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A Conversation with Darpana Sheth of the Institute for Justice About Legal Challenges to Civil-Forfeiture Laws

The Philadelphia District Attorney’s Office recently settled, in part, a federal civil-rights class-action lawsuit seeking declaratory and injunctive relief in regard to its civil-forfeiture policies. I had the opportunity to speak with Darpana Sheth, a lawyer with the Institute for Justice and the lead counsel for the plaintiffs, about this development.

Ms. Sheth and the Institute for Justice have been at the forefront of challenging the use of civil-forfeiture laws, which can be a very powerful tool for the government. Civil forfeiture, unlike criminal forfeiture, generally only requires the government to satisfy its burden by a preponderance of the evidence, and it is directed against the property to be forfeited, rather than an individual criminal defendant – which means that the interests of third-parties are often implicated. Arguably, Philadelphia has been more aggressive than other authorities in its use of civil forfeiture – a tool which the IRS also uses through various federal statutes. The use of civil forfeiture by agencies as seemingly diverse as the City of Philadelphia and the IRS reflects the potential breadth and reach of civil forfeiture, which can apply to a spectrum of situations ranging from alleged drug offenses to alleged regulatory and financial reporting violations.

On May 12, 2105, the District Court hearing the case denied the City’s motion to dismiss the complaint. On November 2, 2105, and consistent with a prior notice of partial settlement, the parties informed the District Court that they have attained a partial settlement.

-Peter D. Hardy

Peter Hardy: In general, why has the Institute for Justice turned its attention to the issue of civil forfeiture? 

Darpana Sheth: Civil forfeiture poses one of the greatest threats to property rights in the nation today. As detailed in IJ’s 2015 update to its landmark study, Policing for Profit, civil forfeiture makes it easy and lucrative for law enforcement to take and keep property—regardless of the owner’s guilt or innocence.

Civil forfeiture provides few procedural safeguards to property owners. Police seize property they suspect is connected to a crime and then prosecutors, based on the legal fiction that property itself is guilty, bring suit against the property to take ownership. To get their property back, owners must intervene in the lawsuit and prove that they did not know of the illegal activity, turning the presumption of innocence on its head. And because it’s a civil proceeding, property owners are not guaranteed counsel or other rights afforded to criminal defendants, treating property owners worse than criminals.

Worst of all, civil forfeiture presents law enforcement with significant incentives to seize property for financial gain. Under most forfeiture laws, law enforcement gets to keep forfeited property and its proceeds, giving them a direct financial incentive to seize and forfeit property. This controversial law-enforcement tool not only strips people of their property and their due-process rights, but also undermines public trust in law enforcement and the belief—so vital to our republic—that we are a nation ruled by laws, and not by men.

PH: How is Philadelphia’s civil-forfeiture program different from those of other government agencies? How is it the same?

DS: While most jurisdictions use civil forfeiture, Philadelphia has turned this controversial tool into an unprecedented Forfeiture Machine, devouring real and personal property from thousands of residents, many of whom are innocent, and converting that property into an almost $6 million annual stream of revenue.

Using a rigged system of copied “form” legal documents and endless proceedings in a courtroom run by the prosecutors themselves, Philadelphia’s “robo-forfeiture” program stripped thousands of City residents of over 1,000 homes, 3,200 vehicles, and $44 million in cash over an eleven-year period. Up to 80 cases of all types have been listed for “hearing” in the infamous Courtroom 478 in a single day.

Altogether, the DA’s Office generated more than $69 million in revenue for between 2002 and 2013, an amount that represents 20 percent of the DA’s budget. The Office spent about 40 percent of these funds on salaries, including those of the very prosecutors who have been running Courtroom 478. This financial stake, and the conflict of interest it engenders, is the engine of the Philadelphia civil-forfeiture machine.

Philadelphia is thus the quintessential example of what happens when state actors face bad incentives and few restrictions.

PH: Tell us about the lawsuit – what specific policies of the Philadelphia DA’s Office does it challenge? If you can summarize, what principle is at the heart of the lawsuit?

DS: This civil-rights lawsuit challenges six specific policies and practices the City and the DA’s Office use when investigating, filing, prosecuting, and ultimately profiting from civil-forfeiture actions. Claim 1 challenges the policy and practice of evicting people from their homes without providing notice or an opportunity to be heard, in flagrant violation of a more than 20-year-old Supreme Court decision.

Claim 2 challenges the policy and practice of forcing property owners to relinquish their rights in order to either be let back into their homes or have the forfeiture action against their property dismissed. For example, the DA’s Office has forced property owners to ban relatives from their homes and prospectively waive constitutional and statutory defenses, like the right to challenge a forfeiture as an excessive fine or raise an innocent owner defense, in any future forfeiture action.

Claim 3 challenges the policy and practice of failing to provide a prompt, post deprivation hearing, forcing property owners to wait months, even years, before they have an opportunity to contest the seizure of their property.

Claim 4 challenges the policy and practice of relisting forfeiture actions, sometimes a dozen times, requiring property owners to make multiple appearances or else risk losing their property forever through a default judgment. This practice helps explain why the DA’s Office won over 90 percent of its 8,284 cash-forfeiture cases in 2010.

Claim 5 challenges the policy and practice of the DA’s Office keeping and sharing forfeiture proceeds with the Philadelphia Police Department. Law enforcement’s direct financial interest in seizing and forfeiting property presents an unconstitutional conflict of interest.

Claim 6 challenges the policy and practice of the DA’s Office running forfeiture proceedings in infamous Courtroom 478.

These claims boil down to the fact that Philadelphia’s Forfeiture Machine pads law-enforcement’s budgets with millions in unaccountable funds by stripping innocent people of their rights and property. Philadelphia’s scheme, with its robo-forfeitures and kangaroo courts, is the inevitable result of the perverse profit incentive underlying civil forfeiture. The principle IJ seeks to vindicate is that law enforcement should not be allowed to keep and spend what they forfeit. It is time police and prosecutors stop treating citizens like ATMs.

PH: What does this partial settlement attain, and what remains to be resolved?

DS: The settlement is a first step to reining in civil forfeiture in Philadelphia. It addresses, on behalf of a class of property owners, the first two claims in the lawsuit. Under the terms of the settlement, police will no longer be able to just show up and evict someone from their home and property owners are no longer forced to surrender their certain rights in order to be let back into their home or have the forfeiture action dismissed. The settlement prevents the DA’s office from using civil forfeiture to break up families. And property owners caught up in the city’s forfeiture machine will no longer be forced to turn over personal information about potential renters or buyers to the DA’ s Office.

The City and the DA’s Office are also in the midst of instituting new policies in how forfeiture proceedings in Courtroom 478 are run. It remains to be seen whether these changes will cure the constitutional deficiencies challenged in the lawsuit.

The main issue left to be resolved is the $69 million question:  Can police and prosecutors use civil forfeiture to pad their budgets?  

PH: Are there any legislative avenues being pursued?

DS: In Pennsylvania, State Sens. Mike Folmer (R., Lebanon) and Anthony Williams (D., Philadelphia) are sponsoring a bill that would require a criminal conviction before property could be forfeited. The bill would also require all forfeiture proceeds to be turned over to the local government for possible allocation to law enforcement through a budgeting process. The legislation would curb the most egregious abuses of the state law, but, with exception of addressing law-enforcement’s retention of forfeiture proceeds, would not affect the challenged policies and practices in Philadelphia.

At the federal level, a bipartisan and bicameral group of lawmakers have introduced and sponsored the Fifth Amendment Integrity Restoration (FAIR) Act, comprehensive reform that would raise the burden of proof on the government and eliminate the profit incentive. The Judiciary Committees of both houses are working on their own comprehensive reform bill as part of a larger effort to reform criminal justice.

PH: “Structuring” is a criminal offense in which a party willfully tries to evade a financial institution’s government reporting requirement for transactions involving more than $10,000 in currency, by breaking up a single transaction above the $10,000 reporting threshold into two or more separate transactions. In December 2014, and in response to publicly-raised concerns about the use of forfeiture by IRS Criminal Investigation (IRS CI) in situations involving legal source deposits where there is no indication that the person is otherwise engaged in criminal activity, the Chief of IRS CI, Richard Weber, issued a statement in which he explained that IRS CI was modifying its policy regarding forfeiture in “legal source” structuring cases. Specifically, he stated that IRS-CI no longer will pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases in the absence of “exceptional circumstances” – although IRS-CI still will regard structuring as an indicator that further illegal activity may be occurring. The Department of Justice (DOJ) subsequently altered their forfeiture policy for structuring.

What do you think prompted these changes by IRS CI and DOJ, and what is your reaction to it?

DS: These policy changes by the IRS and the Justice Department were prompted by the public outrage over cases like Carole Hinders’, and the media attention it received on the front-page of the New York Times. For 38 years Carole Hinders owned and ran Mrs. Lady’s Mexican Food in Spirit Lake, Iowa. Because her restaurant accepts only cash, Carole makes frequent trips to the bank to avoid having large sums of money at the restaurant. In August 2013, the IRS and the Justice Department seized Carole’s entire bank account of $33,000, claiming she was “structuring” her deposits to avoid bank reporting laws. But Carole did nothing wrong and was never charged with a crime.

But despite these policy changes, the federal prosecutors continue to pursue forfeiture in cases like this, including Lyndon McLellan. Under these new policies, the government never should have pursued forfeiture of Lyndon’s bank account. But the government refused to back down even after the policy change was announced. And it has so far refused to give other innocent owners back their money seized before the policy change took effect. 

Disclaimer: This post does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this post without first seeking the advice of counsel.