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United States v. Segal

United States District Court, N.D. Illinois, Eastern Division

May 17, 2018




         Defendant Michael Segal moves for the turnover of corporate stock he believes is his under the terms of a settlement agreement reached by the parties. (R. 2172, Segal's Br.) The government, in turn, seeks reformation of the parties' agreement arguing that, due to a drafting error, the agreement failed to properly memorialize the intent of the parties. (R. 2173, Gov't's Br.) For the reasons stated below, Segal's request for turnover is granted, and the government's request for reformation of the agreement is denied.


         The facts underlying this long-running criminal case were fully set forth in several opinions of the U.S. Court of Appeals for the Seventh Circuit. See United States v. Segal, 811 F.3d 257 (7th Cir. 2016); United States v. Segal, 644 F.3d 364 (7th Cir. 2011); United States v. Segal, 495 F.3d 826 (7th Cir. 2007); United States v. Segal, 432 F.3d 767 (7th Cir. 2005). They are repeated here only as they pertain to the present dispute. In brief, Segal and his company, Near North Insurance Brokerage ("NNIB"), were charged in 2004 "with a bevy of counts including racketeering, mail and wire fraud, embezzlement, false statements, and conspiracy to impede the Internal Revenue Service." Segal, 644 F.3d at 365. Both Segal and NNIB were convicted following a jury trial. Id. NNIB and its parent company, Near- North National Group, Inc. ("NNNG"), were forfeited to the government, as were "all assets of these companies, including all of their interests in other companies." Segal, 432 F.3d at 776 (emphasis omitted). Segal was ordered to serve a 121-month prison sentence and to personally forfeit $30 million to the government. Segal, 495 F.3d at 830. He appealed. Id. The Seventh Circuit affirmed his conviction but remanded for further proceedings on the forfeiture issue. Id. at 830-40. Specifically, the Seventh Circuit had concerns about potential double-counting if the Court did not account for personal funds that Segal had "poured back into the enterprise[.]" Id. at 839. In considering that issue on remand, this Court reduced Segal's personal forfeiture obligation to $15 million. Segal, 644 F.3d at 365. Both sides appealed, but the Seventh Circuit affirmed the revised forfeiture judgment. Id. at 368.

         Thereafter, in order to satisfy the forfeiture judgment, the parties prepared for a hearing scheduled in February 2013 to determine the ownership and value of approximately $47 million in assets being restrained by the government-including financial accounts, insurance policies, stock investments, and partnership interests in real estate ventures, Chicago sports teams, and other entities-that once belonged to Segal and NNIB. Segal, 811 F.3d at 259-62. Shortly before the scheduled hearing, the parties negotiated a stipulated settlement agreement directing the distribution of the restrained assets. (Gov't' Ex. Settlement Order 2/13/13.) Segal-by this time out of prison-"participated actively, indeed aggressively, in the negotiation of the settlement." Segal, 811 F.3d at 259. In essence, the agreement provided that all restrained assets were listed on a document attached as "Exhibit A" and those that were to be returned to Segal were also listed on "Exhibit B." Id. at 264. Assets on Exhibit A that were not specifically listed on Exhibit B would be retained by the government. Id. On February 13, 2013, this Court entered an order approving the agreement.[1] (R. 1706, Order.) Upon approval of the settlement agreement, Segal's $15 million personal debt to the government was extinguished, and he obtained the immediate return of approximately $8 million in assets. (Id.)

         That was far from the end of the matter, however, because various disagreements arose about the terms of the settlement, precipitating several more orders by this Court and another round of appeals by both Segal and the government. See Segal, 811 F.3d at 259, As is relevant here, the parties dispute who is entitled to certain "stock, worth about $467, 000, in the Rush Oak Corporation, a bank holding company" (herein "Rush Oak stock"). Id. at 263. Exhibits A and B to the settlement agreement refer to an asset called "Oak Bank and Trust, " which the parties agree was to be retained by Segal. (Gov't Ex. Settlement Order 2/13/13, Exs. A, B.) In Segal's view, the reference to "Oak Bank and Trust" in Exhibits A and B also encompassed his interest in the holding company, such that he is entitled to the Rush Oak stock under the terms of the parties' agreement. (R. 2019, Segal's Mot.) The government disagreed, arguing that the Rush Oak stock was always considered a separate asset by the parties, and that they mutually agreed this asset was to be retained by the government. (R. 2041, Gov't's Mot.) The government acknowledged, however, that the Rush Oak stock was not actually listed on Exhibit A (representing the assets to be retained by the government), which the government attributed to an oversight at the time the agreement was drafted. (Id.)

         This Court initially sided with Segal and ordered the turnover of this asset. Segal, 811 F.3d at 264. The government appealed, however, and the Seventh Circuit held that further proceedings were required to consider whether the omission of the Rush Oak stock from Exhibit A was a "mutual mistake of fact"-in other words, that "both parties assumed the stock would be retained by the government but in the rush of drafting and redrafting of the settlement agreement had failed to mention it." Id. If that was the case, the Court would be permitted to reform the parties' agreement to reflect their true intent. Id. Accordingly, the Seventh Circuit reversed and remanded for an evidentiary hearing on this issue. Id. at 264-65.

         On January 23 and 24, 2018, the Court conducted that evidentiary hearing. (R. 2162, Min. Entry; R. 2163, Min. Entry.) The parties submitted numerous exhibits and presented testimony from Thomas Moriarty, a former special investigator with the U.S. Attorney's Office who drafted the exhibits to the settlement agreement; Marc Martin, one of Segal's former attorneys who was involved in negotiating the settlement; and Marsha McClellan, former chief of the Anti-Money Laundering and Organized Crime Sections of the U.S. Attorney's Office who oversaw the forfeiture of Segal's assets. (R. 2164, Hr'g Tr. at 1-203; R. 2165, Hr'g Tr. at 204-74.)

         The evidence adduced at the hearing showed that, following the entry of the original forfeiture judgment in 2003, Moriarty began working with criminal case agents to locate Segal's assets. (R. 2164, Hr'g Tr. at 10-12.) This process continued during the appeal, remand, and entry of the revised forfeiture judgment. (Id. at 10-19.) When the process began, Moriarty obtained a preliminary list of assets from a revenue agent who had information concerning both Segal's and NNIB's assets. (Id. at 12.) The government also issued subpoenas to the managers, shareholders and/or corporate officers of entities that owned some or all of Segal's restrained assets to obtain ownership and financial information. (Id. at 12, 116; R. 2165, Hr'g Tr. at 214-15.) McClellan oversaw this subpoena process. (R. 2165, Hr'g Tr. at 215.) As a result of the subpoenas that were issued, information came in about Segal's assets from various entities. (Id. at 215-18.) Moriarty oversaw the process of gathering that information and he organized and listed that information in Excel spreadsheets. (R. 2164, Hr'g Tr. at 13-14, 116.) He prepared and updated these spreadsheets, which he referred to as "schedules, " on a regular basis. (Id. at 18.)

         Among the assets that Moriarty received information about were Segal's interests in Rush Oak Corporation and Oak Bank Corporation, both of which were subject to the freeze orders entered by this Court shortly after the 2004 jury verdict. (Id. at 26, 27.) Moriarty first spoke with Robert Sullivan ("Sullivan"), the president of both corporations, about these assets in 2005. (Id. at 25-26.) Their conversation dealt with the subpoenas that had been served by the government. (Id. at 25.) Moriarty had additional conversations with Sullivan in 2006 and 2007, and also had written communications with Sullivan when he was trying to determine the value of Rush Oak Corporation stock and Oak Bank Corporation stock to put on his asset schedules. (Id. at 26, 28-29, 31; Gov't's Ex. Moriarty 3.) During these communications, Sullivan told Moriarty that Oak Bank Corporation and Rush Oak Corporation are two separate companies. (Gov't's Ex. Moriarty 3; R. 2164, Hr'g Tr. at 118; R. 2165, Hr'g Tr. at 219.) As of June 14, 2006, Moriarty knew that Rush Oak Corporation and Oak Bank Corporation were two separate entities. (R. 2164, Hr'g Tr, at 29, 118.) Moriarty understood from these communications that Rush Oak Corporation was a holding company that owned the stock of Oak Bank Corporation. (Id. at 118, 144.)

         In his schedule of assets, Moriarty had a "generic" category he referred to as "partnerships." (Id. at 17.) Moriarty included limited liability companies, corporations, and other entities in this category even though they were not actually partnerships. (Id.) For example, he listed "Rush Oak Bank and Trust" as a partnership, even though he knew from Sullivan's letter that Rush Oak Corporation and Oak Bank Corporation were actually separate corporations, and that neither was a partnership. (See id.; Gov't's Exs. Moriarty 1, 4, 6.) Moriarty never actually listed either "Rush Oak Corporation" or "Oak Bank Corporation" as an asset in his schedules. (R. 2164, Hr'g Tr. at 119, 128-29.) Instead, he used a variety of terms to refer to these corporations in the many schedules he prepared. Originally, he referred to these corporations simply as "Oak Bank." (R. 2165, Hr'g Tr. at 257.) He later characterized the assets simply as "Rush Oak Bank and Trust, " even though he understood that there was "no asset that's truly named Rush Oak Bank and Trust." (R. 2164, Hr'g Tr. at 120; Gov't's Exs. Moriarty 1, 4, 6.) Moriarty thought that "Rush Oak Bank and Trust" was "some sort of bigger bank than Oak Bank." (R. 2164, Hr'g Tr. at 118.) In his mind, Rush Oak Corporation was a "bank holding company or something like that." (Id., at 19.) He believed that Rush Oak Corporation "was associated with Oak Bank, and Oak Bank was associated with Rush Oak." (Id. at 118.)

         In the asset schedule he prepared in September 2012, Moriarty listed "Rush Oak Bank and Trust" as a "partnership" worth $467, 000. (Id. at 44; Gov't's Ex. Moriarty 1.) In January 2013, Moriarty updated his schedule again in anticipation of the upcoming evidentiary hearing, which was to be held in early February 2013. (R. 2164, Hr'g Tr. at 58-59; Gov't Ex. Moriarty 6 at GSAO76.) Moriarty testified that his January 2013 asset schedule was intended to represent the "universe" of Segal and NNIB assets that had been restrained by this Court. (R. 2164, Hr'g Tr. at 16, 108.) In the January 2013 schedule, he again referred to an asset called "Rush Oak Bank and Trust" and listed it as a partnership owned by Segal. (Gov't Ex. Moriarty 6.) Moriarty's January 2013 schedule also identified the cash dividends paid on the Oak Bank Corporation stock ($3, 240), although the schedule did not list the Oak Bank Corporation stock itself as an asset or provide a value for this stock. (See Gov't Ex. Moriarty 6 at GSA 073; R. 2164, Hr'g Tr. at 119, 128-129.) Moriarty acknowledged that he "made a mistake" by failing to list Oak Bank Corporation and Rush Oak Corporation separately in his 2007, 2009, and 2013 schedules, and by failing to list Oak Bank Corporation as an asset on the January 2013 schedule. (R. 2164, Hr'g Tr. at 32.)

         During the month of January 2013, the parties engaged in extensive settlement negotiations. (R. 2164, Hr'g Tr. at 68-71, 129.) During their negotiations, the parties used Moriarty's January 2013 schedule and a January 2013 Consolidated Schedule of Assets, referred to as "CATS, " which was an internal record "kept by the asset forfeiture paralegals [in the U.S. Attorney's Office] in conjunction with the U.S. Marshals Service." (Id. at 22; see also Id. at 129, 184; R. 2165, Hr'g Tr. at 235; Gov't Ex. Moriarty 2.). Accordingly to Moriarty, the CATS schedule was updated "whenever the Marshals Service received some sort of distribution, sale of asset or a check." (R. 2164, Hr'g Tr. at 23.) The CATS schedule lists the dividends totaling $3, 240 received from "Oak Bank, " but this schedule does not list the stock itself as an asset, nor does it list Rush Oak Corporation or its stock as assets. (Gov't Ex. Moriarty 2.)

         After various settlement discussions, the government offered to settle with Segal by giving him $8 million in assets as well as forgiving his $15 million forfeiture obligation, in exchange for the forfeiture of all other restrained assets. (R. 2164, Hr'g Tr. at 68-71.) The government told Segal and his attorneys that Segal could take any assets listed in Moriarty's January 2013 asset schedule up to ...

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