Opinion
3-99-CV-1842-L, (Consolidated with 3-00-CV-587-H).
April 26, 2004
REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
Pursuant to the District Court's order of reference filed on July 10, 2003, on March 12, 2004, came on to be heard the United States' Motion to Hold Petitioner in Contempt of the Court's September 17, 2002, Order of Enforcement, which the government filed on June 27, 2003. The government appeared through its counsel and Petitioner, John F. Eulich, appeared in person and through counsel. The court received the testimony of James Vivian, Revenue Agent of the Internal Revenue Service; John F. Eulich; Bruce Zagaris, Esq.; and Keith Kennedy, Esq. In addition the court received the exhibits tendered by the parties at the hearing. Having considered the evidence and the pleadings and arguments of counsel, the magistrate judge finds and recommends as follows:
The court has also supplemented the record with a copy of the Banks and Trust Companies Regulation Act, tendered by Petitioner's counsel on March 30, 2004, designated as Petitioner's Hearing Exhibit No. 30.
PROCEDURAL HISTORY OF THE CASE:
This action was filed by John F. Eulich and his wife on August 16, 1999, seeking to quash certain requests for documents relating to the Mona Elizabeth Mallion Settlement Trust No. 16 (hereinafter sometimes referred to as MST-16). A subsequent petition to quash was filed on November 15, 1999 (No. 3-00-CV-587-H) which was consolidated with this action. The government in turn filed counterclaims to enforce the subject summonses.
On December 1, 2000, a hearing was held before the undersigned magistrate judge and on February 9, 2001, the magistrate judge filed a report and recommendation that the summonses be enforced. On September 17, 2002, the District Court adopted the magistrate judge's recommendations and granted the government's motion to enforce. Mr. and Mrs. Eulich filed a direct appeal, and on August 27, 2003, the Fifth Circuit filed its unpublished opinion affirming the District Court's enforcement order as it related to John Eulich and reversing the enforcement order as it pertained to Virginia Eulich. See No. 02-11165 (5th Cir.).
FINDINGS AND CONCLUSIONS:
Following entry of the District Court's enforcement order on September 17, 2002, John Eulich directed Keith Kennedy, the general counsel for Eulich's companies and family interests, to conduct a review of all records maintained in Dallas to locate any documents within the purview of the IRS summonses and its formal document requests (FDR's). Kennedy oversaw the examination of approximately 2000 boxes of documents and in turn produced relevant documents for inspection by agents of the IRS. Both Mr. and Mrs. Eulich and Keith Kennedy appeared before IRS agents to answer questions with respect to matters within the scope of the documents requests. See Petitioner's Hearing Exhibits 19, 20 and 23 (hereinafter referred to as Petitioner's Exhibit ___).
Although Mr. Vivian opined in the course of his testimony that there may still be documents within the United States which are called for in the subject documents requests, he conceded an absence of information to support any claim of non-compliance with respect to domestic documents. Mr. Kennedy in turn testified that the only documents which have not been produced are those maintained by the trustee, the Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. (CIBCT) and possibly documents in the possession of David Rounce, infra. Therefore, the issue which is determinative of the merits of the government's motion is whether John Eulich's failure to obtain copies of the documents from CIBCT or from David Rounce called for in the IRS requests, i.e. the IRS administrative summons served on or about July 15, 1999, the FDR to Eulich dated May 18, 1999, and the FDR to Eulich dated November 15, 1999, constitutes a violation of the court's enforcement order.
Much of Vivian's testimony related to other companies in which Eulich held an ownership interest or had an executive position. Vivian conceded that this information was not called for in the requests at issue. At most such testimony relates only to "layering" a practice described in the testimony of Bruce Zagaris.
The government initially argues that the issue of Eulich's control over the documents in CIBCT's possession has previously been decided and that Eulich is not permitted to re-litigate this issue in the present contempt proceedings. Although the magistrate judge is of the opinion that my prior recommendation filed on February 9, 2001, cannot be read to support such a finding of fact, having presided at the enforcement hearing, I am in a position to explain my prior findings, if they were not sufficiently clear.
It is well established that a finding that requested documents were not in the possession or control of a person subject to an IRS request or that such documents were not in existence at the time the request was served is a defense to a summons enforcement proceeding. E.g. United States v. Huckaby, 776 F.2d 564, 567, reh'g denied 780 F.2d 532 (5th Cir. 1985), cert. denied 475 U.S. 1085, 106 S.Ct. 1458 (1986). The party resisting enforcement bears the burden of producing credible evidence that he does not possess or control the documents sought. The magistrate judge previously found that Eulich had not discharged his burden. See Report and Recommendation of Magistrate Judge filed on February 9, 2001, at pages 4; 7-10. However, the recommendation did not find that Eulich in fact had control over the documents.
The cases cited by the government regarding the res judicata effect of findings in an enforcement proceeding are inapposite. Those cases involved situations in which it was found as fact that requested documents were in the possession or control of the summons respondent, but that in which the respondent resisted production on other grounds such as the privilege against self-incrimination.
Therefore, notwithstanding Eulich's failure to produce copies of documents presently in the possession of CIBCT, he is not precluded from demonstrating an inability to produce the documents. Maggio v. Zeita, 333 U.S. 56, 75-76, 68 S.Ct. 401, 411-12 (1948).
In this circuit, a party under court order to produce documents has a "duty to make in good faith all reasonable efforts to comply." United States v. Rizzo, 539 F.2d 458, 465 (5th Cir. 1976) (quoting United States v. Ryan, 402 U.S. 530, 534, 91 S.Ct. 1580, 1582 (1971) — cited by the Eleventh Circuit in United States v. Hayes, 722 F.2d 723, 725 (11th Cir. 1984).
In an effort to demonstrate that he had met his burden of pursuing all reasonable efforts to comply with the enforcement order, Eulich relies on correspondence sent by him, his wife and two of his daughters requesting documents from CIBCT and the bank's written responses (Petitioner's Exhibits 2-6 and 12-16), his request to David Rounce and the reply (Petitioner's Exhibits 17 and 18), the affidavit of Michael Reame Fullerlove (Petitioner's Exhibit 11) and the expert testimony of Bruce Zagaris.
In determining whether these requests to the bank demonstrate that Eulich has pursued all reasonable efforts to comply with the enforcement order, the testimony of Mr. Zagaris is particularly helpful. He was the only witness who described the banking laws of the Bahamas and who cited and addressed specific laws which govern banking secrecy.
Despite its relatively small size the Bahamas constitute one of the top offshore financial centers in the world, which at one time had more than 400 banks and numerous trust companies. The Bahamas have a reputation of being a tax haven or financial paradise primarily due to the high degree of secrecy which Bahamian law imposes. The confidentiality provisions of the statutes are the cornerstone on which the financial services industry is based and provide a primary attraction for those who seek to remove assets from the purview of tax authorities and law enforcement agencies. Indeed it appears that the Banks and Trust Companies Regulation Act, 2000 (Petitioner's Exhibit 26) was enacted at the insistence of the international financial community because of the large amount of funds from illegal drug transactions which were being deposited in Bahamian financial institutions.
Mr. Zagaris addressed three Bahamian statutes which govern its financial institutions — The Banks and Trust Companies Regulation Act, 1965 (Petitioner's Exhibit 30); The Trustee Act, 1998 (Petitioner's Exhibit 25); and The Bank and Trust Companies Regulation Act, 2000 (Petitioner's Exhibit 26). Each of the acts imposes on Bahamian financial institutions an obligation of confidentiality and the statutes also provide civil and criminal sanctions for unauthorized disclosures and dissemination of account information. E.g. See Petitioner's Exhibit 30, § 10; Petitioner's Exhibit 25, § 83; Petitioner's Exhibit 26, § 15.
Notwithstanding Mr. Zagaris's testimony to the contrary the 2000 Act expressly repealed the 1965 Act. See Petitioner's Exhibit 26, at page 40, ¶ 24.
Parenthetically, Mr. Zagaris's testimony provided further insight into why Mona Elizabeth Mallion appears on the settlement (Petitioner's Exhibit 1) as the settlor. See Report and Recommendation filed on February 9, 2001, at n. 3. Ms. Mallion was an "accommodation settlor", an individual who is identified as the settlor of the trust as an accommodation to the actual settlor — in this case John Eulich — to conceal the settlor's name from anyone having access to the trust documents.
In addressing the issue of whether Eulich has exhausted all reasonable efforts to comply with the court's enforcement order the government submits that there are several alternatives which Eulich did not pursue. The magistrate judge will now address the proposed alternatives.
1. Change of Trustee. In the face of the response letters sent by CIBCT's representative declining to produce copies of trust documents, the government argues that Eulich could have taken steps to see that a more compliant trustee was appointed. Were a United States domestic financial institution named as the trustee, it would not be under the same obligations of secrecy. Likewise, a financial institution with branches in the United States would likely provide the information.
Although the trust instrument is established under Bahamian laws (Petitioner's Exhibit 1 at ¶ 3), there is case authority which in essence trumps Bahamian bank secrecy law when a subpoena is served on a foreign chartered bank which maintains a branch in the United States. In re Grand Jury Proceedings. United States v. The Bank of Nova Scotia, 691 F.2d 1384 (11th Cir. 1982).
In opposing this alternative Eulich has presented evidence that the burdens imposed would render the same unreasonable. Eulich testified that he has generally been satisfied with CIBCT since it became the trustee of MST-16. The annual fee paid to CIBCT is $40,000.00, but he believes the fees of a successor trustee would be up to $500,000.00 a year. In addition, Mr. Zagaris testified that due to the extremely complex nature of the assets and ownership interests of MST-16, a prospective successor trustee would have to engage in a substantial and detailed review of the trust's records, consistent with the present obligation of financial institutions to "know its customers." In the face of this testimony which has not been refuted or called into question by any other evidence before the court, the magistrate judge is of the opinion that requiring the appointment of a successor trustee of MST-16 exceeds the reasonable efforts required of a person subject to an enforcement order.
As explained by Mr. Zagaris, this obligation is imposed to minimize the possibility that assets are the fruits of unlawful activities, primarily proceeds of illegal drug transactions.
2. Changes in the Advisory Committee. As noted in the magistrate judge's prior recommendation, the trust document which includes MST-16 provides for the establishment of an Advisory Committee. See also Petitioner's Exhibit 1 at clause 6, pages 9-11. Eulich is one of the persons identified as having authority to appoint the Advisory Committee. At the present time the Advisory Committee consists of a single member, David Rounce, a resident of the Bahamas. Eulich testified that Rounce had known his family for many years, but that he had not spoken to Rounce recently, but perhaps within the last five years. Again as previously noted, given the duties and obligations assigned to the Advisory Committee vis-a-vis the trust, Id. clause 6.(1)(i)-(iii), it appears that the Advisory Committee must have access to the books and records of the trust.
Following the entry of the court's enforcement order Eulich wrote Rounce a letter requesting documents (Petitioner's Exhibit 17). Rounce in turn replied, providing a limited number of annual accounts (Petitioner's Exhibit 18), none of which were within the purview of the I.R.S. requests, and declining to produce other records in his possession. Eulich subsequently directed Mr. Kennedy to call Rounce to inquire if further documents could be obtained and was informed that Rounce had provided all the documents which he was permitted to provide.
This correspondence, among others, was offered for the limited purpose of demonstrating Eulich's good faith attempt to comply with the enforcement order. It approximates the conduct of the defendant described in the opinion in United States v. Hayes, 722 F.2d 723 (11th Cir. 1984). However, there the defendant personally traveled to Switzerland on two occasions in an effort to gain cooperation of the Swiss resident managing party of the partnership. Here Eulich made no such personal request and assigned the task of follow-up to his lawyer.
Rounce is not a lawyer and Kennedy only surmises that Rounce sought legal advice before responding to Eulich's letter. Eulich has not demonstrated that Rounce in his capacity as the Advisory Committee is prohibited from access to the books and records of MST-16. Mr. Zagaris did opine that the statutes cited by him did not purport to prohibit disclosure by Rounce of records obtained by him from CIBCT.
Even if Rounce refused to seek records from the bank, that fact would not establish that Eulich had made all reasonable efforts to comply. He and the two surviving persons authorized to appoint the Advisory Committee may appoint additional members of the Advisory Committee, being persons who would be willing to seek to acquire records in the present possession of the trustee bank.
At this juncture it cannot be determined under the limited Bahamian law before the court what authority the members of the Advisory Committee might have. Indeed to attempt to do so would be presumptuous and improvident. However, it is clear that Eulich has failed to pursue available avenues with respect to the Advisory Committee so as to demonstrate that all reasonable efforts have been made.
3. Additional avenues. As Mr. Zagaris pointed out in his testimony an action could be filed to obtain disclosure of the trust documents. Conspicuous by its absence is any attempt on the part of Eulich to obtain the advice of an attorney practicing in the Bahamas as to avenues which might be available, with or without the necessity of bringing a court action, to obtain the MST-16 documents from the bank. To the contrary, the only legal advice which he appears to have sought is from Mr. Fullerlove, a solicitor practicing in London, England, who represents related interests of Eulich on the Isle of Man. The Court is free to give such weight to Mr. Fullerlove's opinions as is deemed appropriate. Because of Fullerlove's relationship to Eulich and because there is no showing that he has engaged in the practice of law in the Bahamas, the magistrate judge discounts his opinions. Moreover, because Eulich made no effort to obtain the advice of a law practitioner in the Bahamas, he has failed to show good faith reliance on Mr. Fullerlove's affidavit, let alone satisfying the higher standard which he must discharge in establishing resort to all reasonable efforts to comply.
The magistrate judge also finds it extremely disturbing that Eulich had Mr. Kennedy compromise any payments owing to Mr. and Mrs. Eulich as annuitants under the trust after the prior hearing and without the knowledge or acquiescence of the IRS. In the magistrate judge's prior recommendation it was observed — albeit without the benefit of any Bahamian law authority — that as annuitants under the trust which was initially funded with their assets — both presumably would be entitled to access to the trust documents. No evidence was presented at the more recent hearing with respect to a funding annuitant's right of access to documents, presumably because Eulich's status as annuitant has been extinguished. Although not determinative, it is to be noted that a person charged with contempt may not reply on an impossibility defense when his own conduct was responsible for his inability to comply. See Pesaplastic, C.A. v. Cincinnati Milacron Co., 799 F.2d 1510, 1521 (11th Cir. 1986) citing United States v. Asay, 614 F.2d 655, 660 (9th Cir. 1980).
At the previous hearing evidence was presented that CIBCT was required to hire counsel and appear in FDIC Corporate v. John F. Eulich, et al, No. 3-93-CV-1065-H. See recommendation filed on February 9, 2001, at page 7. Thereafter the bank offset the fees and expenses which it had incurred against the sums due Eulich and his wife under the annuity provisions of the trust.
Although Eulich himself was not the impetus for the requests made by his daughters, beneficiaries under MST-16 (Petitioner's Exhibit 2 and Petitioner's Exhibit 5), he offered these letters and the responses thereto for the limited purpose of demonstrating his good faith attempt to comply with the court's enforcement order. Aside from the fact that his burden is substantially higher, E.g. see United States v. Hayes andUnited States v. Rizzo, supra, in light of the perfunctory nature of the requests coupled with the non-disclosure provisions of the statute, the same are insufficient to establish that his daughters cannot obtain the documents maintained by the bank.
In the course of Mr. Zagaris's testimony questions were posed with respect to vested beneficiaries and contingent beneficiaries. The application of the Bahamian law to these statuses is more appropriately addressed by the Bahamian courts.See n. 7, supra.
Finally, Mr. Vivian testified to his conversations with Helen Carroll, the same representative of CIBCT who responded to the letter requests of Eulich, his wife and his daughters. Vivian asked Ms. Carroll if the bank would provide the documents to Eulich's daughters as they had requested. She advised that she would need to refer the question to the legal department. In a follow-up call she advised that nothing would be provided because it did not fulfill — did not fit in with the client's wishes. Unsurprisingly she also declined to disclose the identity of the client.
From Eulich's own testimony it appears that he advises the trustee bank on investments to be made by the trust to enhance the profitable opportunities from the trust, either directly or indirectly. There is nothing in the record indicating that his investment requests are not complied with. In addition the government offered documents sent by the bank to Eulich's personal attorney which transmit financial information of the trust. See Government's Exhibits R-1 and R-3. The bank has also corresponded with Eulich's counsel concerning the annual fees to be charged. Id. Exhibits R-6 and R-7. From these documents and Eulich's testimony it is not unreasonable to infer that Eulich is the unidentified client to whom Ms. Carroll referred.
Notwithstanding the limitations on disclosures imposed by the Bahamian statutes provided to the court, none prohibits disclosures expressly or impliedly consented to by the customer. If Eulich is the "client" to whom Ms. Carroll referred, it is clear that by granting consent he would have the ability to obtain and produce the trust documents subject to the enforcement order. On the other hand the court has been presented with no evidence that Eulich could not obtain the identity of the present client from CIBCT, thus permitting him to seek consent from that person or entity. CONCLUSION:
The evidence presented establishes by clear and convincing evidence that John Eulich has failed to comply with the court's enforcement order in failing to produce the documents called for in the IRS summons and requests which are in the physical possession of the trustee of the Mona Elizabeth Mallion Trust Fund No. 16, the Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd. and for the reasons stated above John Eulich has failed to demonstrate that he has made all reasonable efforts to comply with the court's order.
The term "all reasonable efforts" has no fixed meaning, but is determined by the facts and circumstances in each case. It is pertinent to note that although John Hayes expended time and expense in personally making two trans-Atlantic trips to Switzerland, the Eleventh Circuit found that this was insufficient to discharge his burden. Hayes, supra. In the present case Eulich and his wife filed two separate actions in this court and appealed this court's order of enforcement, after the cases were consolidated, to the Fifth Circuit. In addition to the services of local counsel, he retained the services of an expert witness to testify in the civil contempt proceeding. Finally, it is undisputed that the MST-16 has current assets of between $75 and 100 million dollars. Given the omissions in his proffered efforts to comply as described above, it is not unreasonable to require further efforts on his part including, if need be, filing an action in the Bahamian courts to require the bank to disclose the records of the trust.
RECOMMENDATION:
For the foregoing reasons it is recommended that the District Court find by clear and convincing evidence that John F. Eulich has not complied with the court's enforcement order filed on September 17, 2002, and that the court further find that Eulich has failed to make all reasonable effort to comply, and that accordingly the court hold him in civil contempt of court.
It is further recommended that the court impose a civil fine in the amount of $1,500.00 per day from the date of the court's order until he produces to representative(s) of the Internal Revenue Service the documents of the Mona Elizabeth Mallion Trust Fund No. 16 or causes the same to be made available to such representative(s).
It is further recommended that in event that John Eulich files an action or causes to be filed an action by persons or entities with colorable standing to seek disclosure of records maintained by the Canadian Imperial Bank of Commerce and Trust Co. (Bahamas) Ltd. in a court of the Bahamas; that the civil fine imposed be tolled during the period that such action is pending, provided that certified copies of all process, pleadings, written and minute orders of the Bahamian court are promptly provided to this court.
The trial court in the Bahamas is denominated as the Supreme Court and the intermediate appellate court is denominated as the Court of Appeals. Under Bahamian law the court of last resort is the Privy Council in London, England, the decisions of which are precedential in the Bahamian courts. If Eulich initiates a court proceeding which ultimately results in a decision that disclosure cannot be required, such decision would establish beyond cavil that at that time he has taken all reasonable steps to comply with the court's enforcement order.
A copy or this recommendation shall be transmitted to counsel for the parties.