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Defendants Entitled to Pre-Trial Probable Cause Hearing in Civil Forfeiture Action After its Property was Seized During a Criminal Investigation of Cigarette Trafficking

09.21.2010

In United States v. Contents of Accounts, Civil Action No. 3:10-CV-228-H (W.D.Ky. Jun. 18, 2010 & Jul. 2, 2010), the United States District Court (“Court”) ordered a pre-trial probable cause hearing for Israel Chavez, Pam Chavez and Chavez, Inc. (collectively, “Defendants”), after the government seized substantially all of Defendants’ personal and business property.  Defendants were entitled to engage in discovery prior to its probable cause hearing and present evidence and question witnesses at the hearing to rebut the government’s assertion of probable cause.

Chavez, Inc. sold cigarettes online.  Israel Chavez owned Chavez, Inc. and his ex-wife, Pam Chavez, was thought to be heavily involved with the business.  Due to Kentucky’s rise in cigarette taxes, Israel Chavez began traveling to South Carolina, which had the lowest cigarette taxes at the time, to purchase cigarettes in bulk.  Those cigarettes were stored in an office located in Kentucky until they were sold on the company’s website and shipped to consumers outside of Kentucky.  Like most internet retailers, Chavez, Inc. did not collect sales taxes or any other taxes owed on the cigarette purchases made by consumers outside Kentucky. This resulted in Chavez, Inc. having lower prices than most other local retailers.

However, the federal government soon began a criminal investigation of Chavez, Inc. for the alleged sale of cigarettes over the internet without paying state taxes or filing federal Jenkins Act reports.  Based on a sealed affidavit, the government obtained search and seizure warrants and seized Defendants’ property and accounts that were traced to the alleged illegal activity.  After Defendants’ filed a Motion to Return Property under Federal Criminal Procedure Rule 41(g), the government filed a civil forfeiture action with the Court.

The government’s support for the civil forfeiture of the Defendants’ property was based upon two arguments: (1) that the property seized constituted proceeds of illegal activity under mail and wire fraud statutes; and (2) that the property was contraband under the Contraband Cigarettes Trafficking Act (“CCTA”).  Although the Court declined to find a basis for civil forfeiture from the alleged violations of the CCTA, it did find that the government had properly asserted grounds for mail fraud which were sufficient for a civil forfeiture action.

The Jenkins Act, 15 U.S.C. §§ 376-378 (1949), requires a remote cigarette seller to file reports detailing sales to customers in states in which the seller has no presence.  Chavez, Inc. failed to comply with the Jenkins Act by not filing the required report in any state.  Although the Court was concerned that Defendants’ assets were held for months and that no indictment had yet been issued, it still sided with the government by holding that Defendants’ knowing and intentional violation of the Jenkins Act could serve as the basis for mail fraud.  The Court issued an Order on June 18, 2010, denying Defendants’ Motion to Dismiss or for Preliminary Injunction of the government’s civil forfeiture action.

However, the Court was still troubled by the government’s use of sealed affidavits to shut down Chavez, Inc. and freeze substantially all of Defendants’ personal assets without notice or a hearing.  Because denying Defendants a full opportunity to challenge the pre-trial seizure of their property could raise Due Process concerns under the Fifth Amendment, the Court also ordered on June 18, 2010, a probable cause hearing to determine whether the seized property should be released.  The Court explained that a claimant in a civil forfeiture case may, in some cases, be entitled to a “post-deprivation, pre-trial hearing to contest the taking of his or her property.”  Therein, the Court ruled that a pre-trial evidentiary hearing was appropriate because the government had seized substantially all of the Defendants’ assets based on probable cause and because the affidavit that was relied on to find this probable cause was being challenged by the Defendants.

The Court also determined that in an evidentiary hearing to contest the pre-trial seizure of property, it is the government’s burden to show that it had probable cause to forfeit the property.  Id.;  see United States v. One Learjet 24D, 191 F.3d 668, 673-674 (6th Cir. 1999).  Furthermore, the Court ruled that the Defendants were entitled to engage in discovery prior to the hearing and to call and question witnesses and present other evidence to challenge the government’s assertion of probable cause at the hearing.

However, prior to this evidentiary hearing, the government filed a Motion to Stay Discovery and a Protective Order to limit the Defendants’ access to an agent that was involved in the criminal investigation.  On July 2, 2010, the Court issued an Order which denied the government’s Motion to Stay Discovery and sustained in part and denied in part the Protective Order.  The Court reasoned that because it was the government’s choice to seize the property and pursue a civil forfeiture action during an ongoing investigation, the Defendants should not be denied the right to the return of their property just because the government had not concluded its investigation.  Thus, the Court declined to stay discovery and ordered that the agent could be called and questioned during the pre-trial hearing.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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