Various items were confiscated during a dawn raid on the sprawling £20m New Zealand home of Dotcom, formerly Kim Schmitz, by local police in January.
The action came as US authorities took action against file-sharing website Megaupload, and issued extradition orders for Dotcom and his associates to face charges of mass alleged copyright infringement.
However, a judge in New Zealand has now ruled that the court order secured to justify the seizure of property and assets should not have been granted, local media has reported.
Judge Judith Potter said that the court order should be considered "null and void". Millions of dollars worth of assets were taken in the raid, including luxury cars and jet skis, but it has now transpired that the paperwork was not correctly filled out.
Potentially more serious for prosecutors is that Dotcom was temporarily unable to mount a legal defence due to the seizure.
Police in New Zealand have already admitted to making "procedural errors" in filing the paperwork, and Dotcom's legal team have pounced on this to argue that the initial asset seizure was "unlawful" and the property should be returned.
Today's hearing was scheduled after the New Zealand government said that five mistakes had been made in the initial court order, leading Judge Potter to rule that the paperwork never actually had any legal power.
The judge granted a second court order filed by the government asking to confiscate all assets seized in the raid, and asking to take further assets uncovered using evidence from the original raid.
However, she also said that she would soon make a ruling on whether the mistakes made by police would result in Dotcom getting his property back.
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