Congratulations to attorney Steven Kessler, for this appeals court victory! 
Steven frequently contributes pleadings to FEAR's Brief Bank II, where his Brief to the Second Circuit is available along with the Government’s Brief .

Second Circuit orders government to honor settlement agreement.    
by Judy Osburn

Assistant U.S. Attorney Tracey Knuckles resigned in the midst of arranging for return of fifty percent of $660,200 in seized currency pursuant to an in-court settlement agreement. At the same time the government suddenly attempted to renege on its settlement agreement, painting a picture of fear with unsubstantiated assertions that claimants intended to use the money to fund terrorism. The government also claimed that former AUSA Knuckles had no authority to enter the government into a binding settlement agreement–at least not where the government later cries “terrorism case!”

 “Settlement agreements are contracts” stated the Second Circuit Court of Appeals on July 2, 2007, affirming the district court’s order enforcing the settlement agreement in United States v. $660,200. The appellate court agreed with the district court’s finding that Assistant U.S. Attorney Tracey Knuckles and her supervisor (who was transferred on or about the same time that Ms. Knuckles resigned) had actual and apparent authority to enter into the in-court settlement. 1

Arguing that it should be allowed to renege on its settlement agreement, the government had contended that it should not have to comply with the law and rules where it alleges threats to “national security.”2  Claimant Sami Khalil’s attorney, Steven Kessler, opened his summary argument to the Second Circuit:

With Old Glory waving behind it, appellant [Government] asserts, in the very first paragraph of its Preliminary Statement, that this is a terrorism case. Appellant uses appropriate catchwords and attempts to paint a picture of fear around appellee and the defendant funds. However, once the arguments begin and the facts of the settlement and the court’s decisions below unfold, appellant’s arguments for reversal of the district court’s orders have little, if anything, to do with terrorism.

Kessler’s client, claimant Sami Khalil, had never been charged with any crime related to the civil forfeiture proceeding. The only charges filed against anyone in relation to the seized currency were for failure to report currency carried while attempting to board a commercial flight to Egypt–not terrorism. The government’s own agent had testified that, even under the government’s version of the facts, there was no question that at least $275,000 of the seized currency belonged to Mr. Khalil, who submitted sworn explanations of the source and purpose of the defendant currency supported with extensive documentation.

The district court found the government had drafted the eight-page settlement agreement, which it now wanted to renege on, and transmitted it to the claimants and their counsel, who signed and returned the document without any changes. The government provided forms for wiring the claimants’ share of the settlement to their attorneys’ escrow account, and the claimant’s attorneys quickly transmitted those forms to appropriate Treasury officials.

On April 13, 2005, attorney Steven Kessler spoke briefly about the wire transfer arrangement with AUSA Tracey Knuckles. That conversation turned out to be the defense attorney’s last communication with Ms. Knuckles. Over the next six weeks Kessler attempted to was unable to reach her, or find out anything about what had happened to the settlement arrangements. Then, on June 1, 2005, he learned that Ms. Knuckles had resigned and the government had just as suddenly decided to renege on the settlement agreement. Kessler then moved the district court to enforce the settlement. The court granted an Enforcement Order and the government submitted a brief letter requesting the court to reconsider its decision.

The district court determined that a hearing was necessary to establish an accurate record regarding the government’s request for reconsideration of the Enforcement Order. Before a hearing date was set the court received a letter from the government declining its chance to establish a record of the facts and to elaborate on AUSA Knuckles’ conduct. The government’s letter conceded that it had intended to enter into the in-court oral settlement agreement, but claimed that its eight-page written agreement (which it had sent to the claimants who signed and returned it to the government unchanged) was not binding because “it was not executed on behalf of plaintiff United States.”

One week later the government submitted a second letter to the district court that completely contradicted the positions taken in its previous submissions. The government now stated that it had not intended to enter into a binding in-court settlement until it signed the eight-page agreement that AUSA Knuckles had sent to claimants, and that she had no authority to agree otherwise.

In reconsidering its Enforcement Order the district court found that the government “made no attempt to explain AUSA Knuckles’ inaction, absence and the communication void following her April 13, 2005 conversation with Kessler, other than allusions to new information on terrorism.” It also found that the in-court oral settlement was binding and enforceable and that AUSA Knuckles and her supervisor AUSA Richard Weber (who had been promoted to a position in Washington at or about the time of Ms. Knuckle’s resignation) had both actual and apparent authority to enter into the in-court settlement agreement. The district court also rejected the government’s alternative, three-page terrorism argument alleging “material misrepresentation” by claimant Khalil regarding the purpose of the defendant currency.

Four months later the district court awarded costs and attorneys fees for the enforcement action to claimant Khalil under the Equal Access to Justice Act on the ground that the government was not “substantially justified” in opposing the settlement. 3 The district court denied the government’s motion to stay the Enforcement Order pending appeal. However, the government subsequently obtained a stay from the Court of Appeals by asserting that urgent national security concerns necessitated its refusal to honor the settlement.

The government’s appeal to the Second Circuit sought to re-open the forfeiture proceedings back to “the pre-trial stage where the government can have the opportunity to prove that the defendant funds should be forfeited in their entirety.” However, the original complaint sought forfeiture only in connection with a co-claimant’s violation of currency reporting requirements, not terrorism. If the appeals court granted the government’s request to nullify the settlement and remand the case for trial, Kessler argued, the government “could no longer play its previous game of litigating failure to report while whispering about terrorism. On remand, the terrorism whispers would have to be brought front and center. To do that, appellant would have to assert a new forfeiture claim under a different statute… . In other words, on remand, this would be a different case.”

Throughout the proceedings the government flip-flopped between claims of its former prosecutor’s lack of authority to enter into a settlement agreement; its intention, or alternatively its lack of intent, to enter into a settlement agreement; and insinuations of “new evidence” of fraud and terrorism. The Second Circuit found no merit in these arguments, nor the government’s contention that it is entitled to vacate a settlement based on assertions of national security, supported by nothing more than unsworn statements by its counsel in legal memoranda.

The Second Circuit noted that, while the district court awarded attorney fees pursuant to the Equal Access to Justice Act (EAJA), “it is presently an open question whether the Civil Asset Forfeiture Reform Act4  (CAFRA) displaces EAJA with respect to fees awarded in a civil forfeiture action, and therefore whether any fee award to Khalil should have been made instead under CAFRA.” However, since neither party had raised this issue, the appellate court considered it waived and affirmed the grant of fees and costs of enforcing the settlement to claimant Khalil.

Endnotes:

  1. The district court and the Second Circuit both “declined the government’s invitation ‘to second guess the decisions of AUSAs Knuckles and Weber [her supervisor who] assessed evidence that the money was linked to terrorism, and nonetheless confirmed the settlement.’ ” United States v. $660,200, _06-4148-cv (2007), quoting United States v. $660, 200, 423 F.Supp.2d 14, 34 (E.D.N.Y. 2006).
  2. The government sought an “extraordinary circumstances” reversal of the district court’s Enforcement Order under Rule 60(b)(6).
  3. 28 U.S.C. § 2412(d)(1)(A).
  4. 28 U.S.C. § 2465.