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John Stockdale, Jr.
September, 2018

Preserving Assets for the Bankruptcy Estate Seized under Michigan’s Civil Asset Forfeiture Laws

According to the Michigan State Police’s 2018 Asset Forfeiture Report, there were 5,558 forfeitures in 2017 under the Public Health Code, MCL § 333.7521-333.7533 (the “Controlled Substances Act”), related to controlled substances, but only 67 under the Omnibus Civil Forfeiture Act, MCL § 600.4701-4709, related to crimes other than controlled substances.[1]  The significant difference between these two forfeiture proceedings is the pre-condition of a conviction prior to forfeiture:  Under the Controlled Substances Act, a forfeiture occurs 21 days after the seizure whether or not there is a conviction while under the Omnibus Civil Forfeiture Act, forfeiture occurs approximately 28 after the conviction.[2] Michigan’s state courts have exclusive jurisdiction over a forfeiture action.[3]  In either case, the legal standard for disputing the forfeiture is the lower preponderance of the evidence and the claimant must establish that the asset to be forfeited is not proceeds, or an instrumentality, of criminal activity.[4]  Because a forfeiture can occur without a conviction, Michigan’s civil asset forfeiture laws have received sever criticism, and several bills seeking to reform those laws are currently before the legislature.[5]

A recent bankruptcy case involving federal forfeiture laws[6] sparked the following question: What happens to assets seized under Michigan’s civil asset forfeiture laws when the property owner seeks bankruptcy protection before the assets are forfeited?  The United States District Court for the Eastern District supplied the answer in In re Hann[7].

In Hann, debtor sought to compel turnover of his car and computer[8] that were seized by the State in connection with charges for possession of child sexually abusive material, and using the internet to commit a crime against a minor.[9]  The car and computer were forfeited to the State after the debtor was convicted of the charges.[10]  In bankruptcy court, the Debtor sought turnover of the assets under 11 U.S.C. 542(a) as exempt property and to enforce the automatic stay against the State with respect to those assets.[11]

The Hann court concluded that the continuation of the forfeiture proceeding against the seized property, which would otherwise be property of the estate under 11 U.S.C. § 541(a), did not violate the automatic stay. The court explained that 11 U.S.C. § 362(b)(4) excludes actions and proceedings by a governmental unit to enforce its police or regulatory power.[12]  The court concluded that “[a] state forfeiture action comes within the police power exception of § 362(d)(4).”[13]

The Hann court further rejected the debtor’s turnover request under 11 U.S.C. § 542(a).  It reasoned that “when [11 U.S.C. § 542(a) is] read in conjunction with § 362(d)(4), which exempts state forfeiture actions from the automatic stay provisions, it is clear that a state government agency that has seized, and is seeking to forfeit instrumentalities of criminal activity, is not required to deliver that property to the bankruptcy trustee under § 542(a).”[14]  In reaching this decision, the court emphasized that “the criminal action exception [to the automatic stay] indicates the legislature’s intent to turn away from bankruptcy those with unclean hands.”[15]

Lastly, the Hann court rejected the debtor’s assertion that the forfeiture violated his chapter 7 discharge injunction provided by 11 U.S.C. § 524.  It noted that “state forfeiture proceedings, commenced under the state’s police powers, simply do not fall within § 524.”[16]

Hann, while unpublished, makes it is clear that the filing of a bankruptcy case does not provide the debtor (or the chapter 7 trustee) with any relief. To recover the seized assets from the state, the debtor (or the chapter 7 trustee) must establish in the state court forfeiture proceedings that the seized property was either (i) not proceeds, or an instrumentality, of criminal activity or (ii) if the debtor is not the criminal defendant, that the debtor neither had knowledge of, nor consented to, the criminal activity.[17]  In either case, the state court analyzes the issues under the preponderance of the evidence standard.[18]

Schafer and Weiner has significant experience representing debtors in bankruptcy and other insolvency matters.  Additionally, John has successfully recovered seized assets in forfeiture proceedings on behalf of a secured creditor.  Please contact Schafer and Weiner to discuss your rights where the Bankruptcy Code intersects with Michigan’s civil asset forfeiture laws.

 


[1] Available at https://www.michigan.gov/documents/msp/2018_Asset_Forfeiture_Report_Final_06-26-18_627115_7.pdf.  Additionally, forfeiture can be accomplished for certain public nuisance activity such as gambling and prostitution under MCL § 600.3801-600.38340, which operates in much the same fashion as under the Public Health Code and does not require a conviction prior to forfeiture.

[2] Compare MCL § 333.4522-4523, MCL § 600.4707.  This article only summarized certain aspects of the Controlled Substances Act and the Omnibus Civil Forfeiture Act (collectively, the “Acts”).  It is not intended, does not, and cannot be construed as covering all aspects of the Acts. 

[3] MCL § 600.4703(5).  See also In re Forfeiture of $1,159,420, 194 Mich. App. 134 (under Controlled Substances Act, forfeiture proceedings are in rem).

[4]  MCL §600.4707(b).  See also In re Forfeiture of $275, 227 Mich. App 462 (1998) (as applied to the Controlled Substances Act).

[5] See Jarrett Skorup, Where Michigan Stands on Civil Asset Forfeiture (July 17, 2018), available at https://www.mackinac.org/where-michigan-stands-on-civil-asset-forfeitureSee also Shane Trejo,  Michigan Bills Would Reform Civil Asset Forfeiture; Federal Loophole Remains (April 18, 2018), available at https://blog.tenthamendmentcenter.com/2018/04/michigan-bills-would-reform-civil-asset-forfeiture-federal-loophole-remains/

[6] Sweet v. USA (In re VPH Pharmacy, Inc.), Case No. 18-11280 (E.D. Michigan) [DN 6, entered July 25, 2018].

[7] 2009 U.S. Dist. 79201 (E.D Mich. July 23, 2009).

[8] Id. at *2, fn. 2.

[9] Id. at *1.

[10] Id.

[11] Id. at *2.

[12] Id. at *6.

[13] 2009 U.S. Dist. 7920, *6.

[14] Id. at *7.

[15] Id. at *9, quoting United States v. Grooms, 1997 U.S. Dist. LEXIS 13991, *__ (W.D. Va. 1997).

[16] Id. at *9.

[17] MCL § 600.4702(2); MCL § 333.7521(d)(iv).

[18] See infra, fn. 4.