United States v. Bailey

UNITED STATES OF AMERICA, Plaintiff, v. JAMES W. "BILL" BAILEY, JR., Defendant.

IN RE: EAJA PETITIONS

CRIMINAL CASE NO. 1:11-cr-00010-MR-DLH

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA ASHEVILLE DIVISION

April 27, 2015

MEMORANDUM OF DECISION AND ORDER

THIS MATTER is before the Court on the Petitioners' motions for awards of attorneys' fees and costs pursuant to the Equal Access to Justice Act, 28 U.S.C. § 2412(d) ("EAJA") [Docs. 622, 623, 631, 632, 649, 650, 653, 655, 656, 657, 658, 659, 660, 661, 662, 663, 664, 665, 666, 667, 668, 669, 670, 671, 672, 674, 675, 677, 683, 712].

I. INTRODUCTION

The Defendant James W. "Bill" Bailey, Jr. ("Bailey" or simply, "the Defendant"), was a financial advisor who admitted to engaging in a massive Ponzi scheme to defraud investors of millions of dollars over the course of adecade. Petitioners herein were among Bailey's clients. They were not, however, victims of his fraud. They forwarded funds from their individual retirement accounts (IRAs) to the Defendant's company for the purpose of purchasing real estate or other property with their IRA funds. Unlike so many of the Defendant's other clients, whose funds were stolen and never invested as promised, these IRA clients (Petitioners) received the assets they had instructed the Defendant to purchase within the time promised.¹

The Government sought the forfeiture of the assets purchased in whole or in part on behalf of Bailey's IRA clients on the theory that such assets constitute the proceeds of the Defendant's fraud. The present Petitioners objected to the forfeiture, claiming that they are the sole, rightful owners of the properties. While the Government eventually agreed to dismiss some of these properties from the preliminary order of forfeiture, it continued to seek forfeiture of the other properties. The Court ultimately rejected the Government's position and ordered all of the Petitioners' properties to be removed from the preliminary order of forfeiture. The Petitioners now seekawards of attorneys' fees and costs under EAJA as prevailing parties. For the reasons that follow, those motions are granted.

II. PROCEDURAL BACKGROUND

On February 1, 2011, the Defendant was charged in a Bill of Information with filing false tax returns, in violation of 26 U.S.C. § 7206(l); committing mail fraud, in violation of 18 U.S.C. § 1341; and committing securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. § 240.10b-5, and 18 U.S.C. § 2. [Doc. 1]. The Bill of Information contained a Notice of Forfeiture, which stated the Government's intent to pursue the forfeiture of the Defendant's interest in various properties pursuant to 18 U.S.C. § 982 and 28 U.S.C. § 2461(c). [Id. at 3].

The Defendant entered a plea of guilty to the Bill of Information on February 16, 2011. [Doc. 15]. Following the Defendant's plea of guilty, the Government and the Defendant presented the Court with a proposed Consent Order and Judgment of Forfeiture ("Preliminary Order of Forfeiture" or "Preliminary Order"), pursuant to which the Defendant agreed to forfeit, among other things, his interest in the properties identified in the Notice of Forfeiture in the Bill of Information. [Doc. 16 at 8]. As originally entered, the Preliminary Order authorized the preliminary forfeiture of "[a]ny and all interest in any LLCs, including LLCs in the name of Southern FinancialServices clients, established by Defendant and/or Southern Financial Services for the purpose of managing and/or purchasing assets ...." [Doc. 16 at 3]. It further authorized the preliminary forfeiture of "any and all assets titled in the name of LLCs established by Defendant and/or Southern Financial Services for the purpose of managing and/or purchasing assets ...." [Id.]. Beyond the Defendant's consent to the proposed forfeiture and his stipulation as set forth in the Plea Agreement that he "has or had a possessory interest or other legal interest in each item or property" identified in the Bill of Information [Doc. 3 at ¶8(b)], the Government presented no evidence supporting the forfeiture of these properties. The Preliminary Order of Forfeiture was entered by the Magistrate Judge on February 16, 2011.

On March 11, 2011, several petitioners (collectively, "the Sage Petitioners") filed verified claims, seeking to adjudicate the validity of their interest in the certificated securities of Sage Automotive Interiors, Inc. ("Sage Certificates" or "Certificates") that were identified as forfeitable assets in the Preliminary Order. [Docs. 23-38]. Other verified claims asserting interests in various real properties and LLCs identified in the Preliminary Order quickly followed. [See Docs. 40, 41, 42, 43, 46, 47, 62, 71, 72, 73, 74, 76, 79, 80, 82, 83, 85, 86, 87, 88, 89, 92, 93, 94, 96, 97, 98, 99, 100, 101, 103, 104, 110, 111, 113, 114, 115, 119, 120, 121, 122, 131, 168, 171, 174, 183, 186, 187,200, 292]. The majority of these Petitioners were Bailey's former clients, who had forwarded IRA funds to Bailey, a purportedly qualified IRA custodian², for the purpose of establishing self-directed IRA limited liability companies and purchasing properties to be held in the names of such companies.³ The remaining Petitioners had never been clients of Bailey and had used their own personal funds to buy interest in certain properties, but owned these properties jointly with a limited liability company established by Bailey on behalf of an IRA client.

In each Petition, the Petitioners took the position that the Defendant had no interest in the identified properties; that the Petitioners had a superior interest in the properties such that they would prevail under § 853(n)(6)(A); and that the Petitioners would also qualify as bona fide purchasers of the properties under § 853(n)(6)(B). In support of their verified claims, thePetitioners presented documentary evidence, including closing documents and account statements, to show that the properties were in fact owned by the Petitioners and that the Defendant had no ownership interest therein. Despite this evidence, the Government took the position that the Defendant nevertheless had an ownership interest in the properties because some or all of the funds used to purchase such properties flowed through the Defendant's bank accounts and thus, in the Government's view, constituted proceeds of his fraud.

On March 22, 2011, the Sage Petitioners moved for an expedited hearing on their claims. [Doc. 48]. The Court granted the Sage Petitioners' motion and held an expedited hearing on April 5, 2011. Following the expedited hearing, on April 8, 2011, the Court entered an Order ("the First Sage Order"), directing the return of the Certificates to the Sage Petitioners subject to certain requirements. [Doc. 164]. Particularly, the Court concluded that because the Defendant had obtained money from the Sage Petitioners through fraudulent means, a constructive trust arose in those funds at the time that they were conveyed to the Defendant. [Id. at 7]. Having determined that the Sage Petitioners had a valid legal interest in the funds under state law and that such interest was superior to any interest the Defendant may have had, the Court then conducted a tracing analysis.Using the bank record summaries that were prepared by the Government and introduced at the hearing without objection by the Sage Petitioners ("the Bank Summaries"), the Court applied the lowest intermediate balance rule to trace the Sage Petitioners' funds and determine the amount of the Certificates' value that should be returned to them. The Court recognized a constructive trust on the entirety of the Certificates issued on behalf of some of the Sage Petitioners. [Id. at 8-9]. With respect to other Sage Petitioners, for whom Certificates were purchased in whole or in part with commingled funds, the Court awarded only a percentage of the Certificates' value. [Id. at 9-10].

In this Order, the Court noted as follows:

The [Sage] Petitioners are in a relatively unique position. Unlike many other victims who "invested" money with Defendant and received some payouts in return (thereby reducing their total losses), the Petitioners have lost 100% of the funds they provided to the Defendant for the purchase of the Sage Certificates. Other victims are being allowed to keep the proceeds that the Defendant paid to them, despite the fact that such payouts may be technically forfeitable as proceeds of the Defendant's crimes, because the Government as a practical matter does not intend to pursue forfeiture of these assets. Unfortunately for the Petitioners, their "payout," i.e., the Certificates that were issued on their behalf, happened to be in the physical possession of the Defendant at the time that the Government physicallyseized the Defendant's assets. It is only because of this fortuitous (or rather, unfortuitous) occurrence that the Government now seeks forfeiture of the Certificates. Had the Certificates been delivered to the Petitioners, the Government concedes that it would not have sought the forfeiture of this property. But because the Certificates were in the possession of the Defendant, and thus are, in the words of the Government, "low hanging fruit," forfeiture of this property is being pursued. It is the Government's decision to pursue forfeiture of these Certificates, however, that truly renders the Petitioners victims in this case.

[Doc. 164 at 11-12].

In June 2011, several of those Sage Petitioners who received only a percentage of the Certificates' value filed a motion to clarify the Court's Order regarding the calculation of their percentage ownership of the Certificates. [Doc. 226]. While that motion was pending, the Court granted the motions of various other Petitioners to conduct discovery for a period of sixty (60) days. [Docs. 152, 153, 154, 155, 156, 158, 159, 160, 164, 175, 179, 184; see also Order, Doc. 230]. In that 60-day period, these Petitioners conducted...