In re Moffitt, Zwerling & Kemler, PC

• Decision Date: 12 October 1994
• Docket Number: Misc. No. 93-0006-A.
• Court: U.S. District Court — Eastern District of Virginia
• Parties: In re MOFFITT, ZWERLING & KEMLER, P.C.

864 F. Supp. 527

In re MOFFITT, ZWERLING & KEMLER, P.C.

Misc. No. 93-0006-A.

United States District Court, E.D. Virginia, Alexandria Division.

October 12, 1994.

COPYRIGHT MATERIAL OMITTED

Gordon D. Kromberg, Asst. U.S. Atty., Alexandria, VA, for U.S.

Arthur R. Mathews, Craig M. Blackwell, Wilmer, Cutler & Pickering, Washington, DC, for petitioners.

MEMORANDUM OPINION

ELLIS, District Judge.

The question presented in the final chapter of this novel criminal forfeiture proceeding is whether the government can use a criminal forfeiture statute, 21 U.S.C. § 853, to reach the proceeds of drug trafficking when those proceeds were used by the drug trafficker to pay legal fees and the law firm spent the fees prior to the entry of the forfeiture order. More particularly, the question may be stated as follows:

Can the government, in such a criminal forfeiture proceeding, require a law firm to pay the government a sum of money equal to a cash legal fee the law firm received from a client when:

(i) a court ordered the forfeiture of the legal fee, having determined the cash involved constituted proceeds from drug trafficking;

(ii) a court also determined that the law firm had no right, title or interest to the legal fees because it was not reasonably without cause to believe the fee was subject to forfeiture; and

(iii) it appears that the law firm deposited the cash legal fee in its general account and spent the account before the date of the entry of the forfeiture order.

I¹

William Paul Covington ("Covington") trafficked in cocaine and marijuana in northern Virginia for several years. Federal authorities eventually became aware of the operation and, by the summer of 1991, began to seize Covington's assets for forfeiture.² Covington was represented at this point by the law firm of Phillips, Beckwith and Hall. In August 1991, Covington sought to retain the law firm of Moffitt, Zwerling and Kemler, P.C. ("the Law Firm") as his new counsel. The Law Firm informed Covington that he would need to provide fees up front in the amount of $100,000. Covington brought a total of $103,800 in cash to the Law Firm on August 23 and August 24, 1991. The Law Firm told Covington that it would hold the extra $3,800 to cover expenses.

The Law Firm's partners filed Currency Transaction Reports, or Forms 8300, disclosing the receipt of the $103,800. These forms require identification of the entity from whom the cash is received. In this instance, the Law Firm, on attorney-client privilege grounds, chose not to disclose Covington's identity on the forms it filed.³

The government was wholly unaware of Covington's $103,800 cash payment to the Law Firm until November 1991, when government agents secured the cooperation of William "Junior" Atkinson, one of Covington's major customers. Covington, it appears, needed cash to pay the Law Firm's retainer, and sought out Atkinson to collect on a $32,000 debt owed by Atkinson for past drug transactions. Thus, the government learned through Atkinson in November that Covington had transferred a large amount of cash to the Law Firm. Because the government was unable to obtain conclusive evidence of Covington's payment to the Law Firm, the $103,800 in fees was not specifically addressed either in the original indictment of Covington on October 30, 1991 or the superseding indictment of January 9, 1992. Both indictments, however, contained a forfeiture count broadly phrased to cover "any and all properties constituting, or derived from, proceeds the defendants obtained, directly or indirectly, as a result of a conspiracy."

The government did not obtain further evidence of the fees paid by Covington until February 1992, when government investigators received copies of the Form 8300s filed by the Law Firm, and the Currency Transaction Report forms from the Law Firm's bank, Burke & Herbert Bank, reflecting two deposits totalling $103,800. Those documents established that the Law Firm had received and deposited $103,800 in cash in late August 1991, but did not identify the source of the money. Thereafter, the government obtained a search warrant to examine the bank's records regarding the deposits. While the results of the search warrant further corroborated that the Law Firm had deposited the $103,800, the records seized did not tie that money to Covington.

On February 11, 1992, the government served a subpoena duces tecum on the Law Firm, seeking disclosure of the amount and form of payment received from Covington. The Law Firm moved to quash the subpoena on the ground that it would impair Covington's right to obtain fully effective counsel. Another judge of this division granted the motion to quash the subpoena on March 13, 1992. The government appealed this ruling, but the Fourth Circuit Court of Appeals dismissed the appeal as moot after the Law Firm agreed voluntarily to supply enough of the requested information to the government. United States v. Covington, No. 92-5201 (4th Cir. Oct. 15, 1992).

Strongly suspecting that Covington was the source of the $103,800 in cash deposited by the Law Firm in late August 1991, the United States Attorney for the Eastern District of Virginia elected to seek forfeiture of the fees and, on March 16, 1992, requested authorization to do so from the appropriate Department of Justice (DOJ) official. On May 12, 1992, the DOJ advised the prosecutors in the case that the request had been approved. That same day, the government filed a Bill of Particulars which specifically identified the $103,800 as property subject to forfeiture under Covington's indictment.

The next day, the government moved for an order to restrain the Law Firm from expending any monies received from Covington. The Court granted the order that day. This order enjoined the Law Firm from "transferring, conveying, liquidating, encumbering, wasting, secreting, modifying the terms of or disposing of any real or personal property or United States Currency described in the indictment returned in this case or in the Bill of Particulars, or any property traceable to such property."

The Law Firm maintains that by May 1992 it had only $3,695 of the money it received from Covington. The remainder of the $103,800 had been spent or disbursed before the entry of the restraining order. At the time Covington retained its services, the Law Firm had two bank accounts: a general operating account and an escrow account. The Law Firm initially deposited $93,800 of Covington's money in the general operating account, and placed the remaining $10,000 in the escrow account. In September 1992, the Law Firm moved a portion of Covington's money from the general operating account into a new savings account.⁴ Law Firm records indicate that by the end of January 1992 the savings account had a zero balance and the general operating account had a slight negative balance. On that basis, the Law Firm contends that it no longer possessed any of Covington's money in either of these accounts at the time of the May 1992 restraining order. Meanwhile, the Law Firm gradually withdrew funds from the $10,000 in the escrow account in order to pay for expenses incurred in representing Covington. By the time the restraining order was entered in May 1992, the escrow account contained only $3,695.⁵

In August 1992, a conflict of interest compelled the Law Firm to withdraw as Covington's counsel.⁶ With the aid of appointed counsel, Covington eventually pled guilty to three charges, specifically, a drug conspiracy in violation of 21 U.S.C. § 846, money laundering in violation of 18 U.S.C. § 1956, and a firearms offense in violation of 18 U.S.C. § 924(c). At sentencing on February 26, 1993, the Court, inter alia, ordered the forfeiture of virtually all of Covington's assets, including the $103,800 he paid to the Law Firm, contingent on the rights of any third parties to be claimed pursuant to 21 U.S.C. § 853(n).⁷

Thereafter, the Law Firm filed a petition under § 853(n), contending that the forfeiture was improper because the Law Firm was "reasonably without cause to believe that the property was subject to forfeiture." 21 U.S.C. § 853(n)(6)(B). After an evidentiary hearing, the Court found that the $103,800 paid to the Law Firm constituted proceeds of Covington's drug trafficking, and that the Law Firm had not met its burden of proving that it took the cash from Covington without reasonable cause to believe that it was subject to forfeiture. Moffitt, 846 F.Supp. at 468-69, 472-76. This ruling had the effect of leaving in place the February 1993 final order of criminal forfeiture as to the $103,800.⁸

The government has now proposed a final decree of forfeiture of the $103,800. The Law Firm opposes that decree on the grounds that, although the $103,800 is property subject to forfeiture, that property was largely dissipated well before the entry of the restraining order, and the Law Firm now possesses only $3,695 of that property.

II

As this is a criminal forfeiture⁹ proceeding under 21 U.S.C. § 853, analysis properly begins with an explication of the overall statutory scheme.¹⁰ And, the proper starting point for this task is § 853(a), as it contains the core of the statute. It provides that a person convicted of violating a federal drug law punishable by imprisonment of more than one year must forfeit any property "constituting, or derived from, any proceeds the person obtained, directly or indirectly" from the crime. 21 U.S.C. § 853(a)(1).¹¹ Thus, under § 853(a), a defendant must forfeit criminal proceeds, and in addition, property which the government establishes to be derived therefrom. Section 853(b) clarifies that the term "property" includes both real and personal property, whether tangible or intangible. Significantly, the government has the benefit of a rebuttable presumption that property is forfeitable where a defendant acquired it during the period of the criminal activity and there is no likely source for it other than criminal...