The Crown describes the error as a "procedural" one. There were two provisions of law authorizing seizure, and it improperly chose the one that provided no notice to Kim DotCom and the other property owners.

Radio New Zealand reports:

Justice Potter says the Police Commissioner applied for a foreign restraining order in January, when his office should have applied for an interim restraining order.

I think the law they are talking about is The Criminal Proceeds Recovery Act of 2009 (CPRA).

The order was issued under the authority of New Zealand Attorney General Chris Finlayson, who also serves as the minister in charge of the Crown Law Office. The order authorized police and the Official Assignee to seize and retain the property.

This error wasn't a mere technicality and it sure doesn't seem to be an oversight. It wasn't drafted in haste by a lone bureaucrat, police officer or prosecutor. How do we know this? Because the NZ police bragged about how many specialists were involved and how much time and effort went into the seizure operation in their newsletter?

While the global investigation was led by the FBI, its staff were completely hands-off in New Zealand as they have no jurisdiction to conduct investigations here, says Detective Inspector Grant Wormald, Taskforce Leader at OFCANZ [Organised & Financial Crime Agency New Zealand.]

“Our police already have a good reputation for being competent and capable. This operation reinforced our long-standing relationships with international law enforcement agencies,” he says.

An OFCANZ team of five picked up the case last September and worked intently to meet their goal of a mid-January termination. “The level of commitment shown by the OFCANZ investigative team was outstanding. We also benefitted from input by staff from several specialist groups who contributed their expertise before and during the termination phase.”

Ten search warrants were executed at addresses across Auckland and equipment including computers and documents were seized for evidential purposes. Luxury vehicles were restrained by the Official Assignee, along with artwork, electronic equipment and up to $11m in cash.(my emphasis.)

Nor does it seem the FBI was entirely sidelined:

Detective Superintendent Mike Pannett, New Zealand Police Liaison Officer in Washington, monitored termination activities around the world from the FBI’s Multi Agency Command Centre

After submitting a correct motion and getting the second order on February 1, police conducted a second round of raids, seizing jewelry, more cars, and the home Kim DotCom bought in December, located near the mansion.

Interesting sidenote: Kim Dotcom's legal team in the seizure cases is headed up by a big firm, Simpson Grierson. The firm may have a big incentive in the outcome: getting paid. One of the accounts seized pursuant to the invalid order was a law firm trust account maintained for Kim Dotcom. That's probably where he sent his legal fees. The account is also listed in the U.S. Superseding Indictment as an asset to be forfeited.

Update: I just read the actual court order and there are two statutes involved. The first, as I mentioned is The Criminal Proceeds Recovery Act of 2009 (CPRA). The second (and more relevant) is the Mutual Assistance in Criminal Matters Act 1992 (MACMA). The application should have been made for an Interim Foreign Restraining Order under Section 60 of MACMA and Sections 128-131 of CPRA. Instead it was made under Section 54 of MACMA and Sections 132 -135 of CPRA. From the Court's Order (which I received from the Ministry of Justice in New Zealand):

The major differences between interim foreign restraining orders under s 60 and the registration of a foreign restraining order under s 56 of MACMA, following application under s 54, is that the former is a temporary order made without notice by a New Zealand Court, while the latter is the on-notice registration of an order that has been made by a foreign Court. If the foreign restraining order was made without a hearing in the foreign Court (or without the respondent having an opportunity to be heard), a right of appearance is conferred on the person who is subject to the order.

Here, the Commissioner has confused the processes. He applied for the incorrect order (on-notice order for registration of a foreign restraining order), using the without-notice procedure for an interim foreign restraining order.

The second order, applied for on January 30 and issued on February 1, was extended on February 28 and 29 until March 21. Justice Potter writes in her order that she will consider the issue of whether the February 1 order is sufficient to continue holding the property seized under the first invalid order, or whether the restrained property must be released because it was unlawfully seized and restrained under the first order, as part of her decision on whether to extend the February 1 order past March 21.

This makes sense because the Crown's argument is that the property can't be released because it is being held pursuant to the correct February 1 order. But that order expires on March 21. Instead of deciding whether the Feb. 1 order was improperly granted and nullifying it, the Judge can just consider whether to again extend it. If she decides the assets seized under the first order cannot be held pursuant to an order granted after the seizures, she will just refuse to extend it again, letting it expire -- which means the property has to be released.

This order has been extended on 28 February 2012 and 29 February 2012 until 5 p.m. on 21 March 2012, subject to certain conditions. The property of the respondents is currently being restrained pursuant to this order....I consider it preferable to consider and determine those issues in the context of the Commissioner's application to re-register the foreign restraining orders.