A Victory Against the IRS in North Carolina

Last May, I wrote about a pending civil asset forfeiture case taking place in the federal eastern district of North Carolina. Put briefly, Lyndon McLellan of Robeson County had his business’s assets seized by the Internal Revenue Service for having committing the sin of “structuring.” This is where a person carries out cash transactions in such a way as to avoid the IRS’s reporting requirement for transactions or related transactions that involve more than $10,000 in cash. The rule, meant to catch money launderers and drug dealers, ended up causing trouble for small business owners like Mr. McLellan, leading the IRS and U.S. Department of Justice to announce a new policy of not pursuing such “structuring” cases involving small business owners who have not been charged with any crime.

As McLellan’s assets were seized before the announcement of the new policy, the federal prosecutor involved was under no obligation to drop the case (even though he could and should have). When it became clear that the federal government would not back down easily, the Institute for Justice took on Mr. McLellan as a client, and demanded that the government return his money. Just weeks after IJ’s initial involvement, the government dropped the case and returned all of Mr. McLellan’s money. But that was not the end of the episode, as McLellan had still losses thousands of dollars in attorneys’ fees, accountants’ fees, and interest that he would have earned on this money. IJ therefore opted to continue litigating the case:

“The government cannot turn Lyndon’s life upside down and then walk away as if nothing happened,” said Robert Everett Johnson, an attorney at the Institute for Justice who represents Lyndon. “Lyndon should not have to pay for the government’s lapse in judgment. And the government certainly should not profit from its misbehavior by keeping the interest that it earned while holding Lyndon’s money. We’ll continue to litigate this case until the government makes Lyndon whole.”

And litigate it they did, until just days ago when Judge James C. Fox of the United States District Court for the Eastern District of North Carolina issued his order. At issue was whether the court should dismiss the government’s case with or without prejudice. Based on federal statutes and the interpretations of those statutes by almost every federal circuit court, Judge Fox reasoned that were he to dismiss the case without prejudice, this would preclude McLellan from seeking recovery of attorneys’ fees and other expenses involved in the seizure. Judge Fox wrote:

Here, Claimants argue that the ability to seek recovery under CAFRA is a significant right, the loss of which would constitute substantial legal prejudice. Certainly, the damage inflicted upon an innocent person or business is immense when, although it has done nothing wrong, its money and property are seized. Congress, acknowledging the harsh realities of civil forfeiture practice, sought to lessen the blow to innocent citizens who have had their property stripped from them by the Government. Through CAFRA, Congress provided for relief in such cases. This court will not discard lightly the right of a citizen to seek the relief Congress has afforded. The court concludes that deprivation of such a right would work a substantial legal prejudice.

The government has 60 days to appeal Judge Fox’s decision to the United States Court of Appeals for the Fourth Circuit, should it choose to do so.

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