Eleventh Circuit Court of Appeals Creates Deeper Circuit Split Over Pre-Trial Restraint of Assets

The 11th Circuit Court of Appeals, based in Atlanta, issued its opinion on April 26, 2012, in the case of United States of America v. Kaley, ___ F.3d___, available here; (“Kaley II”).  The Defendants challenged a district courts order denying their motion to vacate a pretrial protective order restraining their assets. This is the second time the case came before the 11th Circuit.  In United States v. Kaley, 579 F.3d 1246 (11th Cir. 2009) (“Kaley I“), available

here, the 11th Circuit reversed the district courts order which had concluded that the Kaleys were not entitled to a pretrial evidentiary hearing on their motion to vacate the protective order, and remanded the matter for further proceedings. On remand, the district court determined that the Kaleys were entitled to a pretrial, post-restraint hearing, but that the only question to be addressed at the hearing was whether the restrained assets were traceable to or involved in the conduct charged in the indictment. At the hearing, the Kaleys did not present any evidence regarding traceability, and the district court declined to set aside the protective order.

The relevant facts are as follows:

In January 2005, Kerri Kaley, then a sales representative with Ethicon Endo-Surgery, was informed she was the target of a grand jury investigation in the Southern District of Florida. Kaley was suspected of stealing prescription medical devices (“PMDs”) from hospitals and then selling them on the black market. Kaley retained counsel in the investigation. Kaleys husband, Brian Kaley, who was also under investigation, retained a separate attorney. Together, the two attorneys informed the Kaleys that their legal fees to take the case through trial would be approximately $500,000. To obtain funds to pay those fees, the Kaleys applied for and obtained a home equity line of credit of $500,000 on their residence and used the proceeds to buy a certificate of deposit (“CD”).

On February 6, 2007, the grand jury returned a seven-count indictment against the Kaleys.  Count One charged a conspiracy to transport PMDs in interstate commerce while knowing them to have been stolen, in violation of 18 U.S.C. § 371, available here. Counts Two through Six charged five substantive 18 U.S.C. § 2314 offenses, available here and Count Seven charged obstruction of justice, in violation of 18 U.S.C. § 1512(b)(3), available here. The indictment also sought criminal forfeiture of all property traceable to the § 2314 offenses, including the CD.

On February 7, 2007, the Government moved the district court ex parte for a protective order restraining the Kaleys from transferring or otherwise disposing of the property listed in the forfeiture count, and a magistrate judge, concluding that the indictment established probable cause that the property was “traceable to” the Kaleys commission of the § 2314 offenses, granted the motion the same day.

On March 5, 2007, the Kaleys moved the district court to vacate the February 7th protective order. They contended that the order prevented them from retaining counsel of their choice in violation of their Sixth Amendment right to the representation of counsel. A magistrate judge heard this motion too on April 6th and sustained the protective order; however, he limited the protective orders scope (insofar as it applied to the CD) to $140,000.

On April 10, 2007, the grand jury returned a superseding indictment. This indictment replicated the first seven counts of the first indictment and added an additional count — a charge that the Kaleys had conspired to launder the proceeds of the § 2314 offenses, in violation of 18 U.S.C. § 1956(h), available here. This indictment also sought the criminal forfeiture of the CD and the Kaleys residence on the theory that those assets were “involved in” the Kaleys commission of the § 1956(h) offense. On April 17th, the Kaleys renewed their motion to vacate the February 7th protective order (as amended by the order of April 6th), and expressly requested a pretrial, post-restraint evidentiary hearing.  The magistrate judge heard the motion on April 27th. He questioned whether the indictment alone provided probable cause to restrain the defendants assets and ordered the prosecutor to submit an affidavit supporting probable cause. The prosecutor responded by filing, in secret and under seal, an affidavit executed by the FBI case agent.

On May 1, 2007, the magistrate judge issued two orders. In the first order, he found probable cause — based on the indictment and the case agents affidavit — that the CD and the Kaleys residence were “involved in” the violations of § 1956(h) and § 2314. In the second order, he amended the February 7th protective order to include within its scope the full value of the CD and the Kaleys residence. On May 2nd, the magistrate judge issued a third order denying the Kaleys motion to vacate the protective order and to hold a pretrial, post-restraint evidentiary hearing.

The 11th Circuit in Kaley I, held under United States v. Bissell, 866 F.2d 1343 (11th Cir. 1989), available here, that a defendant whose assets are restrained pursuant to a criminal forfeiture charge in an indictment, rendering him unable to afford counsel of choice, is entitled to a pretrial hearing only if the balancing test enunciated in Barker v. Wingo, 407 U.S. 514 (1972), available here, is satisfied. Id. at 1353. The 11th Circuit in Kaley I concluded that the district court incorrectly applied that test, and reversed and remand the case for further consideration consistent with the opinion in Kaley I.

However, Judge Tjoflat wrote a specially concurring opinion that asserted that the 11th Circuits decision in Bissell, was dicta, and hence not binding on the Kaley I court.  Judge Tjoflat stated:  “In the absence of binding precedent, the panel should have looked to the general requirements of procedural due process.” See United States v. E-Gold Ltd., 521 F.3d 411, 415 (D.C. Cir. 2008) (using this approach to determine whether a post-restraint, pretrial hearing was due), available here. (Andrew Ittleman of Fuerst Ittleman, PL was counsel of record in the E-Gold case before the D.C. Circuit Court.)

After remand, an evidentiary hearing was conducted on July 29, 2010, and the district court heard arguments from the parties regarding the hearings proper scope. The Kaleys explained that they were not contesting whether the restrained assets were traceable to or involved in the conduct charged in the indictment, but instead were taking the position that the protective order should be vacated because the underlying facts did not support the crimes charged in the first place. The government responded that, in light of this Courts decisions in Bissell and Kaley I, it was not required to offer substantive evidence from its case against the Kaleys in order to establish the evidentiary foundation of the criminal charges, and that the only purpose of the hearing was to determine whether the restrained assets were traceable to or involved in the conduct charged in the indictment. 

On October 24, 2010, the district court issued an order denying the Kaleys motion to vacate the protective order. Citing language taken from Bissell and Kaley I, the district court concluded that the only relevant inquiry at the hearing was whether the restrained assets were traceable to or involved in the alleged criminal conduct. Because the Kaleys did not attempt to challenge traceability in any way — arguing only that the governments underlying case had no merit “ the district court denied their motion to vacate the protective order. On October 27, 2010, the Kaleys filed their second appeal from the district courts order.

On appeal in Kaley II, the 11th Circuit examined the scope and purpose of the forfeiture statute, 21 U.S.C. section 853, available here. The 11th Circuit noted that Section 853 does not require a hearing for the issuance or continuation of a post-indictment restraining order. Under subparagraph (1)(B), to obtain such a restraining order before the filing of an indictment requires “notice to persons appearing to have an interest in the property and opportunity for a hearing.” Id. § 853(e)(1)(B). But, in sharp contrast, subparagraph (1)(A), dealing with post-indictment restraining orders, contains no such requirement. See id. § 853(e)(1)(A).  Since the statute itself imposes no hearing requirement, the only pretrial hearing required is one provided under the Due Process Clause.

The question before the 11th Circuit in Kaley II was what exactly what  the hearing requires. Kaley I suggested that the defendants cannot challenge the underlying indictment itself, and the 11th Circuit expressly so held. The basis for the decision was a line of U.S. Supreme Court cases that held that the grand jurys function cannot be usurped by the Courts; see Costello v. United States, 350 U.S. 359 (1956), available here; United States v. Williams, 504 U.S.  36, 54-55 (1992), available here; Bank of Nova Scotia v. United States, 487 U.S. 250, 261 (1988), available here; United States v. Calandra, 414 U.S. 338, 344-45 (1974), available here. Thus, according to the 11th Circuit, an indictment valid on its face is not subject to challenge on the ground that the grand jury acted on the basis of inadequate or incompetent evidence.  In other words, in the 11th Circuit a criminal defendant cannot challenge the governments position that assets are forfeitable if the evidence presented to the grand jury was sufficient for the grand jury to indict.

However, the 11th Circuits decision in Kaley II is in direct and express conflict with the 3rd, 8th, 2nd, and D.C. circuits.  The 11th Circuit recognized as such by stating that:

The Third and Eighth Circuits have held otherwise, concluding that a court must hold a full hearing at which “the government must demonstrate that it is likely to convince a jury, beyond a reasonable doubt, . . . that the defendant is guilty of [the statutory violation] and . . . that the profits or properties at issue are subject to forfeiture.” United States v. Long, 654 F.2d 911, 915 (3d Cir. 1981), available here; United States v. Lewis, 759 F.2d 1316, 1324 (8th Cir. 1985) (following Long), available hereSee also United States v. Monsanto, 924 F.2d 1186 (2d Cir. 1991) (en banc), available here. The 11th Circuit also stated that:  “The D.C. and Ninth Circuits, like the Second Circuit in Monsanto, have held that the postrestraint hearing must address whether there is probable cause to believe that the defendant is guilty of the crime that makes the assets forfeitable. United States v. E-Gold, Ltd., 521 F.3d 411, 419 (D.C. Cir. 2008); United States v. Roth, 912 F.2d 1131, 1134 (9th Cir. 1990)” available here.

Judge Edmondson, like Judge Tjoflat before him, authored a concurring opinion, see slip op. at 30, and remarked that: “I concur in todays result. I concur because I cannot say with strong confidence that my colleagues on the panel are incorrect in the way they see the law working. But I concur with deep doubts. And if I were deciding the case alone, I expect I would reach a different result and write something largely in line with United States v. Monsanto, 924 F.2d 1186 (2d Cir. 1991) (en banc), and United States v. E-Gold, Ltd., 521 F.3d 411 (D.C. Cir. 2008).”  Judge Edmondson continued:  “I have voiced my doubts, but I cannot firmly conclude that the legal position my experienced, able colleagues have taken is definitely erroneous. Therefore, I do not dissent, although I am uneasy that the limits that we set today for the hearing essential to continue a pretrial restraint on property might well be too limiting under the Constitution.”

The takeaway from Kaley I and Kaley II, is that, as it currently stands, a criminal defendants ability to contest pretrial the governments use of the federal forfeiture statute is limited, but varies from circuit to circuit.  As the concurring opinions in Kaley I and Kaley II demonstrate, there is a clear circuit split, one which appears will have to be settled by the U.S. Supreme Court.  Also the concurrences in Kaley I and Kaley II show the good possibility that the 11th Circuit may be willing to re-examine its position by the full (en banc) court. 

The attorneys at Fuerst Ittleman, PL have extensive litigation experience before the U.S. District Courts and the U.S. Circuit Courts of Appeal regarding criminal forfeitures.  You can contact us by calling 305.350.5690, or by emailing us at contact@fuerstlaw.com.

This entry was posted on Monday, May 7th, 2012 at 1:34 pm and is filed under White Collar Defense.

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