United States v. $7,599,358.09

• Decision Date: 29 August 2013
• Docket Number: Civil Action No. 10–5060 (SRC).
• Parties: UNITED STATES of America, Plaintiff, v. $7,599,358.09, et al., Defendants.
• Court: U.S. District Court — District of New Jersey

953 F.Supp.2d 549

UNITED STATES of America, Plaintiff,

v.

$7,599,358.09, et al., Defendants.

Civil Action No. 10–5060 (SRC).

United States District Court, D. New Jersey.

June 18, 2013.

Order Denying Motion to Amend Aug. 29, 2013.

Marion Percell, U.S. Attorney's Office, Newark, NJ, for Plaintiff.

Richard M. Meth, Fox Rothschild LLP, Roseland, NJ, for Defendants.

OPINION

CHESLER, District Judge.

This is a civil forfeiture action involving money seized by the United States of America (the “Government”) from three bank accounts which had been held in the name of Leading Edge Group Holdings, LLC (“Leading Edge”),¹ a company owned by Allen Hilly. The seized money, which is named as the Defendant in this in rem action, will hereinafter be referred to as the “Leading Edge accounts” or the “Defendant property.” After this action was initiated by the Government to forfeit the Defendant property, various claims were filed by claimants asserting ownership over portions of the Defendant property. All but one those claims were stricken for lack of standing. The sole remaining claim belongs to Claimant the Director of Insurance for the State of Illinois, acting in his capacity as Liquidator of two Illinois companies, Administrative Employers Group (“AEG”) and Employers Consortium Inc. (“ECI”), also owned by Hilly. (The Claimant will be referred to in this Opinion as the “Liquidator.”)

The matter presently before the Court focuses on the merits of that remaining claim. The Government and the Liquidator have cross-moved for summary judgment on the Liquidator's claim.² For the reasons expressed below, the Court will deny the Liquidator's motion for summary judgment and grant summary judgment in favor of the Government.

I. Background

The material facts of this case are undisputed. In brief, they are as follows:

Allen Hilly acquired two Illinois companies, AEG and ECI, in 2004 and 2005, respectively. These companies were Professional Employer Organizations (“PEOs”), which means that they were engaged in the business or performing employment-related services, such as managing payrolls, collecting and remitting employment-relatedtaxes and obtaining workers' compensation insurance. AEG and ECI would contract with client companies to collect tax withholdings from the wages of the clients' employees (i.e., trust fund taxes) as well as the employer portion of payroll taxes owed, with the obligation to then pay those trust fund taxes and payroll taxes to the IRS on behalf of the clients. AEG and ECI also represented to clients that they were engaged in the business of providing workers' compensation insurance, or a legal substitute therefor, and accordingly collected payments from clients led to believe they were buying workers' compensation coverage. In reality, AEG and ECI were not able to provide workers' compensation coverage, and they did not remit the trust fund and payroll tax monies to the IRS.

Instead, Hilly used AEG and ECI, together with his New Jersey company Leading Edge, to perpetrate two fraudulent schemes on the clients of these companies. In one scheme, Hilly and his companies made false representations concerning workers' compensation coverage, and collected money from clients based on those misrepresentations, up to and after Hilly's arrest in December 2006 related to the fraudulent scheme. Through 2006, payments made by clients of AEG and ECI for workers' compensation insurance were wire-transferred from accounts held by AEG and/or ECI to two UBS bank accounts held in the name of Leading Edge. In the other scheme, Hilly directed AEG and ECI not to transfer to the IRS the monies representing the trust fund and payroll taxes owed by AEG and ECI clients but rather to divert those monies to a Bank of America bank account held in the name of Leading Edge. Those monies were sometimes further diverted by causing wire transfers to be sent from the Leading Edge Bank of America account to the Leading Edge UBS accounts. The diversion of tax monies held by AEG and ECI on behalf of clients occurred from February 2006 through at least December 2006, when Hilly was arrested. Hilly diverted over $15 million dollars in wrongful wire transfers from the AEG and ECI bank accounts in Illinois to the Leading Edge accounts in New Jersey. The UBS and Bank of America accounts described here were seized upon Hilly's arrest. The criminal action against Hilly abated due to his death, and the Government filed the instant civil forfeiture action on September 30, 2010.

On December 8, 2010, the Liquidator filed his claim in this action. Of relevance to the Liquidator's claim, AEG and ECI were found by an Illinois state court to be transacting in the unauthorized business of insurance and to be insolvent. By that same order, entered on April 21, 2008, the Circuit Court of Cook County, Illinois affirmed the Director of Insurance of the State of Illinois, i.e., the Liquidator, as receiver and liquidator for ECI and AEG. In this role, and by the terms of the April 21, 2008 Order, the Liquidator, among other powers granted by the order, “is vested by operation of law with the title to all property, contracts and rights of action of AEG and ECI” and “authorized to deal with the property, business and affairs of AEG and ECI.” (Basil Decl., Ex. 1.) The Liquidator filed a civil suit in Illinois state court against Leading Edge to recover the money wrongfully transferred from the AEG and ECI accounts to the Leading Edge Accounts. By order of May 27, 2009, the Liquidator obtained default judgment against Leading Edge in the amount of $14,267,007.08, and the judgment was registered in New Jersey on July 17, 2009. The Liquidator's claim on the Defendant property consists of the amount of that judgment, plus interest.

II. DiscussionA. Standard of Review

Summary judgment is appropriate under Federal Rule of Civil Procedure 56(a) when the moving party demonstrates that there is no genuine issue of material fact and the evidence establishes the moving party's entitlement to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A factual dispute is genuine if a reasonable jury could return a verdict for the non-movant, and it is material if, under the substantive law, it would affect the outcome of the suit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). “In considering a motion for summary judgment, a district court may not make credibility determinations or engage in any weighing of the evidence; instead, the non-moving party's evidence ‘is to be believed and all justifiable inferences are to be drawn in his favor.’ ” Marino v. Indus. Crating Co., 358 F.3d 241, 247 (3d Cir.2004) (quoting Anderson, 477 U.S. at 255, 106 S.Ct. 2505).

“When the moving party has the burden of proof at trial, that party must show affirmatively the absence of a genuine issue of material fact: it must show that, on all the essential elements of its case on which it bears the burden of proof at trial, no reasonable jury could find for the non-moving party.” In re Bressman, 327 F.3d 229, 238 (3d Cir.2003) (quoting United States v. Four Parcels of Real Property, 941 F.2d 1428, 1438 (11th Cir.1991)). “[W]ith respect to an issue on which the nonmoving party bears the burden of proof ... the burden on the moving party may be discharged by ‘showing’—that is, pointing out to the district court—that there is an absence of evidence to support the nonmoving party's case.” Celotex, 477 U.S. at 325, 106 S.Ct. 2548.

Once the moving party has satisfied its initial burden, the party opposing the motion must establish that a genuine issue as to a material fact exists. Jersey Cent. Power & Light Co. v. Lacey Township, 772 F.2d 1103, 1109 (3d Cir.1985). The party opposing the motion for summary judgment cannot rest on mere allegations and instead must present actual evidence that creates a genuine issue as to a material fact for trial. Anderson, 477 U.S. at 248, 106 S.Ct. 2505;Siegel Transfer, Inc. v. Carrier Express, Inc., 54 F.3d 1125, 1130–31 (3d Cir.1995). “[U]nsupported allegations ... and pleadings are insufficient to repel summary judgment.” Schoch v. First Fid. Bancorporation, 912 F.2d 654, 657 (3d Cir.1990). “A nonmoving party has created a genuine issue of material fact if it has provided sufficient evidence to allow a jury to find in its favor at trial.” Gleason v. Norwest Mortg., Inc., 243 F.3d 130, 138 (3d Cir.2001).

If the nonmoving party has failed “to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial, ... there can be ‘no genuine issue of material fact,’ since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial.” Katz v. Aetna Cas. & Sur. Co., 972 F.2d 53, 55 (3d Cir.1992) (quoting Celotex, 477 U.S. at 322–23, 106 S.Ct. 2548).

B. Summary of Arguments

The Government seeks to forfeit the Defendant property pursuant to 18 U.S.C. § 981(a)(1)(C), which provides, in relevant part, that property “which constitutes or is derived from proceeds traceable to ... any offense constituting ‘specified unlawful activity’ (as defined in section 1956(c)(7) of this title)” shall be subject to forfeiture. “Specified unlawful activity” within the meaning of 18 U.S.C. § 1956(c)(7) includes wire fraud, in violation of 18 U.S.C. § 1343. The civil forfeiture statute contains a relation-back provision, which provides that “[a]ll right, title, and interest in property described in subsection (a) of this section shall vest in the United States upon commission of the act giving rise to forfeiture under this section.” 18 U.S.C. § 981(f); see also United States v. Lavin, 942 F.2d 177, 185 (3d Cir.1991) (holding that under 18 U.S.C. § 981(f), “the government acquires its interest in the defendant's forfeited...