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Arizona’s Forfeiture Laws: Why a Borrower’s Misconduct Could Prove Costly for Financial Institutions

Financial Institutions Law Alert Andrea S. Tazioli

In Arizona, the State can lawfully seize any real or personal property if it has probable cause to believe the property is connected to a criminal offense. For example, if an individual is being investigated for crimes such as money laundering, possession and/or sale of illegal drugs, human smuggling, racketeering, fraud, or illegal control of an enterprise, the State can and likely will seize all property that is either: (i) directly connected to these crimes; or (ii) was purchased using illegal proceeds. The State can then initiate a civil forfeiture action and seek to have a court order that the property is forfeited to the State.

While it appears that civil forfeiture actions would affect only those individuals who are being investigated or prosecuted for a criminal offense, this is not the case. In fact, all too often, financial institutions and lenders end up as a party to a forfeiture action. This occurs when a financial institution or lender serves as a lien holder on a piece of property that has been seized by the State. In most instances, the financial institution or lender has no knowledge of the borrower's criminal conduct until they receive a notice that a piece of real property or a vehicle has been seized. The financial institution or lender must then file a claim in the forfeiture action in order to preserve all of its right to the seized property at issue. If a financial institution does not file a timely claim to the property or fails to file a claim at all, then the property can and likely will be forfeited to the State.

In order to initiate a forfeiture action, the State typically files a Notice of Pending Forfeiture (Notice). This Notice contains information regarding the specific property that was seized and the underlying criminal activity that purportedly serves as the basis for the seizure of the property. Under Arizona law, the State must provide this Notice to any owner and interest holder in the seized property via personal service or certified mail —including lenders and/or servicers. Because property liens are often assigned or transferred to other lenders and servicers, it is possible that the State is not aware of the entity that has the interest in the loan. If the owner or interest holder's address is unknown and not on record, the State can effectively serve the owner or interest holder by publishing the Notice in one issue of a newspaper of general circulation in the county in which the seizure occurs. In the case where real property has been seized, this Notice is also recorded with the County Recorder's Office and is viewed as an additional lien on the property.

All claimants have thirty (30) days after the service of the Notice of Pending Forfeiture to file a claim to the seized property. Financial institutions are not exempt from these time restrictions. In the claim, financial institutions must set forth specific information as articulated in A.R.S. § 13-4311(E), including the nature of the financial institution's interest in the property and the reason(s) why the financial institution's interest in the property should not be forfeited. The financial institution must also sign the claim under the penalty of perjury. Importantly, if a claim is not timely filed or not filed at all, the Court could order that the property be forfeited to the State, regardless of the financial institution's position as a lien holder. Therefore, in forfeiture actions, time is of the essence.

In sum, upon learning of a forfeiture action, a financial institution, lender or servicer should immediately retain counsel to assist with the claim to the property. Counsel can ensure that the claim itself contains all necessary information and documentation supporting the claim. Counsel can also communicate directly with the prosecutorial agency bringing the forfeiture action and properly convey the financial institution's position as to the property. In many cases, counsel can negotiate a stipulation between the financial institution and the prosecutorial agency that effectively recognizes that the financial institution's interest in the property is exempt from forfeiture, thus preserving the security interest.

If you have questions about the subject matter of this update, please contact Andrea Tazioli at (602) 229-5710 / [email protected] or your Quarles & Brady LLP attorney.