to property tied to the particular crime(s) of conviction. Nevertheless, the enlarged definition of crimes for which forfeiture is authorized, combined with broad concepts such as substitute property, facilitating property, proceeds, and relation back, may result in broad forfeitures of virtually all of the assets that otherwise might be administered in a bankruptcy case. In the case of fraud, depending on the crimes charged (securities fraud, mail fraud, wire fraud, etc.), the forfeitable property that was involved in, facilitated, or constituted proceeds of the crime may include virtually all of the assets of the (possibly legitimate) business. This is especially true in a Ponzi scheme where there arguably are few if any “clean” assets.
Second, the Bankruptcy Code seeks to gather all of the debtor’s stakeholders in one forum. Claimants generally cannot opt out of the bankruptcy process, and typically will be bound by the discharge even if they decline to participate. (11 U.S.C. §§ 524, 1141 (2012)). In this regard, bankruptcy law again differs from forfeiture law because bankruptcy law is not limited to distributing property to “victims” whose injuries relate directly to the specific crime(s) of conviction. Rather, it proceeds under a broad structure that includes all of the fraudster’s stakeholders without regard to whether their claims or interests arise directly from the fraud.
In contrast, under forfeiture law, the definition of “victims” (again, in reference to the crimes of conviction) may include vast numbers of shareholders, investors and others who claim to have been duped. The definition of victims might not, however, include many others who suffered harm from the business collapse, such as suppliers, utilities, trade creditors, employees, and lenders whose dealings with what they perceived to be a legitimate business unwittingly enabled the fraud to continue.
Third, after all of the assets and stakeholders have been brought together in the bankruptcy forum, the Bankruptcy Code mandates distribution according to a carefully constructed and detailed distribution scheme. (11 U.S.C. §§ 726, 1129(a-b) (2012)). In so doing, it creates an “absolute priority” system under which debt must be paid in full before equity takes a share, analogous to the familiar notion that an insolvent entity may not distribute dividends to shareholders when it is unable to pay creditors. These distributive precepts may come into tension with forfeiture law, however, particularly if forfeited assets are distributed to “victims” under priorities (or exclusivities) that differ markedly from the distributions that would have been made under bankruptcy law.
As a consequence of these different approaches, important substantive conflicts may arise with respect to fundamental determinations of entitlement and distribution under bankruptcy and forfeiture law.
Moreover, because the parallel proceedings in forfeiture and bankruptcy cases may be subject to divergent evidentiary and procedural rules and standards, uncertainties arise with respect to fundamental aspects of evidence gathering, sharing, and preservation. The absence of clearly applicable procedural rules leaves the courts with, at best, limited guidance with respect to the resolution of these conflicts or even the scope of their ability to communicate across courts.
B. Essential Premise of This Resolution
This Resolution is designed to reduce the tensions between forfeiture law and bankruptcy law, and thereby reduce unnecessary litigation and waste of resources. It does so by encouraging the development of protocols and processes to facilitate communication, cooperation and coordination among the parties to forfeiture and bankruptcy proceedings. Coordination is possible because, although bankruptcy law and criminal law wield different tools, they hold firmly to the same fundamental principles regarding financial fraud: the dishonest cheat should pay; those harmed by fraud should be compensated.
It is not enough to agree upon these principles, however. The restorative and distributive rules of bankruptcy law and forfeiture law vest in highly developed statutes. Those statutes evolved from different sources, for different reasons, and are in many ways irreconcilable today. Consequently, it is incumbent upon those who practice and make policy in these areas to collaborate across disciplines to reconcile competing processes where possible, identify points of tension where necessary, and advocate for change where appropriate.
In the absence of clear rules, protocols, processes or guidelines, the level of communication, cooperation and coordination in these cases has necessarily been ad hoc. Consequently, resources that otherwise might be used to compensate those harmed by the underlying conduct may instead be wasted on litigation or other efforts to resolve uncertainties regarding how these divergent legal schemes interact.
C. Recommended Actions
This Resolution does not propose substantive reconciliation of the tensions between forfeiture law and bankruptcy law. Rather, it encourages the entities with a stake in these proceedings to move away from the type of costly litigation and ad hoc coordination that currently defines these proceedings toward the development of coherent policies, protocols, and governing principles.
D. Essential Entities
The essential entities to whom this Resolution is directed include the direct stakeholders as well as rulemaking and lawmaking bodies. Specifically, this Resolution urges that the Recommended Actions be undertaken by:
*the Department of Justice (including without limitation its Criminal Division Asset Forfeiture and Money Laundering Section, Office of International Affairs, Civil Division Commercial Litigation Branch, National Advocacy Center, and Victims’ Rights Ombudsman), United States Attorneys, Executive Office of the United States Trustee, Executive Office of the United States Attorney,
*Securities and Exchange Commission, Securities Investor Protection Corporation,
*Federal Judicial Center,
*Federal Bankruptcy Courts, Federal District Courts, State Courts,
*trustees, receivers,
*appropriate committees of the Federal Judicial Conference of the United States,
*Congress,
*and federal, state and territorial governmental, judicial and legislative bodies and agencies.
E. Related ABA Resolutions
This Resolution is consistent with and furthers the objectives of previous American Bar Association Resolutions that encourage the development of (i) processes to facilitate inter-court coordination, and (ii) guidelines governing asset forfeiture and victim protections. A critical gap remains, however, because none of those prior resolutions address forfeiture or parallel proceedings in the context of the interaction of forfeiture proceedings and bankruptcy proceedings. Relevant or analogous prior Resolutions are set forth here alphabetically.
Civil and Criminal Forfeiture. Urge the United States Department of Justice and state and local prosecutor agencies to promulgate guidelines to govern the use of civil or criminal forfeiture. 91M104A
Conduct of Litigation Filed in Federal, State and Territorial Courts. Supports the establishment of methods of cooperation and coordination between federal (including bankruptcy), state and territorial courts for the conduct of litigation filed in federal (including bankruptcy), state and territorial courts arising out of common facts. Supports the exploration of methods for consolidation of such litigation for some or all purposes within the context of constitutional limitations. 92M120A