The Aggravated White Collar Crime Enhancement: the Freeze and Seize Power of the Government under Penal Code §186.11, by Andrew Dósa

In 1995, the California Legislature enacted Penal Code §186.11 to add two arrows to the quiver of prosecuting attorneys. Penal Code §186.11 can sting a defendant in two ways. The first holds additional incarceration and fines over a defendant’s head. The second arrow of this section is potentially more damaging to a defendant and his family: all of the defendant’s assets can be frozen without notice before a conviction is obtained. This Article is written to introduce criminal practitioners to the dangers their clients can face if they fall into the reach of a prosecutor stringing his bow according to the power granted under §186.11.

The Definition of a White Collar Criminal

The statute, referred to as the Aggravated White Collar Crime Enhancement, applies to any person accused of committing “a related felony” having a material element of fraud or embezzlement, a pattern of “related felony” conduct, and the taking of at least $100,000. This pattern of related felony conduct must have a purpose, result, principals, and/or victims who are inter-connected by “distinguishing characteristics.” Targets of this section could include anyone involved in fraud schemes, market manipulation, and unfair business practices, as well as other players not typically considered white collar criminals, such as automobile repair shop owners accused of insurance fraud.

Legislative Intent

There is minimal evidence to reveal the Legislature’s specific intent in establishing this section. It appears likely, from notes of the Assembly Committee on Public Safety, that the statute was enacted and then amended (1) to be tough on criminals. It doles out fines and more incarceration time and lets a prosecutor perform self-help in pursuing restitution for victims. The original target of this section of the penal code was a criminal involved in substantial financial crimes. The initial legislation set a threshold of $500,000 in proceeds. The law was in effect less than four months when Assembly Member Escutia offered an amendment to “lower the threshold of the Aggravated White Collar Criminal Act.”(2) She apparently wanted to strengthen the Act to protect California’s middle class and seniors from fraud. It was perceived that the higher threshold exempted too many fraud claims, making the existing statute ineffective. As a result, the threshold was reduced to $100,000.

The Assembly Committee on Public Safety’s Report, the Pacific Law Journal’s Review of Legislation (3), and virtually every other source cites this section because of the additional prison sentence and fines it can impose. Upon conviction of two or more felonies in a single criminal proceeding, the defendant faces an additional two, three, or five years in his sentence. Fines were dependent on the amount of the victim’s losses and increased as the proceeds of crime increased* (4).

However, the section wreaks more havoc than intended because of the “freeze and seize” power given to prosecutors. Assets may be preserved at the outset until the time of sentencing and the determination of restitution. The assets are not forfeited outright — the statute does not operate like a forfeiture proceeding. Instead, §186.11 permits a freeze of assets, to prevent the “dissipating or secreting” of assets or property, and bars by injunction any attempt to transfer, encumber, hypothecate, or otherwise dispose of property. The status quo is maintained until sentencing. Ultimately, with a conviction, a prosecutor can perform self-help in taking the frozen assets and paying restitution.

Freezing Assets under §186.11 (5)
A prosecutor simply files a motion, even on an ex parte basis, makes a probable cause showing, and the defendant’s assets are frozen, including property shared with an innocent spouse or party not involved in the crime. The District Attorney can also freeze any assets transferred to others after the crime was committed but before the motion is brought. While good faith purchases are theoretically protected, any other assets transferred by the defendant after the crime could be frozen. This section extends its reach to any assets, whether within or outside of California.

Furthermore, there is no limit to the type of asset subject to this freeze. A defendant’s house and real property, as well as personal property — including cash in a bank, retirement account, and all other assets — can be preserved pending the sentencing. In certain circumstances, the Court can even appoint a referee to manage or oversee the assets preserved. The Court can also require a bond or undertaking on the defendant to preserve assets. Additionally, the District Attorney can file a lis pendens on any real estate.

One cannot underestimate the harm this freeze can cause a defendant. Any opportunity to refinance or obtain a loan secured by any property would be severely hampered, if not effectively eliminated. Efforts by a defendant to fund his defense can be eviscerated. If cash in a bank account is frozen, paying a mortgage or rent (or even groceries) might be impossible. If wages or social security are deposited directly into the frozen bank account, future income can also be lost.

Relief for Innocent Parties and Defendant
Innocent spouses, other innocent persons having any interest in assets with the defendant, and the defendant himself in some circumstances can obtain relief. The court must “seek to protect the interests of these innocent parties.” §186.11(g)(5). Under subsection (c)(6), any persons claiming interest in the frozen property may file a verified claim stating the nature and amount of their interest in the property. The verified claim must be filed within 30 days from the date of the first publication of notice or 30 days after receipt of actual notice.

Innocent parties who file verified claims could then also, under subsection (g)(2), move the Court for an Order to Show Cause hearing. At the hearing, the Court could determine if the Temporary Restraining Order should remain in effect and what relief should be granted from any lis pendens created under (e)(4), or any other modification of an existing order “in the interest of justice”. If there was a showing of good cause, the hearing could be held within two days’ notice of the  request for the hearing. Without good cause, the moving party must give ten days’ notice.

If the Court appoints a receiver to possess, preserve, manage, and operate assets and property of defendant, this court-appointed receiver is entitled to compensation for reasonable expenditures. By implication, the receiver might be able to assert a claim for compensation for the services. The Court may also impose a bond or undertaking in lieu of other orders. The bond would have to be sufficient
to ensure satisfaction of the restitution and fine that could be imposed. Naturally, restitution might not be certain. Thus, it is possible the prosecutor could state a profoundly inflated amount and tie up additional properties of defendant, or impose financial hardship by requiring a bond or undertaking.

Innocent parties and defendant both face challenges if there is a receiver, bond or undertaking imposed. It also forces these third parties to consider retaining counsel. Thus, their expenses increase with no relief or reimbursement available under the statute. Likewise, it puts all of these associates, family members, or friends of a defendant in a position of conflict with them. If they retain counsel, counsel would guide them in efforts to preserve and protect their property, which may be at odds with the interests of the defendant. Another layer of emotional trauma is then visited on a defendant.

The Procedure

Under subsection (g)(1), the District Attorney may submit a peace officer’s declaration containing his personal knowledge of the investigation to establish probable cause to believe that a white collar crime occurred and to identify the amount of restitution and potential fines. The declaration may include hearsay statements of witnesses. Further, if the prosecutor makes a showing of “good cause,” the temporary restraining order may be issued without notice. The court has discretion to consider any matter it deems reliable and appropriate, such as hearsay statements, in order to reach a “just and equitable” decision when it evaluates the need for a
temporary restraining order. Under subsection (g)(3), the courts weigh the relative degree of certainty f the outcome on the merits and the consequences to the parties involved. If interim relief is granted, and the court believes the prosecutor is ultimately likely to prevail, then with the risk of dissipation of the assets outweighs the potential harm to the defendants and interested parties, the court “shall grant injunctive relief.”

The court gives “significant weight” to various factors, such as the:

  1. public interest in preserving property and assets;
  2. difficulty of preserving the property and assets when the alleged crimes involve fraud and moral turpitude;
  3. requested relief sought by a prosecutor on behalf of victims of the white collar crime;
  4. likelihood substantial public harm has occurred where the aggravated white collar crime is alleged;
  5. significant public interest in compensating victims of white collar crime; and
  6. paying of restitution and fines. §186.11(g)(3)(A)-(E).

The statute does not leave defendants without some protections. Under subsection (g)(4), the Court, when making its order, may consider the defendant’s request for release of a portion of the property to pay reasonable legal fees for his defense, for the purpose of posting bail, and any “necessary and appropriate living expenses pending trial and sentencing.” In this way, the court weighs the need of the public to retain property against the needs of the defendant to a portion of the property. See also §186.11(g)(5).

In the event some property frozen under this section is likely to perish, waste, or diminish in value, or when expenses of maintaining a property are disproportionate to its value, the court may, upon motion by a receiver appointed under subsection (f)(2), order an interlocutory sale of the property. Proceeds of that sale would then be deposited with the court, or as directed by the court. §186.11(g)(7). If a defendant owns and operates a lawful business, and issues of liability or preserving the business assets from perishing, spoiling, or wasting arise, the court may make special preservation orders. §186.11(g)(8)-(10).

If the potential for diminution of value exists, the court shall appoint a receiver to dispose or otherwise protect the value of the asset. In the same way, if the business was viable and would not necessarily perish per se, the court could make orders to preserve the business and appoint a receiver to operate the business. However, if a preservation order appointing a receiver was unnecessary, the court would still freeze the asset.

For example, if a defendant was also the absentee landlord of an apartment building, with a management team in place, appointment of a receiver might not be  appropriate. The court would simply freeze the asset. In contrast, if the defendant actively operated any type of business, one would expect the court to seriously consider putting a receiver in place. This action would effectively wrest control of the business from the defendant, based on fears the defendant would skim income or profits from the business. However, if the defendant were the operator of a business selling perishable items, such as flowers, fruit, or other types of food, and the defendant were still in custody, a receiver would have to be appointed, and a specific preservation order would be issued by the court.

Notice Requirements
Notice by the District Attorney can be made by personal service or registered mail. Notice must also be published at least three successive weeks in newspapers of general circulation in the county where the property is located. The notice by the prosecutor to interested parties must inform them they have the right to file a verified claim, the amount of the claim, and setting for the time within which a verified claim must be filed.

When Does it End?
However, there is no question subsection (i)(1)(A) requires a trial court to maintain the preliminary injunction or temporary restraining order until the date of sentencing. Of course, if the case is dismissed, the enhancement is “found to be untrue,” or if defendant is acquitted, the TRO/injunction is immediately terminated. §186.11(h). At sentencing, the Court shall make a finding as to what portion, if any, the property or assets shall be levied to pay fines and restitution to the victims.
§186.11(g)(2) and (g)(4) can reasonably be interpreted to allow a court to consider an order to show cause and modify an existing order, or perhaps even terminate it before sentencing. The court must determine whether the existing order should be modified “in the interest of justice.”(6) Section 186.11 is silent about a defendant or innocent party’s right to bring more than one Order to Show Cause to modify a protective order. At the time the court considers the original order, or at
least when the OSC is heard, the court may consider a defendant’s request to “unfreeze” assets to pay reasonable legal fees for defense of the criminal action and any necessary and appropriate living expenses. It would seem equitable that a second OSC could be filed if there were changed circumstances, and the defendant or innocent party could show the need for relief from the TRO/injunction.

At sentencing, the District Attorney has the right to seek an order to sell the property. Until that sale is completed, the order could continue to restrain transfers, encumbering the property under subsection (f)(1). Until the order is terminated at sentencing, the underlying lis pendens would remain in place. Like general criminal law in California, §186.11 requires the court to order defendant to make full restitution to the victim based on their ability to pay, pursuant to subsection (i)(1)(B). Payment of the restitution shall be a condition of any probation granted by the court. Probation shall continue for up to ten years or until full restitution is made to the victim, whichever is shorter. In order to maintain control over the defendant, the sentencing court retains jurisdiction to enforce its order to pay any additional fines along with the restitution. The court may initiate probation violation proceedings or contempt proceedings against a defendant who willfully fails to comply with any order of the court. §186.11(i)(1)(C).

In the event defendant files an appeal of any order of the court under §186.11, execution of the judgment is stayed pending appellate resolution. While the appeal is pending, the preliminary injunction or temporary restraining order would remain in full force. §186.11(i)(1)(D). The trial court, when making its final order, must seek to protect the legitimately acquired interest of any innocent third parties, including an innocent spouse. While it appears an innocent spouse (or any innocent third party) is protected by the court under language of §186.11, a certain specter remains for an innocent spouse: Under the laws of California’s community property scenario, would an innocent spouse still be liable to pay any portion of the restitution?

Community Property Interests of an Innocent Spouse
Generally, like many things under the law, stating the principles and the general law is fairly easy. Generally, a spouse is responsible for his or her own conduct. Under Family Code §5, debts incurred by one spouse that are not for the benefit of the community, are borne by the spouse incurring them. Debts incurred by a spouse for non-necessities under Family Code §3(b) are also borne by that spouse.

Family Code §1000(a) protects an innocent spouse from debts incurred by the other spouse–a married person is not liable for any injury or damage caused by the other spouse, except in cases where the married person would be liable even if the marriage did not exist. However, under Family Code §1000(b), a married person responsible for personal injury or wrongful death damages is required to satisfy an injured person first from separate property, and then from the community, if
liability is based on an act or omission while the married person was performing an activity not for the benefit of the community. If the liabilities were based on conduct performed for the benefit of the community, then the community property is implicated first. In this way, a spouse is vulnerable.

The community property can be affected, though this does not mean an innocent spouse can share her equity from liability for the spouse’s conduct if it was for the benefit of the community. These sections generally follow basic concepts under the Civil Code stated in 4 — everyone is responsible for the results of his or her willful act and any injury occasioned to another by their intentional conduct in the management of their property or person. However, California case law exposes an innocent spouse for the other’s non-necessary debts or those not directly borne for the benefit of the community. In Re Marriage of Hirsch (1989), 211 Cal.App.3d 104, 259 Cal.Rptr. 39, defendant in a criminal action was convicted and ordered to pay restitution. The court stated: “Even f [responsible spouse] Clement’s conduct was intentionally tortuous, it presented evidence his activities benefited the community. Clement’s exposure to liability arose out of his actions while
serving on the board of USMB, which took place for the most part during his marriage to Claudie.

The remuneration he received for serving on the board was undisputably community property.” Id., at 111. See also: In re Marriage of Stitt (1983) 147 Cal.App.3d. 579, 195 Cal.Rptr.172. Note: The ruling of this court was limited to the specific facts of the case. Thus, if there was evidence suggesting the defendant’s conduct was an activity benefiting the community, community property of the innocent spouse becomes vulnerable. If defendant’s participation in the fraud or embezzlement was allegedly interconnected with his duties as an employee, and the employment was work benefiting the community, the community property of an innocent spouse is exposed.

Defense counsel would have a conflict of interest if he was also representing the spouse’s interest related to assets frozen under §186.11. Representing the spouse’s interest in preserving his/her community interest in any asset that was frozen conflicts with defendant’s interest. Defendant would benefit if the spouse paid some or all of the restitution or fines imposed.

Case Law Interpreting §186.1
There are a few California cases interpreting Penal Code §186.11. The case offers minimal guidance to the practicioner trying to defend a Petition for Protective Order. In People v. Pollard (2001) 90 Cal.App..4th, 483, 109 Cal.Rptr.2d 207, a bail bondsman received a Quitclaim Deed by the defendant a few months after the protective order was in place. The bail bondsman unsuccessfully argued that he was not given adequate notice under this section. The court, seeing the fallacy in the
argument, noted that the District Attorney only had an obligation to give notice to those who had an interest in the property at the time the protective order was signed. The protective order remained in place on the real property, and the bail bondsman could not free the property. It is likely the court’s decision was made easier because of the conduct of the defendant and the bail bondsman in the situation. The court concluded that the transfer by Quitclaim Deed was a blatant
attempt by defendant and the bail bondsman to thwart the District Attorney’s efforts to preserve and freeze defendant’s assets for payment of restitution and fines.

People v. Lai, B199389, May 12, 2008, (2008 Cal. App. Unpub. LEXIS 6367), an unpublished decision of the Court of Appeal, Second District, Division 4, was the second appellate go around for Defendant Lai. Both decisions were unpublished. The court understood Sec. 186.11 to be mandatory, and the sentencing court must determine restitution and fines and then impose the state and county penalty assessments based upon the amount of the section 186.11, subdivision (c) fine.
Specifically, the Court noted:

The penalty assessments are not prohibited by section 186.11, subdivision (l), which provides that a fine ‘imposed under this section . . . shall be in lieu of all other fines that may be imposed pursuant to any other provision of law for the crimes for which the defendant has been convicted in the action.’ The penalty assessments ‘shall be levied . . . upon every fine . . . imposed and collected by the courts for criminal offenses.’ (§§ 1464, subd. (a) & Gov. Code, §§ 76000, subd. (a).) As such, the penalty assessments are not fines, but rather are additional penalties levied upon all fines imposed for criminal offenses. They are not ‘fines’
[*7] imposed for the particular ‘crimes for which the defendant has been convicted,’ as contemplated, and prohibited, by section 186.11, subdivision (l).

The earlier Lai decision, People v Lai, (No. B165662. April 26, 2006) offered a clear guideline for a practitioner trying to confirm the added exposure of his/her client. Along with the fines and penalty assessments, a defendant can get time added to his sentence. Further, the government could raise the provisions of Sec. 186.11 for the first time on appeal.

In People Mozes, Brown, 192 Cal.App.4th 1124 (2011), the ruling provided that victims of white collar crime had a superior position to a claimant with a child support order pursuing the same assets The unpublished opinion of People v. Latou, 2d Crim. No. B224045 (2011), from the Second District, Division Six, rejected defendant’s contentions that because the 20 plus counts against her were “committed during an indivisible course of conduct with the single intent and objective of
theft”, an upper term prison sentence was improper. The court essentially allowed the trial court to exercise its discretion on sentencing. Thus, the lower courts can entertain complaints with multiple counts citing various fraud statutes, even with behavior that could not be considered particular to one fraud statute. This affirms the government’s power to pile on extra counts because there are extra statutes out there. If the legislature can come up with more statutes with more ways of describing fraud, then perhaps the government can charge more crimes.

Conclusion
Penal Code § 186.11 is a powerful and harmful tool in the hands of the government. It is mandatory and cannot be overlooked as a problem for defendants in larger white collar crime cases. It appears it must be applied, and probably in lieu of other penalty/assessment provisions of other statutes that would otherwise be applicable to a defendant’s case.


References:
1. February 22, 1996, A.D. 2827 (Escutia).
2. The Aggravated White Collar Crime Act was enacted by S.B. 950, Chapter 794, Statutes of 1995.
3. See, for example, Pacific Law Journal, “Review of Legislation”.
4. ¶ re fines.
5. All code references are to Penal Code §186.11 and its subsections, unless otherwise noted.
6. Report by Assembly Committee on Public Safety, Paula L. Boland, Chair, Report for Hearing on
April 23, 1996.
7. One Judge of the Alameda County Superior Court concluded that the freeze cannot be altered until sentencing. See People v. Mercado, et al., Alameda County Superior Court Case No. 146566-C. The author believes the court relied exclusively on 186.11(i) and did not properly consider 186.11(g), which appears to allow modifications of a freeze. Defendant brought a Motion to Remove Protective Order (not an Order to Show Cause) based on 186.11(i) to convert the equity in real estate under the freeze into cash, which would have required some complicated legal steps. It was a motion to modify the protective order, not remove the freeze on the value of the asset.

© 2002 Andrew Alexander Dósa