Businesses often turn to Chapter 11 as a last resort to save enterprise value and, in turn, protect the interests of stakeholders. A strategic and well-managed Chapter 11 filing not only preserves value for creditors, it may also protect the interests of customers, trade vendors, employees, shareholders and local communities. But what happens when there are competing interests between the government’s assertion of a civil or criminal forfeiture claim and the right of the target of such claim to seek the protection of federal bankruptcy laws for the benefit of all parties in interest?
The Bankruptcy Code is clear that all of a debtor’s assets, “wherever located and by whomever held,” become property of the bankruptcy estate immediately upon filing. 11 U.S.C. § 541. Yet, many forfeiture statutes operate in direct conflict to this extremely broad test for determining the property of the estate. Through a legal mechanism known as “relation-back,” upon a final judgment of forfeiture, most forfeiture statutes retroactively divest a person or entity of all interest in forfeited property as of the date of the illegal act. See N.J.S.A. § 2C:64-7. Thus, if a debtor’s property is seized pre-petition, and later forfeited pursuant to a final judgment of forfeiture in state court, that property arguably never becomes property of the bankruptcy estate because the debtor is determined, retroactively, to have lost all interest in the forfeited property prepetition.
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