Criminal forfeiture law and bankruptcy jurisprudence have been on a collision course ever since federal prosecutors said they had the authority to dole out millions of dollars recovered from imprisoned lawyer Scott Rothstein for victims of his Ponzi scheme.
The opposing views were thrown into sharp relief during Dec. 6 arguments before the U.S. Court of Appeals for the Eleventh Circuit. The Daily Business Review, a Daily Report affiliate, received a recording of the hearing from the court.
"Your problem is how in the world does criminal forfeiture proceedings adjudicate rights of claimants in the bankruptcy estate?" Circuit Judge Gerald Bard Tjoflat asked Assistant U.S. Attorney Madeleine R. Shirley at the hearing in Miami.
Tjoflat rejected the government's argument that it could seize assets in the accounts of Rothstein's former Fort Lauderdale, Fla., law firm, Rothstein Rosenfeldt Adler, under the auspices of the bankruptcy court.
U.S. District Judge James Cohn in Fort Lauderdale gave the prosecution jurisdiction over Rothstein's yachts, cars and other items, which constitute the majority of the assets in dispute. He also handed prosecutors the power to distribute some of the $2 million left in several RRA trust accounts.
The court-appointed bankruptcy trustee for the law firm's estate contested Cohn's rulings and appealed. The government estimates the amount in dispute at about $50 million.
In the meantime, victims of Rothstein's settlement financing scam uncovered in late 2009 haven't received a penny. The stakes for the government and the bankruptcy bar could not be higher.
The case pits the power of prosecutors to seize the assets of a convicted criminal against the bankruptcy court's power to administer the assets of an estate.
"It has greater ramifications," said attorney William Scherer, a partner at Conrad & Scherer in Fort Lauderdale who represents numerous Rothstein victims. "I can't believe the federal government would not fight this case all the way to the U.S. Supreme Court because it turns forfeiture law on its head."
Tjoflat made it clear at the hearing he felt U.S. Attorney Wifredo Ferrer's office overreached and misused the forfeiture statutes. Prosecutors argued before Cohn that they could distribute assets to victims more efficiently and more cheaply than bankruptcy court, which could give deference to creditors instead of victims and must carve out attorney fees.
"When you frustrate the bankruptcy law, you frustrate all of the creditors of the bankrupt estate and their rights," Tjoflat said.
Attorney Sharon Kegerreis, a partner with Berger Singerman who represented the trustee at the hearing, argued the estate had rights to tangible assets such as the real estate because Rothstein used money from RRA accounts to purchase them.
U.S. Bankruptcy Judge Raymond Ray issued an automatic stay protecting all assets that was usurped by Cohn's rulings, she argued.