Texas

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

Eulich v. U.S.,
No. 99-cv-01842 (N.D. Tex 08/18/2004)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION

JOHN F. EULICH and VIRGINIA WALSH EULICH,
Petitioners,
v.
UNITED STATES OF AMERICA,
Respondent.

MEMORANDUM OPINION AND ORDER

Pursuant to 28 U.S.C. § 636(b), and an order of the court in implementation thereof, the Government's Motion to Hold Petitioner in Contempt of the Court's September 17, 2002 Order of Enforcement, filed June 27, 2003, was referred to the United States magistrate judge for proposed findings and recommendation. \ 1 \ On April 26, 2004, the Report and Recommendation of the United States Magistrate Judge ("Report") was filed, to which objections were filed by the Government on May 12, 2004 \ 2 \ and by Eulich on May 24, 2004. For the reasons stated herein, the court accepts in part and rejects in part the findings and recommendation of the magistrate judge.

I. Factual and Procedural Background

The Internal Revenue Service ("IRS") is investigating Eulich and his wife, Virginia, (collectively "the Eulichs") for the tax years of 1995, 1995 and 1997. As part of its investigation, the IRS seeks documents relating to a Bahamian trust, the Mona Elizabeth Mallion Settlement Trust No. 16 ("the Trust"), and to various corporations controlled by the Trust. To that end, the IRS issued formal document requests ("FDRs) and summonses seeking that information.

On August 16, 1999, the Eulichs filed this action to quash certain document requests relating to the Trust, and the Government subsequently filed counterclaims seeking to enforce the summonses. On February 9, 2001, the magistrate judge filed a report and recommendation, after having held a hearing, recommending that the summonses be enforced against both Eulich and his wife. On September 17, 2002, this court adopted the magistrate judge's recommendation and enforced the summonses and FDRs ("the enforcement order"). The Eulichs appealed, and on August 27, 2003, the Fifth Circuit Court of Appeals affirmed the enforcement order as to Eulich and reversed the enforcement order as to his wife. Specifically, the Fifth Circuit held that Virginia Eulich did not have custody or control of the requested documents, as she was named in the FDRs and summonses only because she is married to Eulich and because community property was used in establishing the Trust. Accordingly, based on the Fifth Circuit's opinion, Virginia Erlich is no longer a party to this action, as she has no obligation or responsibilities associated with the FDR's and summonses. The Fifth Circuit, however, refused to "disturb the finding that John Eulich has control of the [requested] documents." Eulich v. United States, 2003 WL 22018884, * (15th Cir. 2003).

On June 27, 2003, the Government filed its Motion to Hold Petitioner in Contempt of the Court's September 17, 2002 Order of Enforcement. The court referred the motion to the magistrate judge, who held a hearing on March 12, 2004. At the hearing, the magistrate judge heard testimony from James Vivian, a Revenue Agent of the IRS; Eulich; Bruce Zagaris, an attorney; and Keith Kennedy, an attorney. On April 26, 2004, the magistrate judge issued his report and recommendation, recommending that the court hold Eulich in civil contempt of court, as the magistrate judge found by clear and convincing evidence that Eulich has not complied with the court's enforcement order and that Eulich has failed to make all reasonable efforts to comply with the court's enforcement order. Specifically, the magistrate judge recommends that the court impose a civil fine in the amount of $1,500 per day from the date of this order until Eulich produces to representative(s) of the IRS the documents of the Trust or cause the same to be made available to such representative(s). The magistrate judge further recommends that in the event that 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. ("Canadian Imperial Bank") 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. Both parties filed objections to the magistrate judge's report and recommendation. The court now considers these objections and makes a de novo review of those matters to which objections were made.

II. Objections

A. Eulich's Objections

Eulich makes the following objections:

(1) The magistrate judge erred in finding Eulich in civil contempt of the court's enforcement order.

(2) The magistrate judge erred in concluding that Eulich did not make all reasonable efforts to comply with the court's enforcement order because he (Eulich) failed to add members to the Advisory Committee.

(3) The magistrate judge erred in concluding that Eulich did not make all reasonable efforts to comply with the court's enforcement order because he (Eulich) failed to file a lawsuit in the Bahamas.

(4) The magistrate judge erred in finding that Eulich compromised the payments due to him under the annuity in the Trust and that he created the impossibility to comply with the enforcement order.

(5) The magistrate judge erred in finding that Eulich is the unidentified client of Canadian Imperial Bank who prevented the disclosure of the requested information, as this finding is based on speculation and hearsay testimony.

B. The Government's Objections

Although the Government agrees with the magistrate judge's finding that Eulich has not complied with the enforcement order, it makes the following objections:

(1) The magistrate judge erred in recommending that Eulich's sanctions be tolled if he files or causes to be filed a lawsuit in the Bahamas seeking disclosure of the records maintained by Canadian Imperial Bank, as there are other efforts that can be taken by Eulich to comply with the enforcement order.

(2) The magistrate judge erred in recommending a $1,500 per day fine, as it is inadequate, given that the Trust has between $75,000,000 and $100,000,000 in assets.

(3) The magistrate judge erred in finding that it is not reasonable for Eulich to change Trustees, as this finding is not supported by the evidence and is based on Eulich's own self-serving testimony.

(4) The magistrate judge erred in failing to apply the principles of res judicata to the issue regarding whether Eulich had control over the requested documents.

III. Discussion

A. Eulich's Objections

Eulich objects to the magistrate judge's recommendation that he be held in civil contempt. A movant seeking a civil contempt order must establish, by clear and convincing evidence, "(1) that a court order was in effect; (2) that the order required certain conduct by the respondent; and (3) that the respondent failed to comply with the court's order." Lyn-Lea Travel Corp. v. American Airlines, Inc., 283 F.3d 282, 291 (5th Cir. 2002); Petroleos Mexicanos v. Crawford Enterprises, Inc., 826 F.2d 392, 401 (5th Cir. 1987) (citations omitted); United States v. Rizzo, 539 F.2d 458, 465 (5th Cir. 1976). Willfulness is not an element of civil contempt. Petroleos Mexicanos, 826 F.2d at 401. Once the movant has shown a prima facie case, the respondent can defend against it by showing a present inability to comply with the subpoena or order. Id; United States v. Rylander, 460 U.S. 752, 757 (1983). "While the court is bound by the enforcement order, it will not be blind to evidence that compliance is factually impossible. Where compliance is impossible, neither the moving party nor the court has any reason to proceed with the civil contempt action." Rylander, 460 U.S. at 757. "It is settled, however, that in raising this defense, the defendant has a burden of production." Id.

Eulich contends that he "made every reasonable effort in good faith to comply with the Court's [Enforcement] Order, which is all the law requires." Resp. Objs. at 4. Eulich is correct that the party subject to a court order is "under a duty to make in good faith all reasonable efforts to comply" with the order. See Rizzo, 539 F.2d at 465 (quoting United States v. Ryan, 402 U.S. 530, 534 (1971)) (internal quotation marks omitted). The court, however, is not persuaded that he has done so. Although Eulich has requested the documents in question from the parties who likely have physical possession of those documents, he has not exhausted other avenues for obtaining the requested documents, such as, adding members to the Advisory Committee of the Trust or filing a lawsuit in the Bahamas to compel the disclosure of the requested documents. See infra. The court, thus, determines that Eulich failed to exhaust all reasonable efforts to comply with the enforcement order. Accordingly, the court overrules Eulich's objection to the magistrate judge's recommendation that he be held in civil contempt of the court's enforcement order.

Eulich next objects to the magistrate judge's finding that he should have taken steps to add members to the Advisory Committee of the Trust, who would have been amenable to providing the requested documents. Specifically, Eulich contends that he alone does not have the authority to add members to the Advisory Committee, and even if he could, the new members would be bound by the confidentiality rulings of Bahamian law. First, although it is true that he alone cannot add new members to the Advisory Committee, there is no evidence that the other two individuals authorized to appoint members to the Advisory Committee are opposed to doing so or have even been contacted or requested to do so. Second, Eulich made a conscious decision to set up the Trust in the Bahamas. He thus created the present dilemma regarding the disclosure or nondisclosure of the documents in question. Therefore, even if Bahamian law would prevent disclosure of the requested documents by the new members of the Advisory Committee, which is in dispute, Eulich cannot benefit from a situation that he himself created. See United States v. Hayes, 722 F.2d 723, 726 (11th Cir. 1984) (citing In re Grand Jury Proceedings, 691 F.2d 1384, 1391 (11th Cir. 1982) ("This court upheld the district court's civil contempt order, concluding that the inevitability of conflict between laws of different countries did not excuse one who chooses transnational commercial operation from compliance with United States law."); see United States v. Bryan, 339 U.S. 323, 330-31 (1949) ("Ordinarily, one charged with contempt of court for failure to comply with a court order makes a complete defense by proving that he is unable to comply. A court will not imprison a witness for failure to produce documents which he does not have unless he is responsible for their unavailability, . . . or is impeding justice by not explaining what happened to them . . ."); Pesoplastic, 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) ("[W]here the person charged with contempt is responsible for the inability to comply, impossibility is not a defense to the contempt proceedings."). Accordingly, the court overrules Eulich's objection with regard to the magistrate judge's finding that he failed to exhaust all reasonable efforts to comply with the enforcement order because he did not add or attempt to add members to the Advisory Committee.

Eulich also objects to the magistrate judge's finding that he should have filed a lawsuit in the Bahamas to compel the disclosure of the requested documents or sought legal advice regarding the available avenues, including filing a lawsuit, for obtaining the requested documents. Mr. Zagaris, Eulich's expert witness, after running around the barn several times finally came in and acknowledged in his testimony that Eulich and his children, the beneficiaries of the Trust, could file a lawsuit in the Bahamas to compel the disclosure of the requested documents. The Bahamian court may or may not compel the disclosure of the requested documents, but what that court may or may not do is of no moment, as Eulich is and was under an obligation to make a good faith attempt to compel the disclosure of the documents by filing such a lawsuit. We, however, never reach this point because the record establishes that Eulich neither filed, nor attempted to file, such a lawsuit. Given this testimony, the court determines that Eulich did not make all reasonable efforts to comply with the enforcement order. Accordingly, the court overrules Eulich's objection with regard to the magistrate judge's finding that he failed to exhaust all reasonable efforts to comply with the enforcement order because he did not file a lawsuit the Bahamas or seek legal advice regarding the available avenues for obtaining the requested documents.

Eulich further objects to the magistrate judge's findings that he compromised payments due him as an annuitant under the trust after the enforcement hearing and that he is the unidentified client of Canadian Imperial Bank, who prevented the bank from providing the requested information. Eulich contends that the evidence does not support these findings. The court disagrees, as these findings certainly can be reasonably inferred from the evidence in the record. Accordingly, the court overrules Eulich's objections to the magistrate judge's findings that he compromised the payments due to him under the annuity in the Trust and that he was the unidentified client of the Canadian Imperial Bank that blocked the disclosure of the requested information.

Lastly, Eulich objects to the magistrate judge's recommendation that he file a lawsuit in the Bahamas to compel disclosure of the requested documents. He contends that doing so would not only be "an extremely inefficient way to obtain the documents" because "the hurdles of Bahamian law are utterly insurmountable," but would also be expensive. Resp. Objs. at 10. The court finds both arguments unavailing. Given Mr. Zagaris's testimony regarding the availability of judicial intervention and that Eulich created the situation in which he now finds himself, the court overrules Eulich's objection to the magistrate judge's recommendation that he file or causes to be filed an action by persons or entities with colorable standing to seek disclosure of the requested documents.

B. The Government's Objections

The Government objects to the magistrate judge's finding that requiring Eulich to appoint a successor trustee exceeds the reasonable efforts required to comply with the enforcement order. Specifically, the Government contends that the findings that a change in the trustee would cost up to $500,000 and would not be a reasonable method of obtaining the documents are not supported by the evidence. To the contrary, the court finds that Eulich presented evidence to support the magistrate judge's finding. Accordingly, the court overrules the Government's objection to the magistrate judge's finding that requiring the appointment of a successor trustee would exceed the reasonable efforts required to comply with the court's enforcement order. That such an appointment is not required, however, does not preclude Eulich from voluntarily doing so in an attempt to comply with the enforcement order.

The Government next objects to the magistrate judge's finding on the issue of res judicata, The magistrate judge found that res judicata did not preclude Eulich "from demonstrating an inability to produce the [requested] documents." Report, dated April 26, 2004, at 3. Eulich had the opportunity to demonstrate an inability to produce the requested documents at the enforcement hearing. The Government objects to the magistrate judge's findings to the extent that the magistrate judge is allowing Eulich to relitigate the issue of whether he had control of the requested documents at the time of the enforcement hearing. The magistrate judge's statement, however, that he" did not find that Eulich in fact had control over the documents" at the time of the enforcement hearing (Report, dated April 26, 2004, at 3) is unnecessary. Regarding this matter, the Fifth Circuit held that "[o]ur review of the record reveals no clear error with respect to John Eulich; therefore, we will not disturb the finding that John Eulich has control of the documents," Eulich, 2003 WL 22018884 at *1, and its decision is the law of the case. The court therefore sustains the Government's objection to the extent it objects to the magistrate judge's finding that res judicata did not preclude Eulich from demonstrating an inability to produce the requested documents at the time of the enforcement hearing. \ 3 \

The Government further objects to the magistrate judge's recommendation that Eulich's sanctions be tolled if he files or causes to be filed a lawsuit in the Bahamas. Specifically, the Government contends the determination of a Bahamian court should not be determinative on this issue, given the Bahamas's reputation as a tax haven. The Government further contends that even if filing a lawsuit is appropriate, the magistrate judge's recommendation fails to provide any safeguards ensuring a "good faith reasonable effort to litigate." Gov. Obj. at 8. Given the alternatives, other than litigation, that are available to Eulich to compel or attempt to compel the disclosure of the requested information and the demands that would be placed on the court's scare judicial resources in monitoring a Bahamian lawsuit, the court sustains the Government's objection to the magistrate judge's recommendation that the sanctions against Eulich be tolled if he files or causes to be filed a lawsuit in the Bahamas compelling disclosure of the requested documents. Furthermore, Eulich could have filed or caused to be filed a lawsuit compelling disclosure at any time during this litigation or after the issuance of the enforcement order. Tolling the sanctions would thus serve only to reward Eulich's conduct for failing to use all reasonable efforts to comply with the court's enforcement order.

Lastly, the Government objects to the magistrate judge's recommendation that Eulich be sanctioned $1500 a day until he complies with the enforcement order. The Government contends that $1500 a day is insufficient, given that the trust has between $75,000,000 to $100,000,000 in assets. The Government suggests that the sum of $14,000 a day or incarceration is a more appropriate sanction, given that five percent interest per annum on $100,000,000 is approximately $13,500 a day. "Civil contempt . . . is to enforce compliance with a court's order . . . or to compensate a wronged party." Rizzo, 539 F.2d at 463 (citing United States v. United Mine Workers, 330 U.S. 258, 304 (1947)) (internal citations omitted)). In this case, damages to compensate a wrongful party is not the issue. The issue is to obtain compliance with a previously issued court order. Given the size of the Trust, the money it generates, and the likelihood that Eulich will seek to avoid compliance with the enforcement order (based on his history of avoiding the production of the requested documents), the court determines that $1500 a day does not provide enough incentive to ensure compliance with its enforcement order. Accordingly, the court sustains the Government's objection to the magistrate judge's recommendation that the court sanction Eulich $1500 a day until he complies with the enforcement order.

While the court believes that the amount of the fine should be substantially increased, it does not believe that it should be increased to $14,000 per day as suggested by the Government. To obtain compliance with its enforcement order, the court imposes a fine of $5,000 per day for the first 30 days from the entry of this order. If Eulich has not complied by the 31st day, the fine is hereby increased to $10,000 per day. In setting the fine amount, the court notes that the interest rate on a one-year United States Treasury Note at the end of July 2004 was 2.10%. Thus, if the Trust earned at least this percentage in interest, it would earn approximately $4,300 per day on $75,000,000 or $5,800 on $100,000,000. Doubling that interest rate, the Trust would earn approximately $8,600 per day on $75,000,000 or $11,500 per day on $100,000,000. Based on its experience and its knowledge on how investments are handled, the court seriously doubts that the Trust has a return of less than 4.2% annually. The court, however, believes that a fine of $5,000 per day, with a 100% increase if compliance is not obtained within 30 days, is sufficient to get Eulich's attention and obtain his compliance.

IV. Conclusion

Having reviewed the pleadings, file and record in this case, the findings of the magistrate judge, and the objections by the parties, the court accepts in part and rejects in part the findings and recommendation of the magistrate judge. For the reasons previously stated, the court determines that clear and convincing evidence establishes that John F. Eulich failed to comply with the court's Order of Enforcement dated September 17, 2002, and did not make all reasonable efforts to comply with it. Accordingly, court hereby holds John F. Eulich in civil contempt of court and, to obtain compliance with its enforcement order the court imposes a civil fine in the amount of $5,000 per day for the first 30 days from the entry date of this order. If John F. Eulich has not complied by the 31st day, the fine is hereby increased to $10,000 per day until he produces, or causes to be produced, the documents of the Mallion Trust Fund No. 16 to IRS representative(s), or the court orders otherwise. If by the 45th day after entry of this order, Eulich has not complied with the enforcement order, the attorney for the Government shall notify the court of his noncompliance. If the court receives such notice, it will set the matter for a hearing to determine whether Eulich is in compliance and, if he is not, whether the daily fine should be increased or whether Eulich should be incarcerated to obtain compliance with the enforcement order.

It is so ordered this 18th day of August, 2004.

FOOTNOTES

\ 1 \ The docket sheet reflects that the Government's Opposed Emergency Motion in Limine to Exclude Testimony of Petitioner's Expert Witness, Bruce Zagaris, filed February 26, 2004, is outstanding. As the hearing has already been held, the court denies as moot United States' Opposed Emergency Motion in Limine to Exclude Testimony of Petitioner's Expert Witness, Bruce Zagaris.

\ 2 \ Petitioner John F. Eulich ("Eulich" or "Petitioner") did not file a response to the Government's objections.

\ 3 \ Eulich also had the opportunity to demonstrate a present inability to produce the requested documents at the contempt hearing. To the extent that the magistrate judge holds that res judicata does not preclude Eulich from demonstrating that he does not presently have control of the requested documents, the Government has no objection.

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