July 15, 2015

New York Law Journal / Written by: Harvey M. Stone, Richard H. Dolan

This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. In a case involving a 15-year minimum sentence for possessing child pornography and sexually exploiting a child, Judge Jack B. Weinstein outlined the powerful mitigating circumstances of defendant's background, adjourned sentencing, directed the parties to brief issues related to cruel and unusual punishment and possible sentencing alternatives, and ordered an evidentiary hearing.

Judge Raymond J. Dearie denied a claimant company's motion for summary judgment in a civil forfeiture case. Judge Brian M. Cogan, on remand, ruled again for plaintiffs, finding a fraudulent transfer under the New York Debtor Law. And Judge Joseph F. Bianco declined to dismiss claims under the Fair Labor Standards Act that plaintiff's employer did not properly accommodate her as a nursing mother.


In United States v. D.W., 13 CR 0173 (June 25, 2015), where defendant pleaded guilty to possessing child pornography and sexual exploitation of a child, Judge Weinstein ordered a pre-sentence evidentiary hearing on (1) defendant's capacity to plead, and (2) the constitutionality of a 15-year minimum prison term under the circumstances.

"This order," the court stated "should be written with tears." The conduct in question occurred between 2009 and 2013, when defendant was between the ages of 20 and 24.

At 5, he exhibited symptoms of a disturbed child exposed as a fetus to illegal drugs. New York City child welfare services removed him from his birth parents for neglect. While in two foster homes, he was subjected to rape and sexual abuse. At age 9, he was adopted and free of abuse, but remained damaged by his earlier experiences.

Defendant is learning disabled, with an earning potential limited by a truncated education. As an adolescent he repeatedly viewed child pornography.

At age 20 he pleaded guilty to sex abuse and endangering the welfare of a minor, premised on his admission that he had given three young boys "wedgies" (pulling underwear up between buttocks). He had also shown child pornography to one of the boys. During his resulting imprisonment, he was raped by several men.

After his release in 2012, he was "deeply disturbed" and barred from living with his adoptive mother because of a daycare center near her home. Defendant moved to a men's shelter, where he was diagnosed with severe depression and various disorders.

At age 24, he was arrested by the FBI and admitted possessing and distributing child pornography by computer. This led to the charges here. He told a sexual psychologist:

[A] lot of [pornographic] stuff I watched[] is stuff that happened to me. I don't know what drove me to go down this road, but it seemed like when I saw kids doing it to each other it wasn't rape, it wasn't forced.

His examining psychologist found him treatable, but the government's expert found likely "exaggeration" on defendant's part.

Defendant eventually consented to prosecution by information and pleaded guilty to one count of sexual exploitation of a child and one count of possessing child pornography. The plea subjected him to a minimum sentence of 15 years.

At a sentencing hearing on June 11, 2015, defendant's allocution and appearance "suggested that he was seriously troubled, exceptionally passive, and deeply depressed." Slip op. 4. Raising issues as to (1) defendant's capacity to understand the consequences of his plea and (2) cruel and unusual punishment threatened by lengthy incarceration in a non-therapeutic environment, the court ordered an evidentiary hearing for Aug. 3, 2015.

Weinstein identified five issues to be addressed at the hearing:

(1) Why did defendant decide to plead when an adverse jury verdict at a trial would result in the same minimum sentence?

(2) Was defendant capable of waiving his right to trial?

(3) Does a 15-year minimum sentence violate the Eighth Amendment as to this defendant, who has been raped multiple times? In this regard, the parties were directed to inform the court of what protections or treatment would be available in prison. As to the prospect of solitary confinement, Weinstein pointed to Supreme Court Justice Anthony Kennedy's recent comments, by way of dicta, on the "human toll wrought by extended periods of isolation[.]" Davis v. Ayala, 135 S. Ct. 2187, 2209 (2015) (Kennedy, J., concurring).

(4) If incarceration would be unconstitutional, what alternatives—such as a residential sex offender treatment program—should be considered?

(5) What are the risks posed by defendant if released into society before or after completing such a course of treatment or a full prison term followed by supervised release?

Weinstein ended by listing a number of academic articles and judicial decisions related to the court's concerns and asking the parties to file briefs on those materials by July 27.

Civil Forfeiture

In United States v. Approximately Six Hundred and Twenty Thousand Three Hundred and Forty-Nine Dollars and Eighty-Five Cents ($620,349.85) Seized from Wachovia Bank Account Numbers Ending *6176 and *6189 in the Name of eCost.com, and All Proceeds Traceable Thereto, 13 CV 3966 (EDNY, June 5, 2015), an in rem civil forfeiture, Judge Dearie denied summary judgment to Claimant PFSweb Retail Connect, Inc., f/k/a eCost.com, Inc., because factual issues existed as to whether legitimate funds facilitated laundering of tainted moneys.

Claimant was an online retailer of computers and consumer electronics. It had a lockbox account at Wachovia Bank. Each night all funds deposited into the lockbox account were automatically sent to a "lender payment account." Wachovia deducted amounts owed by claimant and transferred the remaining funds to claimant's "operating account," which claimant used to pay its expenses. Each night, the balance in the operating account over $25,000 was transferred to the overnight money making account and then returned to the operating account on the following business day.

The government commenced the forfeiture action after an investigation into suspected money laundering and drug trafficking involving a black market peso exchange scheme designed to repatriate U.S. drug sale proceeds to Mexico. The government alleged that drug sale proceeds were transferred to claimant's lockbox in 13 transfers and cycled through claimant's accounts. In April 2010, the government seized $620,350 from claimant's lockbox and operating accounts and sought forfeiture of the funds as (1) property involved in money laundering under 18 U.S.C. §981(a)(1)(A) and (2) property traceable to the sale of controlled substances under 21 U.S.C. §881. Claimant alleged that its business funds did not facilitate money laundering and that the tainted funds could not be traced through all of the accounts.

Under §981(a)(1)(A), property involved in money laundering includes money that is being laundered, any commissions or fees paid to the launderer, and any property used to facilitate a money laundering offense. Money is used to facilitate money laundering when pooled funds make it easier to disguise and facilitate money laundering. Here, claimant argued, the funds were merely commingled and the government failed to show that claimant's business funds were used to facilitate the laundering. But in the court's view these were questions of fact and, accordingly, summary judgment was not appropriate. Slip op. 7.

Section 881(a)(6) provides for forfeiture of all money furnished in exchange for controlled substances and all proceeds traceable to such an exchange. In the U.S. Court of Appeals for the Second Circuit, when drug money is commingled in a bank account, the court follows the "drugs-in, last-out" rule for tracing tainted proceeds. As long as the balance in the account does not fall below the amount of the tainted deposit, the government will be able to trace the funds to that account. Even when an account balance has been reduced below the amount of the tainted deposit, the government may seize money that is not directly traceable to the criminal conduct. But this right to "substitute seize" is limited by a one-year statute of limitations which runs from the date of the offense. Here, the seized deposits made within the one-year period amounted to $41,047.87.

The government would be permitted to follow the tainted funds as they were transferred from account to account. As Dearie concluded, "The government has followed the tainted funds and established that the seized funds are traceable to the tainted source." Slip op. 10. For each transfer from the lockbox to the operating account, the lender payment account functioned as a pass-through. Where tainted funds are cycled through multiple accounts, the lowest intermediate balance is measured by the combined total of all accounts. Slip op. 11. The lowest intermediate balance of funds traceable to the alleged criminal conduct was $199,057.59. Adding the $41,047.87 of the allowed substitute seizure, the government can trace and substitute seize up to $240,105.46 under count two.

"However, in light of this Court's ruling on count one, at this time Claimant is not entitled to an order requiring the return of any of the funds." Slip op. 11-12.

Debtor-Creditor Law

In Mitchell v. Lyons Professional Services, 09 CV 1587 (EDNY, June 8, 2015), the issue was whether the sale of an insolvent company's customer accounts by the company's principal to a third party, in exchange for the third party's payment of money to the principal rather than to the company, was a fraudulent conveyance under the New York Uniform Fraudulent Conveyance Act. Resolution of the issue gave Judge Cogan an opportunity to compare Article 52 of the New York CPLR with Article 10 of the New York Debtor-Creditor Law (DCL), in the context of post-judgment proceedings under Fed. R. Civ. P. 69.

"Under New York law, unlike perhaps any other jurisdiction, there are two different procedural vehicles for seeking to avoid a fraudulent conveyance." Slip op. 8. The first is a "special proceeding" under CPLR Article 52, which provides various devices for judgment creditors to use to enforce a money judgment. Slip op. 9. One such device, "colloquially known as" a turnover proceeding, provides a mechanism for "attacking a fraudulent conveyance by a judgment debtor." Id. at 10. A turnover proceeding need not involve a fraudulent conveyance, however: "[t]he mere fact that the garnishee owes money to or holds the property of the judgment debtor is sufficient grounds for a judgment in a turnover proceeding against the garnishee." Id. CPLR §5201(b) defines the types of property subject to such an application, providing that, absent exemption, a money judgment may be enforced against "any property which could be assigned or transferred." Slip op. 11.

The second procedural vehicle is a plenary action under Article 10 of the DCL. Unlike a special proceeding under the CPLR, an Article 10 action does not seek to enforce a judgment, but rather "is a suit to obtain a judgment based on the fraudulent conduct of a debtor." Slip op. 9 (emphasis in original). Thus, an action under Article 10 need not concern property capable of being assigned or transferred—the category of property against which a judgment may be enforced—but rather "focuses on the conduct of the debtor," slip op. 11 (emphasis in original), and can be premised on "any transaction done with the intent to 'hinder' or 'delay' creditors." Id. at 13. Since federal practice "does not recognize a special proceeding in lieu of an action," id. at 14, a plaintiff may seek relief under CPLR Article 52 by motion in the federal action in which the judgment first issued, while Article 10 claims may be raised that way or in a plenary action. Slip op. 14-15.

In earlier proceedings, plaintiffs obtained a $266,590 default judgment against defendant Lyons Professional Services, Inc. (LPS), a defunct security guard company, for "egregious sexual harassment and sexual assault" by LPS employees. Under the guise of a "consulting agreement" between LPS's principal, Christopher Lyons, and a third party also in the security guard business, Garrison Consulting, LPS sold its customer accounts to Garrison in exchange for $300,000, payable not to LPS but to Lyons, leaving LPS unable to satisfy the judgment.

Upon earlier trial of plaintiffs' challenge to that transaction under Fed. R. Civ. P. 69, Cogan found the sale of LPS's "book of business" to be fraudulent under DCL §273-a, and entered judgment for plaintiffs against Garrison Consulting and Lyons "for the amount that LPS owed plaintiffs." Slip op. 2, 3. The U.S. Court of Appeals for the Second Circuit vacated "with instructions to consider issues related to whether LPS' 'book of business' was composed of assigned or transferrable property" for purposes of CPLR §5201(b). Id. at 3.

In his June 8 decision on remand, Cogan concluded that the answer to the circuit's question was not relevant—because analyzing whether Lyons' transfer of the customer accounts was a fraudulent conveyance did not depend on whether the property could be used to enforce a judgment, the concern of CPLR §5201(b). Article 52 is "a procedural statute that can be invoked only by a judgment creditor" and whose "devices operate, almost entirely, as remedies in rem against a non-speculative interest of the debtor." Slip op. 12.

The fraudulent conveyance statutes, by contrast, "are conduct-regulating statutes. They create a tort" in order to "discourage debtors and their potential transferees from taking certain actions and to undo the damage caused by those actions if they do." Id. at 12, 13. Since the latter was the substantive law that applied to plaintiff's claims, Cogan did not need to decide whether the LPS book of business "could be assigned or transferred," as would be required to invoke the devices for securing a judgment debtor's property under CPLR Article 52: "until relief is obtained against the transferee, Article 52 of the CPLR plays no role in defining whether the conveyance was fraudulent." Slip op. 9.

Analyzing the transaction between Lyons and Garrison Consulting under the fraudulent transfer provisions of the DCL, Cogan had little trouble concluding that the transaction was a fraudulent conveyance, see generally slip op. 16-22. Accordingly, he once again directed entry of judgment "in favor of plaintiffs and against Christopher Lyons and Garrison Protective Services, Inc., jointly and severally, in the amount of $266,590." Slip op. 23.

FLSA and Nursing Mothers

In Lico v. TD Bank, 14 CV 4729 (EDNY, June 1, 2015), Judge Bianco denied defendants' motion to dismiss plaintiff's claims under the Fair Labor Standards Act (FLSA) that defendant TD Bank failed to provide her with an adequate space to express breast milk and did not allow her to take necessary lactation breaks during the day.

According to plaintiff Aida Lico's allegations, when she returned to work in March 2012 at TD Bank as a bank teller and customer service representative following maternity leave, she was still nursing her child and needed to use a breast pump to express milk. She informed the Branch Assistant Manager that she needed time and a private, sanitary place to pump milk. Her manager restricted her to two daily breaks, but in fact denied plaintiff permission to take a break almost every time plaintiff asked, forcing plaintiff to wait five or six hours at times.

Plaintiff's manager, moreover, suggested locations that were unsanitary and not private, such as the mail room and safe deposit room. Plaintiff began taking time to travel home during work and leaving early to nurse her child, which caused her to miss work. She was terminated for "attendance issues" in May 2012.

Section 207(r) of the FLSA requires an employer to provide (1) a reasonable break time for an employee to pump milk for nursing for one year after the child's birth each time the employee needs to pump the milk, and (2) a place, other than a bathroom, that is shielded from view and free from intrusion, for the employee to express breast milk.

The court found that the FLSA's penalty provision explicitly provided a private right of action for violations of section 207(r). But under that penalty provision, a plaintiff may only recover lost wages and overtime, liquidated damages, attorney fees and costs attributable to the violation of section 207(r). As Bianco concluded: "plaintiff has plausibly alleged damages that are legally cognizable. In several sections of the Amended Complaint, plaintiff alleges that she missed time at work because she needed to travel home in order to express milk." Slip op. 5.

Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.