In re Moffitt, Zwerling & Kemler, PC

• Decision Date: 19 January 1995
• Docket Number: Misc. No. 93-0006-A.
• Citation: 875 F. Supp. 1152
• Court: U.S. District Court — Eastern District of Virginia
• Parties: In re MOFFITT, ZWERLING & KEMLER, P.C.

875 F. Supp. 1152

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

Misc. No. 93-0006-A.

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

January 19, 1995.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Helen F. Fahey, U.S. Atty., Jay Apperson, Gordon D. Kromberg, Asst. U.S. Attys., Alexandria, VA, for Government.

William B. Moffitt, John K. Zwerling, Lisa B. Kemler, Moffitt, Zwerling & Kemler, P.C., Alexandria, VA, Arthur F. Mathews, Craig M. Blackwell, Wilmer, Cutler & Pickering, Washington, DC, for Law Firm.

MEMORANDUM OPINION

ELLIS, District Judge.

Like rumors of Mark Twain's death, statements that the last chapter in this saga had been written were (lamentably) premature. Statements of this sort appeared in In re Moffitt, Zwerling & Kemler, P.C., 864 F.Supp. 527 (E.D.Va.1994) (hereinafter Moffitt II),¹ which held, inter alia, that 21 U.S.C. § 853 requires a party who received forfeitable property from a criminal defendant, but who then transferred or dissipated the property prior to the entry of a restraining or forfeiture order, to forfeit property traceable to the transferred property. Id. at 541-42. The present chapter in this saga concerns disputes arising from the government's application for certain discovery orders in furtherance of its attempts to trace forfeitable property. Whether this is the final chapter remains to be seen.

I.²

In August 1991, William Covington was under investigation for drug trafficking, and sought to retain the Law Firm to represent him. The Law Firm informed Covington that it would require an initial payment of fees in the amount of $100,000. Covington was able to assemble $103,800 in cash by disinterring money he had buried to avoid its forfeiture, and by collecting on debts owed him by his drug customers. On August 23 and 24, Covington delivered the cash to the Law Firm, and the money was promptly deposited into two bank accounts. The bulk of the money, $93,800, went into the Law Firm's general operating account, the account used for ordinary business needs such as paying rent, bills, and salaries. The remaining $10,000 was deposited in the Law Firm's "omnibus" escrow account to be held on Covington's behalf and used to defray the expenses of his representation. Although this account contained funds of many different clients, the Law Firm kept separate ledgers of the amounts deposited and withdrawn for each client.

The Law Firm's bank accounts were quite active. In the months following the deposits of the $103,800, a substantial number of checks were written on the operating account, including several large ones.³ For example, on September 13, 1991, the Law Firm withdrew $50,000 to open a savings account. On September 25, the Law Firm paid out $25,000 from the savings account as a loan to one of its partners, to be repaid with interest over several years, primarily through salary deductions. In January 1992, the remainder of the money in the savings account was withdrawn and redeposited in the operating account. Most importantly, in January 1992 and again in April of that year, the general operating account "zeroed out," that is, it temporarily reached a zero or slightly negative balance. Over the same period of time, Covington's $10,000 in the escrow account was gradually spent as the Law Firm withdrew money to cover the expenses of the representation. By May 1992, although the omnibus escrow account contained substantial sums of money belonging to other clients, Covington's ledger showed only $3,695 of the original $10,000 remaining.

The government's investigation of Covington continued while the Law Firm was spending the funds received from him. It culminated in an indictment on October 30, 1991 for drug distribution and money laundering. Although the indictment contained no specific reference to the funds Covington paid the Law Firm, it did include a forfeiture count broadly covering all property derived from Covington's criminal activities. It appears that the government first received information in November 1991 about the August fee payments made by Covington. Although the government was able eventually to confirm that the Law Firm had deposited $103,800 in cash in its accounts in late August 1991, there was no conclusive evidence that this money had come from Covington. After unsuccessfully attempting to obtain such evidence, the United States Attorney for the Eastern District of Virginia, in March 1992, requested authorization from the Department of Justice to seek forfeiture of $103,800 from the Law Firm. On May 12, 1992, the Department of Justice approved the request, and the government then promptly filed a bill of particulars stating that the money was subject to forfeiture pursuant to Covington's indictment. The next day, the government moved for and received a restraining order enjoining the Law Firm and its partners, William B. Moffitt, John Zwerling, and Lisa Kemler, from expending Covington's $103,800 "or any property traceable to such property."

Covington eventually pled guilty to (i) a drug conspiracy in violation of 21 U.S.C. § 846, (ii) money laundering in violation of 18 U.S.C. § 1956, and (iii) a firearms offense in violation of 18 U.S.C. § 924(c). At sentencing on February 26, 1993, the Court 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). The Law Firm filed such a petition 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). Following a full evidentiary hearing, the Court denied this petition.⁴ The government then proposed a final decree of forfeiture of the $103,800, which the Law Firm opposed on the ground that, with the exception of $3,695 in the escrow account, it no longer had Covington's money. After further hearings, the Court held that the government's forfeiture powers under § 853 are less extensive with regard to forfeiture by third parties, such as the Law Firm, than with regard to criminal defendants, such as Covington. More specifically, the Court ruled that § 853 does not require the Law Firm to forfeit unrelated substitute property in place of the money received from Covington that was spent prior to the entry of the restraining or forfeiture order, but it does require the Law Firm to forfeit any property, held at the time such an order entered, that is derived from or traceable to Covington's money.⁵

The government is now pursuing forfeiture of traceable property from the Law Firm. On October 21, 1994, in furtherance of this effort, the government applied for an order of discovery pursuant to § 853(m).⁶ By order dated November 7, the Court granted in part the government's motion for a discovery order, requiring the Law Firm to produce documents and other materials reflecting all payments from the firm's accounts in which Covington's money had been placed.⁷ In response to the order, the Law Firm provided the government with bank statements of its operating and savings accounts and copies of its general ledger for the period from August 1991 to January 1992. On November 10 and 11, the government submitted eighteen additional requests for information to the Law Firm. The Law Firm responded by letter, providing some, but not all, of the requested information. At a hearing on November 15, the government unsuccessfully sought permission to obtain documents directly from the Law Firm's bank, and the parties also presented argument on a variety of unresolved discovery disputes. The Court heard further argument and received additional briefs from the parties regarding those disputes, and the disputes are now ripe for disposition.

II.

While the parties agree on very little, there seems to be common ground as to one important principle: courts are vested with considerable discretion with respect to the execution of forfeiture orders. Thus, following entry of a forfeiture order, courts may order the deposition of witnesses and production of documents "in order to facilitate the identification and location of property declared forfeited." 21 U.S.C. § 853(m). And in this connection, the statute expressly instructs that execution of forfeiture orders shall occur "upon such terms and conditions as the court shall deem proper." 21 U.S.C. § 853(g).⁸ Apart from this important, but narrow area of agreement, the parties dispute a variety of discovery issues arising from the government's efforts to trace the forfeited funds. Most fundamentally, the parties are at odds about the proper scope of tracing under § 853.

The Law Firm takes a very restrictive view of the government's § 853 forfeiture power. Noting that the statute's purpose is to punish criminals, the Law Firm argues that § 853(c) should not require a third party to forfeit property unless the forfeiture somehow punishes the defendant as well as the third party. The Law Firm thus contends that third-party forfeiture is appropriate where, for example, property was received in sham or fraudulent transactions.⁹ But, the Law Firm argues, § 853(c) forfeiture is improper when it constitutes punishment only of the third party and not the criminal. Since the Law Firm believes forfeiture by it will not punish Covington in any manner, it submits that it should be required to forfeit only the $3,695 remaining in the escrow account, and no other property regardless of its traceability to Covington's money.

This restrictive interpretation of § 853 is unpersuasive.¹⁰ It must be noted that the Law Firm's argument is not uniquely applicable to forfeiture of traceable property. Had the Law Firm placed Covington's $103,800 in a safe and never disturbed it, the Law Firm could still argue now that forfeiture of the money would punish it and not Covington. Thus, the Law Firm's argument, if accepted,...