In one corner is the U.S. Attorney’s Office, which charged Diaz and his wife, Blanca Diaz, in November with conspiring to hire undocumented workers for financial advantage over other homebuilders in the area.
On the other side are the building supply businesses seeking to collect at least $180,000 in debts after Diaz’s businesses were forced into bankruptcy.
At stake is $42,500 in three frozen bank accounts, two homes worth a combined $2.3 million and nine vehicles valued at more than $82,000, court records show.
As of May, Diaz was owed a combined $600,000 from 24 companies, through his company, Miranda Contractors Inc.
The federal government claims in criminal court that the property is the product of Diaz’s illegal activity and therefore subject to seizure under forfeiture law. The competing claim comes from bankruptcy court, where six parties, including one claim on behalf of the couple’s children, say they are entitled to a share.
“The question arises: Who has the rights to the property? Is it the Chapter 7 Trustee or the United States under a forfeiture provision of the U.S. law?” attorney Louis Saul wrote in Feb. 16 letter to U.S. Bankruptcy Court Judge Susan Barrett.
Saul’s question resonates across the U.S. In south Florida, the property, yachts, cars and bank accounts of Scott Rothstein were seized by the U.S. government after he pleaded guilty in 2010 to running a $1.4 billion Ponzi scheme. At the same time, more than 350 creditors made $469 million in claims against Rothstein’s law firm. The competing claims produced mixed results.
“The multiple pieces of Rothstein litigation certainly led to some winners, yet one cannot help but wonder whether the wins would have been greater and the losses smaller had the government and trustee been able to avoid such costly, lengthy, and bitter litigation,” attorney Kathy Bazoian Phelps wrote in an analysis for the American Bar Association.
The growing clash between bankruptcy and federal forfeiture is trickling down from high-profile Ponzi cases, such as Rothstein and Bernie Madoff, to smaller cases like Diaz, said bankruptcy attorney Henry Kevane.
“The government has recently started using its forfeiture rights in all manner of cases,” Kevane said.
Kevane found several facets of Diaz interesting, particularly because it’s focused on immigration crimes. In many crimes forfeiture is used to pay restitution to the victims, but it’s unclear what the purpose of forfeiture is in this case, Kevane said.
The proceeds “are not going to the persons they illegally harbored in the states,” Kevane said. Often these cases boil down to who has the moral high ground, “but there really isn’t a moral difference between the victim of a crime and an unpaid creditor.”
In the Diaz case, the size of the debts varies. In court documents, Augusta Ready Mix Inc. states it delivered concrete to Hugo Diaz and Miranda Contractors Inc. in September and October and received a check for $22,587 in return. That check was returned by the bank five days later because the bank account had been seized by the federal government. After applying various credits, the company says it’s still owed $20,122.
Adding to the confusion are the corporations set up by Diaz. In court papers, attorney Saul alleges that Diaz persuaded Southern Wholesale Supply Co. to extend him credit in the amount of $87,641. Diaz, who entered the country illegally in 2000, asserted that he would pay the bills through his business Miranda Contractors Inc., which carried a federal identity number.
“The corporations of Mr. Diaz were subterfuges and he was, in fact, the owner of these entities for the purposes of doing business illegally in the United States,” Saul writes.
Fourteen charges, including money laundering, were dropped against Hugo Diaz when he pleaded guilty to one count of harboring an illegal immigrant. He was sentenced to 15 months in federal prison and recommended for deportation. His wife was sentenced to time served and immediately released to immigration officials for deportation.
Similar problems over Diaz’s assets are evolving in Aiken County, where he was building six houses on Metz Drive in North Augusta’s Green Acres neighborhood, near the intersection of Atomic and Martintown roads. Maner Builders Supply Co. filed a mechanic’s lien Nov. 15 against Miranda Contractors for nonpayment of materials delivered to the site from July through October. That debt amounts to $31,651. The lien names a separate entity, Metz Street LLC, for breach of contract.
On July 30, the United States filed a motion to dismiss all of these claims.
“... While claims by these creditors against Diaz’s estate may be proper in bankruptcy court, the six petitions filed in this Court must be dismissed because the petitioners lack standing to claim any of the forfeited assets,” the motion reads.
Using case law to build its argument, federal attorneys classify the claimants as unsecured creditors with no legal right to the forfeited assets. There are currently no hearings scheduled on the case in either criminal or bankruptcy court.
Saul, the bankruptcy attorney, makes his position clear in the February letter to Judge Barrett.
“There are sufficient monies to pay all creditors of Mr. Diaz through the U.S. Bankruptcy Court and there would be sufficient monies to pay at least a million dollars to the United States as forfeiture. However, the government does not want it to work that way.”