Last week the Supreme Court in Luis v. United States, No. 14-419, 578 U.S. __ (2016) limited the government’s reach to freeze a criminal defendant’s assets before trial or other judicial proceedings.  Justice Breyer, writing for a plurality that included Justices Roberts, Ginsburg, and Sotomayor, explained that a defendant’s interests in assets neither obtained as a result of nor traceable to alleged criminal activity outweighed the government’s interest in ensuring such assets’ availability for payment of criminal forfeiture or restitution should the defendant be convicted.  Justice Thomas concurred, disagreeing with the balancing approach but explaining that the constitutional right to assistance of counsel necessarily carries with it the “right to use lawfully owned property to pay for an attorney.”

Petitioner Sila Luis was indicted in 2012 for health care fraud.  The government claimed that she wrongly obtained nearly $45 million.  But by the time of the indictment, Ms. Luis only had $2 million in assets, none of which was directly tied to the charged crimes.   The government moved to seize the $2 million in assets under 18 U.S.C. § 1345(a)(2).  That provision allows a court to freeze assets from a defendant charged with violating federal health care and banking laws, including property (1) “obtained as a result” of the alleged violation, (2) “traceable to” the alleged violation, or (3) “of equivalent value” to property obtained as a result of or traceable to the alleged violation.  The government successfully argued the $2 million was “property of equivalent value” under 1345(a)(2)(B)(i).

Ms. Luis challenged the freeze order, arguing that it violated her Sixth Amendment right to retain counsel of her choice in her defense.  The Supreme Court agreed, distinguishing cases that permit pre-conviction freezing of assets obtained as a result of criminal activity or traceable to a crime.  The plurality opinion explained that the assets here were unlike a robber’s loot, in that they were rightfully Ms. Luis’s property, not that of her alleged victims.  Moreover, the Constitution protects the right to assistance of counsel of the defendant’s choice and whom the defendant can afford to hire; it offers no such protection of the government’s or victims’ interest in property forfeitable upon the defendant’s conviction.

Justices Kennedy, Alito, and Kagan, in dissent, questioned the line-drawing between tainted and substitute assets and the weighing of the government’s interests in those assets.  Given that assets in cases such as this are fungible, the decision seems to incentivize spending or hiding fraudulently obtained assets, then using non-tainted assets to hire the best defense counsel available.  And while the plurality acknowledged that freezing untainted assets is especially problematic in cases where the defendant is innocent, Justice Kagan took this a step farther: “the Government’s and the defendant’s respective legal interests in those two kinds of property [allegedly tainted and untainted assets], prior to a judgment of guilt, are exactly the same: The defendant maintains ownership of either type, with the Government holding only a contingent interest.” 

In practical terms, Luis restricts the government’s ability to restrain a criminal defendants’ assets that are not traceable to criminal conduct before a conviction.  This means victims hoping for restitution after a defendant is convicted may find that a defendant has far fewer funds than if substitute assets had been preserved via a freeze order.  On the other hand, those charged with healthcare and banking crimes may now use untainted resources to fund their defense without risk that the government will later claw back those funds.  Similarly, vendors and customers of persons or businesses being investigated for federal crimes should know that assets may pay for a defense instead of funding ongoing obligations.  And while Luis involves the federal statute on injunctions against fraud, its holding may influence other forfeiture and injunctive proceedings.