Supreme Court to Decide Whether Government Can Freeze ‘Untainted’ Funds

When the Federal Trade Commission (FTC) gets a court order to freeze a defendant’s assets for potential consumer redress, all assets are frozen. That can include not only “ill-gotten” gains from the alleged fraudulent scheme, but “untainted” assets unrelated to the scheme, such as an inheritance or previously purchased real estate, investments, or retirement accounts. It is not at all uncommon for a defendant to possess untainted assets of substantial value.

Obviously, with all assets frozen, a defendant can’t afford to hire an attorney and is at the total mercy of the judge, who has virtually unlimited discretion over whether to release funds – even untainted funds – for a defense and living expenses. The FTC routinely opposes motions to unfreeze funds for these vital needs.

Last month the U.S. Supreme Court heard oral argument in Luis v. United States, which frames, in stark relief, the tension between the government’s interest in preserving all available assets for victims and the defendant’s interest in having counsel. While the case arises in a criminal context and thus raises the question of deprivation of the Sixth Amendment right to counsel that is not present in an FTC action (there is no constitutional right to counsel in a civil case), the logic of the government’s position is not so limited. Depending on how the Supreme Court resolves the question, its decision could limit the FTC’s ability to freeze untainted assets.

In Luis, the government sought victim restitution in a criminal action against Medicare fraud. Simultaneously, it moved civilly to freeze all the defendant’s assets, however obtained, under a federal statute that permits restraint not only of the ill-gotten gains of health care fraud but “property of equivalent value,” construed by the government to mean untainted substitute property for dissipated tainted funds. It was stipulated that the defendant’s assets did include untainted property. The district court froze those assets over defendant’s objection that, without them, she would be unable to afford private counsel in violation of her Sixth Amendment rights. The Eleventh Circuit U.S. Court of Appeals affirmed.

While it’s well-settled that tainted funds can be frozen for potential restitution upon a finding of “probable cause” in a criminal case or “probable success on the merits” in a civil matter, and that all assets may be forfeited following a conviction or judgment, the Supreme Court is faced for the first time with deciding whether untainted funds may be restrained as well before trial. The government’s argument is that because all assets are subject to forfeiture if it wins, then upon a preliminary determination that it is likely to win, it has an interest in preserving all available assets for victims which trumps the defendant’s Sixth Amendment right to counsel of her choice. In essence, the government is saying that tainted and untainted funds should be treated exactly the same not only at the post-conviction or post-judgment stage, but also at the pre-trial stage, before wrongdoing has been assessed, regardless of the impact it would have on the accused’s ability to defend herself.

Luis’ argument is that the government position lacks or misreads Supreme Court precedent and that until she is found guilty, the government’s interest in her property is limited to tainted assets, and she retains full legal ownership and control of her untainted assets. To allow the government to freeze her rightful property would deprive her of the means to retain counsel of her choice, in violation of her Sixth Amendment rights, and would give the already powerful federal government an unfair advantage.

Several justices at oral argument, from liberal to conservative, appeared concerned about the breadth, fairness, and potentially far-reaching consequences of the government’s position. Justice Elena Kagan said there was a “powerful intuition” behind the notion that legally acquired assets shouldn’t be restrained before a final determination of fault, especially where needed for legal representation. Justice Anthony Kennedy got the government’s counsel to admit that the logic of its argument was not confined to the health care fraud statute but could be applied to almost any offense for which a fine could be sought, which would, he said, “in effect, prevent the private bar from practicing law, unless it did so on a contingent basis.” Chief Justice John Roberts hypothesized that in a case with $10 million of assets in which legal representation would cost $100,000, would it really be fair to deny the defendant a mere 1 percent of the funds to hire an attorney?

Unlike Ms. Luis, an FTC defendant doesn’t have a Sixth Amendment right to counsel. However, the predicate of Luis’ argument is not the Sixth Amendment per se, but the contention that until she is convicted, the only assets in which the government has a legitimate interest, and thus the right to preserve them for victim restitution, are those derived from the alleged fraud. She should thus be free to use her untainted assets to hire an attorney (or, arguably, for other important needs, such as medical bills, utilities, or the mortgage).

Further, the predicate of the government’s argument that there is no distinction between tainted and untainted funds is not only that both are forfeitable upon entry of judgment, but that the purpose of forfeiture is not only to provide restitution but, significantly, to impose personal punishment for the commission of a crime. The sole purpose of an asset freeze in most FTC cases, in contrast (except where civil penalties are sought for a trade regulation rule violation), is restitution and not punishment.

Finally, the statute under which the FTC seeks asset freezes doesn’t speak of “property of equivalent value” to the ill-gotten gains, which is the linchpin of the government’s claim to untainted funds under the health care fraud statute in Luis. In fact, the FTC statute doesn’t provide explicit asset freeze authority at all. At the agency’s bidding, federal judges have simply ordered freezes in the exercise of their broad equitable authority to grant “ancillary” relief when they issue a temporary restraining order or injunction.

Luis furnishes FTC defendants with possible new grounds (and hope) to protect untainted assets – assets that could be critical for hiring an attorney and paying essential bills – from the crippling effects of an asset freeze. It remains to be seen whether, in its final decision, a Court majority will echo the concerns of unfairness expressed by a minority of the justices at oral argument about depriving a person of his rightful property even before he’s been found guilty or liable. Will a “powerful intuition” that it is unfair be enough to carry the day? Even if so, will the Court find a coherent way to limit the protection of untainted assets only to the Sixth Amendment context, which will then be of little value to FTC defendants? We will know the answers by the end of the Court’s term in June, if not before.