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Month: April 2014

Ch. 7 Trustee Gets Commission-Based Fee

A bankruptcy court erred when it rejected the Chapter 7 bankruptcy trustee’s request for a fee of $17,254 and instead awarded an hourly-based fee of $8,020 because it found the trustee did not properly supervise the case; in a case of first impression in the federal appellate courts, the 4th Circuit says that absent extraordinary circumstances, a bankruptcy court is required to compensate Chapter 7 trustees on a commission basis.

The trustee contends the bankruptcy court erred in failing to award him a commission-based fee. He contend he is entitled to a commission, pursuant to 11 U.S.C. § 330(a)(7), based on the percentage set forth in § 326(a).

The current version of § 330(a)(3) speaks only to the compensation of Chapter 11 trustees. Thus, § 330(a)(3) is generally immaterial in determining the compensation for a Chapter 7 trustee. Section 330(a)(4) is the same as it was before enactment of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It says the court shall not allow compensation for unnecessary duplication of services, or services that were not reasonably likely to benefit the debtor’s estate, or necessary to the administration of the estate.

The BAPCPA added § 330(a)(7) to the Code. This section instructs that in determining the amount of reasonable compensation to be awarded to a trustee, the court shall treat such compensation as a commission, based on § 326.

Congress chose to employ the mandatory term “shall” in § 330(a)(7) when speaking of compensation for Chapter 7 trustees. Yet, it used the word “may” in other portions of the statute. It is uncontroversial that the term “shall” customarily connotes a command, whereas the term “may” typically indicates authorization without obligation. Accordingly, we can rightly assume that Congress said what it meant and meant what it said when it chose to include the term “shall” in § 330(a)(7), thus making its application in the determination of Chapter 7 trustee fee awards mandatory. Examining the other operative words in § 330(a)(7), we note that a commission is a fee paid to an agent or employee for a particular transaction, usually as a percentage of the money received from the transaction. And “based upon” means “derived from.” These definitions lead us to the unmistakable conclusion that, absent extraordinary circumstances, a Chapter 7 trustee fee award must be calculated on a commission basis, as those percentages are set forth in § 326(a).

But what extraordinary circumstances might allow the § 326(a) commission rates to be reduced? The court below stated that extraordinary circumstances include not performing trustee duties, performing them negligently or inadequately. It bears noting that the term “extraordinary circumstance” is absent from the statute. Nevertheless, its employment in the Chapter 7 fee determination scheme appears to be an attempt to reconcile § 330(a)(7) and § 326(a) with § 330(a)(1) and § 330(a)(2). Section 330(a)(7) creates a presumption, but not a right, to a statutory maximum commission-based fee for Chapter 7 trustees.

Here, the bankruptcy court based the trustee’s compensation on an hourly rate, as opposed to a commission-based rate, based on findings that the trustee did not properly discharge his duties, did not administer the state expeditiously and neglected to adequately supervise the case. In light of the plain meaning of § 330(a)(7), however, this was legal error.

The bankruptcy court ought to have first determined what the maximum statutory commission rate for this case was, pursuant to § 326(a). Only after doing that should it have decided whether any extraordinary circumstances existed such that the proper commission rate set out in § 326(a), which is presumptively reasonable, was in fact unreasonable and thus should have been reduced.

We reverse the district court decision affirming the bankruptcy court’s non-commission-based fee award and remand with instructions to vacate the trustee’s fee and remand to the bankruptcy court so it can determine the proper commission-based fee to award to the trustee.

Reversed and remanded.

In re: Geoffrey A. Rowe (Floyd) No. 13-1270, April 28, 2014; USDC at Alexandria, Va.; Brett Shumate for appellant; Patrick M. Wallace for amicus U.S. VLW 014-2-079, 16 pp.

Time Gap No Bar to Child Porn Sentence Increase

Although defendant contends his only documented incident of distributing child pornography occurred more than two years prior to his offense of possession, the 4th Circuit upholds a distribution sentencing enhancement under USSG § 1B1.3 and affirms defendant’s 78-month sentence, followed by 15 years of supervised release.

Despite the limited scope of conduct for which defendant was convicted, under § 3B1.3(a)(2), he may nonetheless be sentenced more broadly for relevant conduct – i.e., the conduct of other offenses insofar as they were part of the same course of conduct as the offense of conviction.

Defendant’s challenge centers on the factual analysis the district court conducted in applying the relevant conduct guideline. The court’s application of § 1B1.3 depended on an evaluation and weighing of the factual details, even though the details themselves may have been undisputed. We review the court’s decision for clear error.

The concept of “same course of conduct” requires only that the defendant be engaged in an identifiable pattern of certain criminal activity. We evaluate the similarity of the offenses, their regularity and the time interval between them.

The district court acknowledged that the two and one-half year gap between the upload of child pornography online and defendant’s offense of arrest was “significant.” But the court had other evidence to support its conclusion that defendant’s distribution of child pornography was part of the same course of conduct as his July 2011 possession of child pornography.

Defendant admitted on the day of his arrest that he had possessed and distributed child pornography during the last 10 years, and that he had distributed child pornography to various Yahoo Groups on at least six occasions, and the CyberTipLine Report documents him uploading child pornography to yet a different website on an additional occasion. During conversations from late 2010 to early 2011, defendant actively solicited images of prepubescent children with whom he wished to have sex, constituting a further extension of his course of conduct. The court found the distribution and possession of child pornography were the “same sort of conduct continuing over the entire period.” We conclude the court’s factual finding was supported by the record and therefore was not clearly erroneous.

Judgment affirmed.

U.S. v. McVey (Niemeyer) No. 13-4285, April 23, 2014; USDC at Parkersburg, W.Va. (Chambers) Jonathan D. Byrne, FPD, for appellant; Jennifer L. Rada, AUSA, for appellee. VLW 014-2-077, 16 pp.

‘Harmless Error’ Analysis Saves Enhanced Sentences

In these consolidated appeals by two defendants involved in conspiracy to distribute cocaine, the 4th Circuit affirms the district court’s application of sentencing enhancements for use of a minor, possession of a dangerous weapon and leadership, and applies harmless error analysis in light of the district court’s assertion that it would have handed down the same sentences without certain enhancements.

The government’s evidence provided the jury with enough circumstantial evidence – defendant Aaron Juarez-Gomez’s drug sales, his frequent and extended presence at the trailer, and the drug-stash contents of the trailer – to support the jury’s factual determination that Juarez-Gomez was involved in a conspiracy with, and aided and abetted, whoever lived in the trailer. In other words, his involvement in several cocaine sales supported a reasonable inference that his repeated visits to the trailer, used as a drug stash house, were less than coincidental. Because we are required to construe all facts and reasonable inferences in favor of the government, we conclude the jury verdict must be upheld.

Juarez-Gomez also qualified for the two-level sentencing enhancement under USSG § 3B1.4  for “use or attempted use” of a minor in the criminal activity. The district court could consider not only the receipt for rental of the trailer/stash house found among the minor’s belongings, but also testimony that the minor paid rent on the trailer “from time to time,” the testimony that defendant held the lease on the trailer and the fact that the minor was a defendant’s son. There also was evidence the minor lived in the trailer and that he attended drug deals and assisted in the extraction of cocaine base from liquid cocaine. We uphold the sentence for 390 months’ imprisonment.

Turning to defendant Erasto Gomez-Jimenez, the district court did not err in enhancing his sentences under USSG § 2D1.1(b)(1) for possession of a dangerous weapon during a drug transaction. Undisputed portions of the presentence report (PSR) gave the court reason to believe the weapons in question were connected to the conspiracy and substantive counts on which he was convicted. The PSR found defendant was responsible for more than 8,000 grams of cocaine and 700 grams of cocaine base recovered in the form of narcotics and currency from the residence. Three firearms – one stolen assault rifle and two handguns — were discovered in the residence as well, including one that was in plain view. Various tools for measuring, storing and dissolving cocaine also were present. The district court found that Gomez-Jimenez was tied to the residence through both his presence there when the police arrived as well as the existence of an energy bill for the residence in his name. Defendant also appears to have been close with his co-conspirators: one was his brother and Gomez-Jimenez brought the son of the third co-conspirator along with him to several drug deals. We decline to disturb the district court finding that the facts here supported a two-level dangerous weapons enhancement under USSG § 2D1.1(b)(1).

Juarez-Gomez also challenged application of the § 3B1.1(c) leadership enhancement, and Gomez-Jimenez challenges the § 3B1.4 use of a minor enhancement.

Rather than review the merits of each of these challenges, we may proceed directly to an “assumed error harmless inquiry” under U.S. v. Savillon-Matute, 636 F.3d 119 (4th Cir. 2011). In the present case, the district court made it abundantly clear that it would have imposed the same sentence against both Juarez-Gomez and Gomez-Jimenez regardless of the advice of the guidelines. The record shows that in each case, the district court provided a thorough and persuasive analysis under 18 U.S.C. § 3353(a). Further, we do not find the 180-month sentence for Gomez-Jimenez to be substantively unreasonable.

Judgment affirmed.

Concurrence & dissent

Gregory, J.: I concur in the majority opinion as to the sufficiency of the evidence for Juarez-Gomez’s conviction and the enhancement for firearm possession. I dissent from the disposition of the remaining sentencing enhancement challenges: use of a minor, USSG § 3B1.4, and the majority’s harmless error analysis.

I would reverse the enhancement of Juarez-Gomez’s sentence for use of a minor. I find that to the extent there is something more than mere presence, those acts do not fall within the guidelines definition. Paying rent for the trailer was neither criminal activity nor a means of avoiding detection. Further, I do not believe a simple statement that the district court would have imposed the same sentence is sufficient, at least where the imposed sentence exceeds what would have been the guidelines range absent a procedural error.

U.S. v. Gomez-Jimenez (Agee) No. 12-5030, April 24, 2014; USDC at Raleigh, N.C. (Dever) Paul K. Sun Jr., Joseph B. Gilbert for appellants; Joshua L. Rogers, AUSA, for appellee. VLW 014-2-078, 49 pp.

No Confrontation Right at Death-Penalty Phase

In this case of first impression, the 4th Circuit says the Sixth Amendment right to confront witnesses does not apply during the sentence-selection phase of a capital murder trial, and a split panel affirms the death penalty for an MS-13 gang member who shot and killed two brothers in a Greensboro, N.C., restaurant.

Alejandro Enrique Ramirez Umaña shot and killed two brothers, Ruben and Manuel Salinas, at point-blank range in a restaurant in Greensboro, North Carolina, because Umaña perceived that the brothers had insulted Umaña’s gang, Mara Salvatrucha, commonly known as MS-13. A jury convicted Umaña of murder in aid of racketeering, in violation of 18 U.S.C. § 1959(a)(1), and murder while using a firearm during and in relation to a crime of violence, in violation of 18 U.S.C. § 924(c) and (j)(1). The convictions on those charges subjected Umaña to a maximum sentence of death.

The same jury returned a verdict that Umaña was death eligible on the four capital counts, as provided in 18 U.S.C. §§ 3591-3596, and imposed the death penalty. On appeal, Umaña challenges every phase of the proceedings below. We reject his claims and affirm the convictions and sentence.

During the sentence selection phase of trial, the district court allowed the government to introduce hearsay statements of MS-13 members accusing Umaña of committing prior murders in Los Angeles. Specifically, the court allowed detectives to testify at trial about their interviews with Luis Ramos, Luis Rivera, and Rene Arevalo. The court also allowed the government to introduce the transcripts of the interviews with Rivera and Arevalo.

Umaña objected to the evidence on the grounds that it (1) violated his right to confrontation under the Sixth Amendment and (2) constituted unreliable hearsay. The district court held that the Confrontation Clause does not apply to the sentence selection phase of capital sentencing and that the hearsay statements bore sufficient indicia of reliability and trustworthiness to be admissible during sentencing. Umaña now contends that the district court erred on both counts.

Courts have long held that the right to confrontation does not apply at sentencing, even in capital cases. In Williams v. New York, 337 U.S. 241 (1949), the Supreme Court noted that in modern sentencing, which seeks a punishment that fits the offender, not just the crime, the sentencing judge should be able to consider “the fullest information possible concerning the defendant’s life and characteristics.” If that information is subject to cross-examination, it would become “unavailable.” The Williams court indicated that the standard is no different for capital cases, saying it did not accept the contention that “we should draw a constitutional distinction as to the procedure for obtaining information where the death sentence is imposed.” We conclude that Williams squarely disposes of Umaña’s argument that the Sixth Amendment should apply to capital sentencing.

Williams remains good law. The Supreme Court recently affirmed its viability in Alleyne v. U.S., 133 S. Ct. 2151 (2013). And we recently held in U.S. v. Powell, 650 F.3d 388 (4th Cir. 2011), that a sentencing court may consider any relevant information before it, including uncorroborated hearsay, provided that the information has sufficient indicia of reliability to support its accuracy.

Umaña’s suggestion that evidence at sentencing be restricted by the Confrontation Clause would frustrate the policy of presenting full information to sentencers. A policy of full information during sentencing, unrestricted by the strict rules of evidence, enhances reliability by providing the sentencing jury with more relevant evidence, whether presented by the government or the defendant. To now impose the rigorous requirements of confrontation would not only be a setback for reliable sentencing, it could also “endlessly delay criminal administration in a retrial of collateral issues.”

We conclude that the Confrontation Clause does not preclude the introduction of hearsay statements during the sentence selection phase of capital sentencing. The district court did not abuse its discretion in admitting the hearsay evidence about the Los Angeles murders during the sentence selection phase of trial. We conclude Umaña had a fair trial and that the death penalty was justified by the jury’s factual findings and by law and was not imposed under the improper influence of passion, prejudice, or any other arbitrary factor.

Conviction and death sentence affirmed.

Dissent

The majority opinion denies defendant the right to confront his accusers in a jury proceeding to determine whether he lives or dies. The right to confront one’s accusers is a right as old as it is important. The Sixth Amendment guarantees a defendant the right “to be confronted with the witnesses against him” “in all criminal prosecutions.” It also guarantees the right to an attorney, jury fact finding, notice of the crimes of which a defendant is accused, and a trial in the venue where the crime was committed.

The majority strips Umaña of the Sixth Amendment right most important for ensuring the accuracy of trial outcomes during the most important proceeding of his life. This is an important constitutional question that the Supreme Court has not yet resolved, though three circuits have wrestled with the issue. This is an issue of first impression in this circuit, though we have held that the Confrontation Clause does not apply in non-capital sentencing.

The evidence linking Umaña to previous murders was as powerful as it was problematic. For both the Los Angeles and El Salvador murders, there was not enough evidence for prosecutors to bring a case or sustain a conviction in stage one of a Federal Death Penalty Act trial. Unfazed, the government simply bided its time until the third stage of the trial, when, per the district court’s ruling and the majority opinion today, important constitutional safeguards disappear. Umaña filed a timely objection at sentencing, arguing that his Sixth Amendment rights were violated.

Because I conclude that the Confrontation Clause applies at every stage of an FDPA trial, not just the first two stages, and because I conclude that it is both wrong and unconstitutional for a death sentence to rest on unconfronted accusatory evidence, I dissent.

U.S. v. Umaña (Niemeyer) No. 10-6, April 23, 2014; USDC at Charlotte, N.C. (Conrad) Vincent J. Brunkow for appellant; Adam C. Morris, AUSA, for appellee. VLW 014-2-076, 104 pp.

Justices search for limits in cell phone search cases

PWASHINGTON — Applying centuries-old constitutional principles to situations not contemplated by the Founding Fathers is nothing new for the justices of the U.S. Supreme Court. But that doesn’t make it easy, as was clear during two hours of oral argument Tuesday in cases testing the Fourth Amendment’s limits on cell phone searches.

The attorneys arguing in U.S. v. Wurie and Riley v. California urged the court to draw a bright line with respect to police’s ability to search the contents of arrestees’ cell phones. Attorneys for the government urged the justices to rule that such searches are allowed under the incident-to-arrest exception, while defense attorneys asked the court to find such searches unreasonable absent a warrant or specific exception.

But several justices expressed a desire to proceed more cautiously and draw a line somewhere in the middle, given the fast-evolving technology of cell phones, the vast amount of personal information contained within them, and the speed with which that information — which may include evidence of a crime — can be erased.

“We’re living in a new world,” Justice Anthony M. Kennedy said. “[S]omeone arrested for a minor crime [can have] their whole existence exposed on this little device.”

Phone searches

The defendant in U.S. v. Wurie, Brima Wurie, was arrested by Boston police for selling drugs. At the police station officers seized two phones from him. While in the police’s possession, one of the phones rang repeatedly and displayed “my house” on its external screen. Officers opened the phone, pressed a button to view the call log, traced the phone number identified as “my house” to an address and obtained a search warrant for the premises, where they found drugs, a firearm and ammunition.

Wurie was charged with drug and firearm offenses. He sought to suppress the evidence from the search of his home, arguing that it stemmed from an unlawful search of the contents of his cell phone. A federal district court denied the motion, but the 1st U.S. Circuit Court of Appeals reversed.

Riley v. California stems from a traffic stop in San Diego, California. David Riley was arrested on firearm charges and his smartphone was seized. An officer searched the phone and found pictures of Riley making gang signs, text messages using gang lingo and other communications linking him to an earlier shooting.

At his trial for the shooting, Riley unsuccessfully sought to suppress the evidence. He was convicted and the California Court of Appeal affirmed the conviction.

The Supreme Court granted certiorari separately, but scheduled arguments in tandem.

During those arguments, the justices asked the attorneys to analogize cell phones to a host of other items to which a Fourth Amendment analysis may be applied: diaries; wallets and billfolds, compact disks, briefcases, laptops and iPads. They even considered if the type of cell phone searched informed the analysis, meaning that the outcome in Wurie, which involved the search of an old flip-top phone, could be different from the resolution in Riley, where a smartphone was searched.

Vast amount of ‘personal and private information’

Boston-based federal public defender Judith H. Mizner represented Wurie. She argued that although courts have ruled that obtaining information like call logs, which can be obtained from cell phone carriers, does not require a warrant, cell phone searches are different. Call log information on phones “contain more than simply the numbers dialed,” Mizner said.

“You have the associational information that’s created by the user” identifying who each number belongs to, she said. “In this case, it was linking ‘my house’ to a particular number.”

Justice Samuel A. Alito Jr. noted that the Fourth Amendment allows searches of homes incident to arrest, and information possessed by phone companies, such as the numbers dialed from an account, does not require a warrant.

If the call log is not covered by a reasonable expectation of privacy, and ‘my house’ is not covered by a reasonable expectation of privacy, then where’s the search?” he asked.

“The phone itself if covered by a reasonable expectation of privacy, Mizner said.

Alito wasn’t sure the text of the Fourth Amendment made the answer so clear.

“Are we trying to answer an empirical question, [which is] what is the reasonable expectation of privacy  of a person in 2014 who has a cell phone on his or per person,” Alito asked, “or are we legislating what we think is a good privacy rule?”

“The court is determining whether or not in 2014 an individual has a reasonable expectation of privacy against government intrusion into a device that carries around an increasingly large percentage of somebody’s personal and private information,” Mizner said.

Jeffrey L. Fisher, a professor at Stanford Law School in Stanford, California, argued on Riley’s behalf that police have no more right to search a cell phone without a warrant than they have to rifle though private papers in the drawers of an individual’s home. And cell phones contain for more information, Fisher argued, making the expectation of privacy even greater.

“That protection should not evaporate more than 200 years after the founding because we have the technological development of smartphones that have resulted in people carrying that information in their pockets,” Fisher said.

Kennedy asked if there was a way for the court to generally allow searches of cell phones, but “draw the line which will still result in a judgment in your favor?”

Fisher said there was not, continuing, “we have an exploratory search [here] where not even the state has contended the amount of information looked at is equivalent to what somebody could have carried around in the old days.”

Categorical rule?

In Wurie, Deputy U.S. Solicitor General Michael R. Dreeben argued that “any categorical rule that would preclude searches of cell phones incident to arrest would be inconsistent with historical practice and detrimental to law enforcement.”

But Justice Stephen G. Breyer pointed out that a general warrant requirement for searches with certain exceptions for exigent circumstances could be an easy rule to apply.

“You don’t need a special rule, other than the rule ‘get a warrant,’” Breyer said.

But Dreeben disagreed.

“That rule completely compromises the interests [of the] search incident to arrest” exception, Dreeben said. Allowing searches in this situation serves police’s interest in “discovering evidence that could help them in the prosecution, protecting [police] safety, and avoiding [evidence] destruction.”

California Solicitor General Edward C. DuMont, arguing in the Riley case, compared the search of cell phone photographs to a search of a wallet or billfold which also happens to contain pictures of a suspect’s children.

Justice Elena Kagan pointed out that cell phones contain far more data, from calendars to bank statements and GPS location data.

“Could [police] look at that person’s GPS and find out every place that person has been because that person was arrested for driving without a seat belt?” she asked. “That strikes me as a very different kind of world [than] searching pictures of family in a billfold.”

“One can always think of marginal case where that might be a concern,” DuMont replied.

“People carry their entire lives on cell phones,” Kagan said. “That’s not a marginal case. That the world we live in.”

A decision is expected later this term.

Questions or comments can be directed to the writer at: [email protected]

Attorney charged with embezzling from accounts

dA veteran Fairfax County attorney has been indicted on eight counts of embezzlement.

James G. Kincheloe Jr. is accused of misappropriating more than $778,000 from an elderly client and the estates of the client and her husband.

Lawyers involved in the administration of the accounts say Kincheloe looted the finances of an elderly widow and her deceased husband, often using a rubber stamp to add her signature to checks and other documents.

Kincheloe was removed from control of the accounts by a Fairfax County judge in February 2012. A year later, based on claims arising from the accounts, Kincheloe was denied a bankruptcy discharge. Now, creditors and beneficiaries are fighting for any remaining assets.

The embezzlement indictments were returned by a multi-jurisdictional grand jury on April 3 and revealed on April 24, according to a Fairfax County police spokesperson. Three of the indictments also name Kincheloe’s wife, Heidi Pender Kincheloe, who allegedly worked as an assistant in his law office.

The case against Kincheloe is being prosecuted by Marc J. Birnbaum of the Virginia attorney general’s office. Birnbaum is assigned to work with the Northern Virginia special grand jury, according to Fairfax County Commonwealth’s Attorney Raymond F. Morrogh.

None of the law enforcement offices involved would provide additional information about the charges against Kincheloe, but detailed allegations of financial mismanagement were spelled out in civil pleadings filed on behalf of four alleged victims. The plaintiffs claimed Kincheloe misappropriated money they would have received from the estates of a Fairfax couple.

Kincheloe had done legal work for Edward and Pearl Buckley before their deaths, according to a lawsuit on behalf of beneficiaries of Pearl’s estate. Edward died in 2007, leaving his property to Pearl and naming Kincheloe as executor of his estate.

Kincheloe began to take control of the remaining assets in March of 2008, according to the suit. At that time, Pearl Buckley was 90 years old, in poor physical health, nearly blind and suffering from memory loss and dementia, the lawsuit said.

Kincheloe allegedly used a power of attorney Pearl had signed some years before. He was aided in his control of Pearl’s finances by a rubber signature stamp Pearl obtained when her failing eyesight made it difficult to sign her name, the suit said.

A representation agreement allegedly prepared by Kincheloe and signed with the stamp of Pearl’s signature provided for a flat monthly fee of $9,750, even though Pearl’s monthly income at the time was approximately $3,000 a month from pensions and investments.

Kincheloe allegedly cut off family members, including beneficiaries, from visits with Pearl unless they made appointments. The visits were supervised by Kincheloe’s wife or another person, the lawsuit said.

Kincheloe set up a bank account with the power of attorney and, in the year and a half before Pearl’s death, he and his wife paid or transferred to themselves more than $390,000 from Pearl’s money, according to the lawsuit.

After Pearl’s death in September 2009, Kincheloe qualified as executor of the estate and transferred the balance of Pearl’s money to a new bank account. Kincheloe never filed tax returns for the estate and never made any substantive distributions to any of the beneficiaries, the lawsuit said.

All told, Kincheloe and his wife took $778,396.55 from Pearl, Pearl’s estate and Edward’s estate in checks, cash and credit card payments, the suit said. In addition, the couple paid a total of $167,161.89 to Kincheloe’s family, employees or associates in unearned or improper payments, the suit said.

The beneficiaries – cut off from access to any information about Pearl’s accounts – sought legal help. “Over time, they discovered there was a lot less money in the estate there should have been,” said Joseph W. Stuart of Fairfax, who represented two of the beneficiaries.

Kincheloe falsely accused some beneficiaries of improperly taking items from the estate in order to justify keeping his activities confidential, the lawsuit alleged. Stuart said Kincheloe also falsified documents and lied under oath to hide his defalcation.

“A lot of this has been just one concealment after another,” Stuart said.

At the request of the beneficiaries, a judge removed Kincheloe from control of the Buckley estates in February 2012 and appointed Cary Z. Cucinelli of Fairfax as administrator.

Stuart, Cucinelli and other lawyers labored to recover any remaining assets, but found few.

“By the time that he was removed, only a small amount of cash and one piece of property remained,” Stuart said. He said it was not clear what Kincheloe did with the money.

Cucinelli, as administrator, and the beneficiaries of the Buckley estate successfully opposed a bankruptcy discharge for Kincheloe and then sued him for damages.

Because Kincheloe had no legal malpractice insurance, no surety on his bond as executor and few apparent assets, the claimants dropped the lawsuit. It appeared the suit would cost more to pursue than might be recovered, Cucinelli said.

Kincheloe’s home in Fauquier County is “mortgaged up to the hilt,” and there are no other significant assets, Cucinelli said.

Justice, she said, would have to come through criminal prosecution.

Cucinelli said it is “offensive” to think anyone would do this to another person, but worse when an attorney is accused.

“When we have a bad apple, it makes all of us look bad,” she said.

The criminal investigation of Kincheloe’s activities began in June 2012 and involved both county and federal law enforcement, according to a Fairfax County police spokesperson.

Kincheloe and his wife each were released on a $10,000 personal recognizance bond, according to a spokesperson for the attorney general’s office.

The court set June 16 as a tentative trial date, according to the police spokesperson. It was not clear who will represent Kincheloe for the criminal charges.

David C. Jones Jr. of Fairfax, counsel for Kincheloe in the civil lawsuit, said he would ask if Kincheloe had any comment on the criminal charges. He had not responded by press time.

Kincheloe has practiced law for 39 years, according to information on his website. He has served as a commissioner in chancery for the Fairfax County Circuit Court and was the Clifton town attorney for 18 years, according to his biography. He also belonged to a number of civic and social clubs.

In 2011, Kincheloe was hit with judgments totaling $456,500 arising from his work on a divorce case. He persuaded his client to take an unfavorable settlement and defrauded her brother-in-law in a loan scheme to pay his fees, according to claims in the case.

Those claimants also are trying to collect on their judgments, Cucinelli said.

It was not clear whether Kincheloe might be the subject of a current Virginia State Bar investigation. Disciplinary charges are confidential until a case is set for hearing or otherwise resolved.

Kincheloe was publicly reprimanded by the VSB in 1994 for misconduct in his business dealings with a client. His law license is active and he is in good standing with the VSB, according to online records.

This post was updated on April 30 to add information on the terms of bond.

Bogus check scam going strong

Law firms in the Roanoke-Salem area are the latest to report a series of emails baiting lawyers for an apparent fraud scheme.

Firms say they have received email inquiries about representing a foreign company in a local debt collection matter, reports the Salem/Roanoke County Bar Association.

It’s a variation on a common swindle that’s been targeting law firms nationwide and in Virginia. The Virginia State Bar described the practice as the familiar “Nigerian mail scam” on steroids.

The ruse usually involves apparently well-established businesses. Just as the law firm gets ready to file a collection action, the matter is declared settled and a large cashier’s check arrives, payable to the law firm.

The law firm is urged to deposit the check, recover its fee, and quickly wire to the balance to an overseas account. Sharp-eyed lawyers often learn the cashier’s check is counterfeit before it is too late, but some targets do not.

Recent email inquiries reported in the Roanoke Valley involve a supposed $514,000 debt owed by a “James Richmond” in Salem. The would-be client is a “Daido Steel Corp.” in Japan. The email describing the case includes a contract for representation, according to the S/RCBA report.

The bar association said the sender later requests information for making a transfer to the lawyer’s bank account and then uses the information to withdraw money from the account.

Warning signs include the quick appearance of a settlement check, before the lawyer has a chance to call the supposed debtor, and an envelope with a Canadian postmark, even though neither of the businesses has any connection to Canada.

A Virginia lawyer was spared as a victim when his secretary spotted a Canadian postmark and the lack of a return address on an envelope with such a check, according to the VSB’s report in December.

When any questionable check is deposited, the lawyer should be cautious not to disperse any proceeds until the check has “cleared,” not when the bank says “funds are available,” said VSB Ethics Counsel James M. McCauley.

Judge Stone honored on retirement

The Roanoke Chapter of the Federal Bar Association recently recognized retired U.S. Bankruptcy Judge William F. Stone Jr. for his 14 years of service on the court.

Stone, who sat mainly in Roanoke, is a former Martinsville attorney appointed to the bankruptcy court bench in 1999. His credentials include a clerkship with U.S. District Judge Ted Dalton.

The FBA chapter presented Stone with photographs commemorating his service at the 2013 naturalization ceremony at Monticello, where musician Dave Matthews was the featured speaker.

Stone was succeeded on the bankruptcy court bench this year by Paul M. Black of Roanoke.

Endorsements made for Harrisonburg area judgeships

At a special session of the Harrisonburg/Rockingham County Bar Association this week, members voted to endorse attorneys James O. Clough and John S. Hart Jr. as candidates for potential judicial positions in the general district courts, to endorse Clough as a candidate for potential judicial positions in the juvenile and domestic relations courts, and to find senior assistant commonwealth’s attorney Anthony W. Bailey qualified as a candidate for potential judicial positions in the J&DR courts.

The HRBA did not endorse or find qualified any candidate for circuit court who sought consideration, according to an announcement from the association.

Decisions on which judgeships to fund – and who will fill funded vacant judgeships – have been delayed while the General Assembly grapples with Medicaid and the state budget.

Virginia In-House

VA inhouseVirginia Lawyers Weekly is pleased to present “Virginia In-House,” a special supplement to the April 28, 2014 paper. This 8-page B-Section is sponsored by the Alexandria law firm of DiMuroGinsberg PC.

Articles from the 2014 in-house section present some of the important issues for corporate counsel:

Private practice to in-house: what the transition looks like. After 16 years in private practice, Detroit attorney Rebecca Simkins made the move to in-house counsel for Quicken Loans. She shares a first-hand account of her experience.

When business interruptions occur, whose liability is it? The recent spate of weather-related casualties has caused many business owners to re-examine their business interruption insurance coverage, and now even the most bottom-line-focused entrepreneurs are thinking inclusion of this type of coverage may be money well-spent.

U.S. Supreme Court weighs in on severance pay.  Avoiding what attorneys say could have been an “earthquake” effect from businesses rushing to file for a collective $1 billion in tax refunds, the U.S. Supreme Court recently held that severance payments are wages for federal tax withholding purposes.

Minimize employment claims by training supervisors. Statistics and anecdotal information continue to show that discrimination and retaliation claims are on the rise. Despite the monumental strides companies have made in adopting anti-discrimination and anti-harassment policies and training, there is still much work to be done in eradicating illegal activity in the trenches.

Upcoming IP decisions that should be on in-house counsel’s radar. This term is a very active one for the U.S. Supreme Court in the area of intellectual property law. Here is a quick primer on some of the cases that are expected to have a significant impact on IP enforcement and licensing, for in-house counsel as they assist their companies in negotiating the ever-changing IP legal landscape.

Strategy looms large in noncompete arena. A decision on whether a business should sue its former employee, its former employee’s new employer, or both, doesn’t rest solely on determining which parties a plaintiff can make good-faith claims against. There are benefits and pitfalls to each approach, and lawyers disagree on which course usually is the best.

Best practices for avoiding data breach liability. Security breaches are an increasing threat to all businesses. The risk of liability and reputational damage associated with such incidents has escalated, and many key industries are the intended targets. It is not surprising, then, that data security is now a top concern for both general counsel and corporate directors.

We look forward to hearing your thoughts about this section and your suggestions for other areas of practice to explore.

Best practices for avoiding data breach liability

Data breaches and cyber-attacks are an unfortunate reality. In the past few years, Google, Yahoo, LinkedIn and Wyndham Hotels have all faced data security breaches.

Now, security breaches are an increasing threat to all businesses. In May of last year, Yahoo Japan notified users that a breach may have compromised 22 million user IDs, and in last April, LivingSocial, an online daily deal website, notified more than 50 million customers of a breach resulting from a cyber-attack.

The risk of liability and reputational damage associated with such incidents has escalated, and many key industries — including defense, financial services, health care, retail, pharmaceutical and energy — are the intended targets.

Even more troubling is that the threat is often hidden, with companies not knowing that they have been hacked or that valuable information, including trade secrets or other intellectual property, has been stolen until after significant damage has occurred.

Moreover, a data security incident involving lost or stolen personal information of customers or employees — whether resulting from malicious hacking or employee negligence — may lead to enforcement actions from increasingly active state and federal regulators, fines for failure to comply with payment card data security standards, major news headlines, and even consumer class action lawsuits.

It is not surprising, then, that data security is now a top concern for both general counsel and corporate directors.

Data breach prevention

Companies should take the following precautions to minimize the likelihood of a data breach and potential liability:

Identify all sensitive data handled by the company, its custodians and its storage locations. Conducting an inventory of your company’s sensitive data is an essential step in safeguarding that information.

Ensure compliance with state and federal regulatory requirements. Depending on the type of data your company holds, it may be subject to a broad array of state and federal laws, including HIPAA, the Gramm-Leach-Bliley Act and state data security regulations. Consult with legal counsel to ensure compliance with the complex patchwork of laws.

Regularly review and update your company’s written information security policies. This is a requirement under some federal and state laws and a recommended practice for all companies.

Implement and maintain both computer system security measures and physical security measures.

“Companies need to ensure they have the most secure network they can afford, and keep it up-to-date,” said Collin J. Hite, a Richmond attorney who handles insurance recovery for data breaches. He noted that mobile devices must be included in the purview of network security, and these devices should be properly encrypted.
While computer security measures (e.g., passwords, encryption, firewalls, anti-virus software) are critical, physical security measures (e.g., locked cabinets, shredders) are equally important to safeguarding sensitive data and personal information.

Implement best practices and train employees. A company’s policies are only as good as its practices. Many data breaches result not from sophisticated cyber-attacks, but from basic employee negligence.

“The weakest link in cybersecurity is human error,” said Hite. He emphasized that most criminals aren’t attacking companies at the front gate. Instead, they are sneaking in the back door by exploiting vulnerabilities caused by unsuspecting or unwitting employees.

For example, an employee may forget his laptop on the subway or leave a thumb drive in the coffee shop. Phishing scams are also a common means for criminals to access a network.

In addition to training, companies should have a protocol for employees to follow when they lose a device, as well as a remote means for wiping a device’s data, Hite said.

Ensure vendor compliance. Exercise diligence when retaining third-party service providers or “business associates” with whom sensitive information may be shared. In some circumstances, a company may be found liable for its vendor’s non-compliance.

“If you’re using vendors and giving them access to sensitive information, whether it’s your own or your customers’, you have to undertake some due diligence on that vendor,” said Kathryn L. Ossian, an information technology lawyer in Ferndale, Mich. “You also have to have it in the contract and have them agree to what security measures you need them to live up to.”

Conduct periodic attorney-directed data security assessments. Such assessments will assist in detecting vulnerabilities and ensuring compliance with applicable laws. Businesses should retain outside counsel in order to preserve the attorney-client privilege applicable to any reports or other communications relating to the assessment.

Consider cyber liability insurance. Companies have had only mixed success in relying on traditional insurance policies to cover the costs associated with data breaches. Many companies now purchase cyber liability insurance, which is specifically designed to cover the costs of forensic investigations, notification and credit monitoring for affected individuals, regulatory compliance, and defending lawsuits and payment of any resulting judgments or settlements.

“Industry is seeing a dramatic uptick in companies purchasing cyber insurance,” Hite said. But he warned that companies must read the fine print carefully when purchasing a cyber insurance policy.

“Cyber insurance is not one size fit all,” he said. For example, some providers may refuse coverage if a non-encrypted device becomes compromised.

Responding to a data breach

Although the steps outlined above will reduce the risk of a data breach, not all breaches are avoidable. In the event of a data breach, companies must comply with data breach notification laws, which have been enacted in 46 states, including Virginia and the District of Columbia.

Virginia Code §18.2-186.6 provides the procedure for notification following a breach of personal information in the commonwealth.

A business that suffers a breach must notify consumers “without unreasonable delay.” If more than 1,000 people are involved, the business must advise the attorney general and all consumer reporting agencies that compile and maintain files on consumers on a nationwide basis, again “without unreasonable delay.”

It ultimately will be up to the courts to interpret what is reasonable under the law.

“What’s ‘reasonable’ is going to be judged by what you did, when you did it and what lese was going on in your industry,” Ossian said. “Certainly if you’re a bank, the requirements and what may be reasonable might be higher than what’s reasonable for a company that doesn’t take credit cards or deal with the same kind of information as banks do.”

At the federal level, the HITECH Act’s breach notification rules require health care organizations to report data breaches involving 500 or more individuals to the affected individuals, the U.S. Department of Health and Human Services, and “prominent media outlets serving a State or jurisdiction” within 60 days. Breaches involving fewer than 500 individuals must be reported to the department annually.

Data breaches become a crisis situation for many companies, with management scrambling to determine what happened, how it happened, and what steps to take to mitigate the damage.

To limit potential liability for a data breach, companies should

Maintain an incident-response plan and team. The incident-response plan, prepared before an incident occurs, should identify the team members (e.g., executive management, IT, legal, human resources and public relations professionals), specify each team member’s responsibilities, outline breach response measures, and involve outside professionals (i.e., legal, forensic, public relations) immediately following an incident.“Companies need strong leadership in the net security department,” Hite said. Company leaders should have policies in place and stress to employees that these policies must be followed. “All the security in the world won’t help” if even one employee does not follow through.

Remember that time is of the essence. It is important to act quickly when facing a data security incident, given the deadlines under applicable state and federal laws. Failure to do so could lead to both increased regulatory scrutiny and liability.

Consult with legal counsel. Data breaches are often complex and may affect thousands, or even millions, of individuals, necessitating compliance with dozens of breach notification statutes. It is recommended that outside counsel be consulted to guide the breach response, ensure compliance and preserve applicable privileges. When dealing with complex breaches, engaging an outside forensics investigation firm may also be recommended.

According to Hite, a good cyber insurance policy has vetted a panel of vendors to cover these services. With such a policy, it takes one phone call to the insurer to secure a forensic IT consultant to help re-secure and rebuild the network, implement crisis management and provide legal counsel.

Preserve corporate reputation. Large breaches make the headlines. It is critical for the company to preserve its reputation with both the affected individuals and the general public. Engaging a public relations firm may be helpful in this regard. Offering credit monitoring to affected individuals may also help to maintain corporate reputation, reduce the risk of consumer identity theft and potential lawsuits, and appease regulators.

In the digital age, cyber-attacks and data breaches are constant threats to businesses. With breaches of large, sophisticated companies coming to light nearly every day, and state and federal regulators taking a hard line approach to data security, businesses understandably are concerned.

To combat this increasing threat, companies should implement best practices to minimize the risk of a data breach and resulting liability. Prevention and self-protection are essential components to reduce the threat and impact of data breaches and cyber-attacks.

– By Patrick J. O’Toole Jr. and Corey M. Dennis. O’Toole and Dennis practice law in Boston.  This article includes additional reporting by Sarah Rodriguez and Douglas Levy.

Strategy looms large in noncompete arena

One of the most difficult and critical decisions lawyers must make is deciding who to sue.

Though it’s arguably the first decision in any lawsuit, when it comes to suing to enforce restrictive covenants such as non-competition agreements, the choice is especially critical.

A decision on whether a business should sue its former employee, its former employee’s new employer, or both, doesn’t rest solely on determining which parties a plaintiff can make good-faith claims against. There are benefits and pitfalls to each approach, and lawyers disagree on which course usually is the best.

The decision may require updating the noncompete research folder, because a steady flow of cases brings constant refinements to the law.

“The things seem to be changing every three months,” said Chris T. Craig of Fairfax. The shifting analysis could implicate the decision on whether to sue – not just the former employee – but the new employer as well, he said.

And as if all that doesn’t make the decision hard enough, it also has to be made in a hurry.

“You’re trying to move fast to get the other side to stop, because you’re losing business,” Craig said.

“It’s kind of a fire drill,” said Boston lawyer John R. Bauer. “In order to obtain a preliminary injunction, the former employer has to show that they are being irreparably harmed. If the former employer delays in seeking injunctive relief, the court will infer that the harm is not so irreparable,” Bauer said.

Divide and conquer

Few noncompete suits proceed beyond the injunction stage, with cases being either dropped or settled depending on who prevails there. But obtaining an injunction is not the only way a plaintiff business can “win” a case against a former employee.

Pressuring an employee to quit his new job with a competitor — or the competitor to fire him — can achieve the same practical effect of protecting trade secrets and customer relationships.

Lawyers say leaving the new employer out of the lawsuit is often the best, and cheapest, way to reach such a resolution. The competing employer often has the resources to prolong the struggle.

“If you bring in a new employer, you’ve brought in a deep pocket,” said Michele Whitham of Boston.

A better course might be to try to get the new employer to see your side of things before hitting the business with a lawsuit.

“You tell the employer, ‘Your new employee is subject to these noncompete clauses. I’m sure you’ll do the right thing,’” suggested Craig.

The strategy is effective if the new employer is not aware of the restrictive covenants an employee has previously signed or the bad behavior he allegedly has engaged in — such as stealing proprietary materials from the former employer on the way out the door.

“If we can get the new employer to say that the employee misled the new employer as to the nature of his activities, we might not sue that new employer, but bring it to the court’s attention that the former employee is lying to everyone,” said Kevin J. O’Connor of Boston.

Naming the employer

Other lawyers said that a new employer’s response, or lack thereof, to a lawsuit or pre-lawsuit demand letter can provide clues about whether a plaintiff business is dealing simply with an unethical, rogue employee, or if the new employer itself is encouraging the employee to violate his restrictive covenants and/or compete unfairly with his previous employer.

If the new employer does not respond to a demand letter or lawsuit against the employee by cutting ties or reaching out to the former employer to find a resolution, that silence may signal the company is knowingly benefiting from the employee’s knowledge of his former employer’s business practices and customer relationships.

“If the employee has been gone for a while and already disclosed confidential information, you’re going to need to enjoin the employer from using those secrets,” Bauer said. “That’s a situation where you would [sue the new employer as well] right off the bat. Clearly, sometimes the former employer can’t get all the relief it needs just by suing the employee.”

O’Connor won an injunction for his client that not only enforced a non-solicitation clause against the former employee, but also forced his new employer to withdraw all bids it made to customers with which the employee had any prior involvement.

“That’s a classic example of why you would want to get the employer,” O’Connor said. “Also, when you have an injunction against a company, you have the benefit of a legal department paying careful attention and trying hard to comply.”

“The injunction they got in that case, which is spectacular, wouldn’t have been possible without suing the employer,” said fellow Boston lawyer C. Max Perlman. “If you don’t sue the employer, … the court is not likely to enjoin bids in process.”

Adding an employer to the lawsuit presents substantial risks and higher costs.

“It’s considerably more expensive because you now have two defendants to sue,” Bauer said. “You have more depositions to take, more discovery to respond to.”

And there are other issues to consider in suing the new employer, he said. If the allegation is that the new employer has the plaintiff’s trade secrets, the plaintiff will have to disclose those trade secrets in the course of discovery.

“[I]n order for a company to defend itself against a claim that it misappropriated trade secrets, it’s going to have to know what the trade secrets are. There will be protective orders and other measures taken, but there’s a risk,” Bauer said.

O’Connor also warned that “you may, for business reasons, not want to sue a competitor because you might be on the other end of a retaliatory strike down the road.”

In a similar vein, Perlman said plaintiff businesses have to think about how suing a competitor will play within the industry and in the press.

Companies have to consider whether they’re going to look like the “good guy or the bad guy” and whether the lawsuit could harm efforts to recruit future employees.

“If you’re not considering that, you’re making a mistake. The cases don’t happen in a vacuum,” Perlman said. “You have to think 360 degrees on that decision.”

Claims against new employers also are harder to prove since they are not parties to the restrictive covenants themselves and most often are sued for tortious interference with contractual relations, which requires proof of intent.

“Simply hiring a new employee is not a tortious act,” Bauer said. “Hiring a person to steal trade secrets is a tortious act, but good luck proving it.”

Rules of thumb

While Bauer believes suing the new employer is sometimes the best way to bring the competitor to the negotiating table, Perlman warned that once the new employer is put on the defensive and hires lawyers, it may feel compelled to see the fight to the end.

“If you sue the employer, they get more invested in the employee’s side of things,” Perlman said. “You make it harder for them to wash their hands of the situation.”

That’s one reason Perlman said he usually errs on the side of leaving the new employer out of the lawsuit. He also prefers to stick with the usually stronger claims against the employee, if he can.

The tortious interference with contract tort is a tough one and could prove to be a stumbling block, Perlman said.

“You might turn an easy injunction case against the employee into a hard one against the employer.”

O’Connor, however, said his general preference is “to be as aggressive and inclusive as possible.”

“If there’s a way I can get to the new employer in good faith, I take advantage of that,” he said. “You want the injunction to be as tight as possible and as broad as possible.”

Bauer, meanwhile, advises sending demand letters in advance of a lawsuit to the employee and new employer.

Craig agreed an advance letter can “flush out” details of the situation.

“I think you go straight at them. Send them a letter,” he said. “You provide the new employer the information that he needs and then that guy needs to make a decision.”

“Sometimes those demand letters lead to a resolution before the lawsuit even gets filed,” Bauer said. “And if there’s no response from either the employee or the employer, that’s significant.”

The big risk is the letter’s recipient might sue for a declaratory judgment first and lock the plaintiff into a jurisdiction it would prefer to avoid.

In general, though, it’s worth sending the demand letter, Bauer said. “It can save a lot of money and it’s pretty routine.”

– By Brandon Gee, with additional reporting by Peter Vieth.