Yes, New York attorney Marc Dreier's alleged US$380 fraud (details here) is chump change compared with Bernie Madoff's US$50 billion Ponzi Scheme. But it's still a lot of money. And even more noteworthy is how federal prosecutors have trampled on the rights of Dreier's clients and other unsecured creditors of his firm.
Authorities investigating the Dreier affair have already seized most of his property and frozen his personal and corporate accounts. While a judge may award a portion of the proceeds of these sales to unsecured creditors (such as clients awaiting payments from Dreier's escrow account), they're not first in line. And they may have to wait many years to even make a claim for their money.
Under U.S. criminal forfeiture law, title to forfeitable property vests to the government at the time of a defendant's criminal act. The government—not unsecured creditors—therefore has first dibs on the Dreier's assets. As presumably innocent third parties, the unsecured creditors can petition the court for recovery of their assets. However, under the procedural rules for criminal forfeiture, they can do so only after Dreier's trial. That could be many years away.
Naturally, Dreier's unsecured creditors aren't happy about this. They've petitioned a federal bankruptcy judge for permission to hire attorneys specializing in criminal forfeiture. Presumably, they'll try to persuade the judge in Dreier's criminal case to apply bankruptcy law, rather than criminal forfeiture law, when divvying up the seized assets. But there's no guarantee they'll prevail.
This isn't a new problem. Back in 1992, federal prosecutors seized more than US$400 million in assets belonging to John McNamara, a wealthy entrepreneur in New York. McNamara's creditors—more than 6,000 in all—were then confronted with unpaid loans and a debtor whose assets had been seized by the government.
It's highly unlikely that McNamara's creditors assessed the likelihood of the government seizing his assets when they granted him credit. They also assumed—wrongly—that they could use well-established bankruptcy procedures to reclaim their assets if McNamara defaulted on his obligations. They had no idea that forfeiture laws might trump their claims.
The bottom line: if someone owes you money, just hope they're never arrested for a crime punishable by criminal forfeiture (more than 400 federal statutes and thousands of state statutes). If they are, you may not be able to make a claim for what you're owed for years—and your interests may well take a back seat to the government's interests.
Copyright © 2009 by Mark Nestmann
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