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Criminal – Forfeiture – Substitute Property – Contraband Cigarettes

In this criminal case for conspiracy to violate the Contraband Cigarette Trafficking Act and for tax evasion and mail fraud, an Abingdon U.S. District Court says it must amend a forfeiture order for defendants’ bank accounts to protect the legal interests of two states in the funds contained in the escrow account.

The corporate defendant, CLP Inc., was a cigarette manufacturer and the individual defendants, McLaughlin and Chemali, were officers or agents of CLP. In connection with the prosecution, this court entered an order of forfeiture of certain substitute property pursuant to 21 U.S.C. § 853(p), that covered the interests of defendants in certain bank deposits. Thereafter, the states of Oregon and Wisconsin filed petitions pursuant to 21 U.S.C. § 853(n), seeking an adjudication of their third-party interests in these forfeited funds.

Under the Master Settlement Agreement of litigation against cigarette companies, some manufacturers, including CLP, were not parties to the MSA, but under state statutes, had to pay into an escrow account. CLP entered into an escrow agreement April 30, 2003, with a North Carolina bank, First-Citizens Bank & Trust Co., and made payments for several years. CLP is entitled to interest from the escrow account as earned, after deduction of the escrow agent’s fees and expenses.

The petitioning states agree they have no claim to the interest generated by their sub-accounts, but contend the U.S. is not now entitled to the principal, since CLP has only a reversionary interest and the U.S. cannot obtain any greater interest than CLP has in the principal funds.

The states’ interests in the escrow funds is not deficient because they have simply failed to take some additional step required to perfect that interest. The state statutes and the escrow agreement specifically provide them with the right for up to 25 years to make their tobacco-related claims, without reversion of the fund to CLP during that time. Unlike the defendants in the cases relied upon by the government, CLP has no power over the funds until the escrow expires, regardless of whether the states have made any claims. Stepping into CLP’s shoes here means the government must wait for the reversion of the principal funds in accord with the terms of the escrow agreement.

I find petitioners have shown that the forfeiture order must be amended to protect their legal interest in the funds contained in the escrow account.

U.S. v. McLaughlin (Jones, J.) No. 1:09cr00004, USDC at Abingdon, Va.; Sharon Burnham, AUSA; E. Scott Austin for Oregon, Christopher J. Blythe for Wisconsin. VLW 010-3-480, 8 pp.

VLW 010-3-480

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