United States of America v. Lui, No. 3:2016cv00969 - Document 118 (N.D. Cal. 2018)

Court Description: ORDER DENYING MOTIONS FOR CONTEMPT AND SUMMARY JUDGMENT by Judge Jon S. Tigar denying 104 Motion for Contempt; denying 109 Motion for Summary Judgment. (wsn, COURT STAFF) (Filed on 4/18/2018)
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United States of America v. Lui Doc. 118 1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 UNITED STATES OF AMERICA, Plaintiff, 8 v. 9 10 LAWRENCE Y. LUI, Defendant. 11 United States District Court Northern District of California Case No. 16-cv-00969-JST ORDER DENYING MOTIONS FOR CONTEMPT AND SUMMARY JUDGMENT Re: ECF Nos. 104, 109 12 Before the Court are Plaintiff’s Motion for Contempt and Defendant’s Motion for 13 14 Summary Judgment. ECF Nos. 104, 109. For the reasons set forth below, the motions are denied. 15 I. 16 BACKGROUND The Petition arises from an Internal Revenue Service (“IRS”) investigation into the tax 17 liabilities of Lawrence Y. Lui (“Lui”) and Gorretti L. Lui for the years of 2005 to 2012. ECF No. 18 1 at ¶ 3. On July 8, 2014, Revenue Agent Meiling Yang, a former Revenue Agent, served 19 Petitioner with a summons related to the alleged tax liabilities. Id. ¶ 7. Agent Yang interviewed 20 Lui pursuant to the summons on August 4, 2014. Id. ¶¶ 9-10. Lui refused to provide testimony, 21 citing his Fifth Amendment privilege against self-incrimination, as well as other privileges. Id. 22 ¶ 10. On July 29, 2015, Agent Lee served Lui with another summons for documents related to the 23 alleged tax liabilities. Id. ¶ 11. The Government sought to compel the production of documents 24 related to Wealth Grand Limited, a Hong Kong company (“WG”), Netfinity Assets Corporation, a 25 British Virgin Islands company (“Netfinity”), and Jatur Sdn. Bhd., a Malaysian company 26 (“Jatur”). ECF No. 1-3 at 7. 27 Agent Lee interviewed Lui pursuant to the second summons on August 28, 2015. ECF No. 28 1 ¶ 14. Lui provided some responsive documents, but did not provide all responsive documents or Dockets.Justia.com 1 provide testimony. Id. Seeking a court order compelling Lui’s cooperation with the summons, the Government 2 filed a petition on behalf of the IRS on February 26, 2016. ECF No. 1. On March 15, 2016, this 4 Court found that the Government had established a prima facie case and ordered Lui to show 5 cause as to why he should not be compelled to produce the requested documents and testimony. 6 ECF No. 6. The parties subsequently submitted briefing. ECF Nos. 21-1, 33, 43, 47.1 The 7 Government also moved to quash Lui’s requests for admissions and documents. ECF Nos. 32, 38, 8 45, 51, 61. Lui moved to dismiss the record summons portion of the Government’s complaint. 9 ECF Nos. 59, 61, 62. The Court held a hearing on the order to show cause, as well as the other 10 motions as they related to the substance of the order to show cause on December 15, 2016. The 11 United States District Court Northern District of California 3 Court ultimately ordered re-briefing on the order to show cause. ECF No. 73. Lui retained new 12 counsel, ECF Nos. 75, 80, and submitted an amended memorandum of points and authorities 13 opposing the Governments’ summonses. ECF No. 82. The Government filed a new reply. ECF 14 No. 84. Lui filed a sur-reply. ECF No. 88. In its July 31, 2017 order, the Court concluded that Lui had sufficiently demonstrated that 15 16 he did not possess the documents directly related to the Netfinity or WG assets, but that he had not 17 demonstrated that he had no documents related to the transfer of those assets and ordered him to 18 turn over any documents regarding the transfer, or to submit a declaration explaining that no such 19 documents exist. ECF No. 98 at 7-8. Lui filed a declaration that explained, under penalty of 20 perjury, that he did not possess or control any documents relating to the transfer on August 11, 21 2017. ECF No. 99. As to the testimonial summons, the Court concluded that Lui properly 22 invoked his Fifth Amendment privilege and could not be compelled to answer questions regarding 23 his interests in foreign accounts or the ownership and reporting of foreign entities, and ordered Lui 24 to answer only eleven questions—five general background questions identified in the parties’ joint 25 brief at ECF No. 94 at 3, the question of “who keeps of the books and records of Netfinity Asset 26 27 28 Lui originally moved to strike the Government’s reply to his sur-reply on the grounds that it was untimely filed, and the Government responded. ECF Nos. 52, 55, 57. Lui then withdrew his motion to strike. ECF Nos. 89, 90. 2 1 1 Corporation,” and five specific questions regarding his lack of possession or control of the 2 summoned documents as of the date of the summons, ECF No. 98 at 9-11. The Court also 3 rejected Lui’s various challenges to the validity of the summons. Id. at 11-13. Finally, the Court 4 granted the Government’s motions to quash Lui’s affirmative discovery against the Government, 5 and denied Lui’s motion to dismiss. Id. at 15. 6 On October 11, 2017, the Court held a case management conference, at which the 7 Government asked the Court whether it could ask follow up questions to the eleven questions in 8 the July 31, 2017 order. ECF No. 103. The Court instructed the Government to comply with the 9 Court’s July 31, 2017 order. On October 19, 2017 the Government conducted a summons interview. Three IRS agents 11 United States District Court Northern District of California 10 asked Lui questions while a U.S. Attorney and a lawyer representing Mr. Lui were present. ECF 12 No. 104-1. At this interview, Lui answered the eleven questions that the Court ordered him to 13 answer. He based his answers in part on written notes, which he provided a copy of to the 14 Government. Id. Throughout the interview, when IRS agents asked questions other than the 15 eleven questions in the July 31, 2017 order, Lui’s attorney instructed him not to answer. Id. For 16 example, when IRS Agent Lee asked Lui to “describe all positions you have had the for past 20 17 years,” Id. at 14, and “Did you receive any stock distribution of dividend or interest income from 18 Netfinity?,” Id. at 54, Lui’s lawyer directed his client not to answer. Lui did occasionally answer 19 follow-up questions that went beyond the eleven questions identified in the Court’s July 31, 2017 20 order. For example, in response to a line of questioning from IRS Agent Chenoweth, Lui provided 21 information concerning which documents he reviewed to prepare his answers to each of the eleven 22 questions. Id. at 36-40. Lui also answered questions regarding which lawyers helped him prepare 23 for the interview, and over what time period. Id. 24 The Government now moves for a finding of contempt, arguing that Lui failed to comply 25 with the Court’s July 31, 2017 order. ECF No. 104 at 6. Specifically, the Government argues that 26 Lui failed to answer questions about the transfer of Netfinity stock to his siblings, and his 27 signatory authority on Netfinity and other bank accounts. Id. The Government seeks an order 28 issuing remedial or coercive measures to ensure Lui’s compliance with the summons and order, 3 1 and directing Lui to pay the Government’s costs and expenses incurred in seeking contempt. Id. 2 Lui opposes the motion for contempt and seeks entry of summary judgment that he is in full 3 compliance with the Court’s July 31, 2017 order. ECF Nos. 109, 110. The Government opposes 4 Lui’s motion. 5 II. 6 LEGAL STANDARD District courts have “inherent power to enforce compliance with their lawful orders through civil contempt.” Cal. Dep’t of Social Servs. v. Leavitt, 523 F.3d 1025, 1033 (9th Cir. 8 2008) (citation and quotation marks omitted). “A person who fails to comply with an order 9 enforcing an IRS summons may be held in contempt.” United States v. Bright, No. 07-cv-00311, 10 2008 WL 3876111, at *3 (D. Haw. Aug. 20, 2008) aff’d as modified, 596 F.3d 683 (9th Cir. 2010) 11 United States District Court Northern District of California 7 (citing United States v. Rylander, 460 U.S. 752, 753 (1983)). 12 In moving for an order finding Defendant in contempt, the Government bears “the burden 13 to show (1) that [Defendant] violated [a] court order, (2) beyond substantial compliance, (3) not 14 based on a good faith and reasonable interpretation of the order, (4) by clear and convincing 15 evidence.” United States v. Bright, 596 F.3d 683, 694 (9th Cir. 2010) (internal quotation marks 16 omitted). The Government must make those showings by clear and convincing evidence. F.T.C. 17 v. Affordable Media, 179 F.3d 1228, 1239 (9th Cir. 1999). “The burden then shifts to the 18 contemnor[] to demonstrate why [he was] unable to comply.” Id. (internal quotation marks 19 omitted). It is a “long-standing rule,” however, “that a contempt proceeding does not open to 20 reconsideration the legal or factual basis of the order alleged to have been disobeyed and thus 21 become a retrial of the original controversy.” United States v. Ayres, 166 F.3d 991, 995 (9th Cir. 22 1999) (citation and internal quotation marks omitted). Accordingly, a contemnor may not 23 “challenge[] . . . the validity of the summons and the enforcement order” during contempt 24 proceedings. Id.; Bright, 596 F.3d at 694 (“When defending against a finding of contempt after an 25 adversary enforcement proceeding, a taxpayer cannot relitigate the Fifth Amendment privilege or 26 lack of custody or control.”) (citation omitted). 27 28 The alleged contemnor is entitled to “reasonable notice of the specific charges and [the] opportunity to be heard in his own behalf.” Taylor v. Hayes, 418 U.S. 488, 499 (1974). Notice of 4 1 the contempt charges must be “explicit.” Little v. Kern Cty. Superior Court, 294 F.3d 1075, 1081 2 (9th Cir. 2002). “Civil contempt is characterized by the court’s desire to compel obedience to a court order 3 4 or to compensate the contemnor’s adversary for the injuries which result from the 5 noncompliance.” Bright, 596 F.3d at 695–96 (internal quotation marks omitted). “Given the 6 remedial purpose of the sanction, a finding of contempt must be accompanied by conditions by 7 which contempt may be purged, spelled out in either the original order or the contempt order. 8 Moreover, although the district court generally must impose the minimum sanction necessary to 9 secure compliance, the district court retains discretion to establish appropriate sanctions.” Id. (internal quotation marks at citations omitted). 11 United States District Court Northern District of California 10 III. 12 13 DISCUSSION The Court concludes that Lui complied with its July 31, 2017 order. The Court’s order instructed Lui to answer eleven specific questions: 14 (1) When did you become a U.S. citizen? 15 (2) Are you a citizen of any other country? 16 (3) Did you take any accounting classes in college? 17 (4) Did you take any accounting or tax classes in graduate school? 18 (5) Do you have any education in accounting or tax matters? 19 (6) Who keeps the books and records of Netfinity Asset Corporation? 20 (7) Did you possess any summonsed documents as of July 29, 2015? 21 (8) Who possessed the Netfinity documents on July 29, 2015? 22 (9) Where do the individuals that possessed the documents on July 29, 2015 reside? 23 (10) How do you know that your siblings possessed or controlled the documents on July 24 29, 2015? 25 (11) What documents do you possess that evidence your siblings’ possession or control of 26 the Netfinity documents? 27 ECF Nos. 94 at 3, 98 at 9-10. The Court’s order made clear that any further summons interview 28 was limited to these questions. The Court held that Lui had properly invoked his Fifth 5 1 Amendment privilege as to his interests in foreign accounts, and his ownership and reporting of 2 foreign entities, and could not be compelled to answer questions regarding those subjects. ECF 3 No. 98 at 9-11. 4 The transcript of the October 19, 2017 interview shows that Lui answered these eleven 5 questions. See, e.g., ECF No. 104-1 at 13-16 (answering questions 1-5, 7-11); Id. at 34 6 (answering question 6). For example, in response to question six, Lui answered “I believe my four 7 siblings controlled them as of today, August 4, 2014 and July 29, 2015.” ECF No. 104-1 at 61. 8 And in response to question eleven, Lui described eight specific documents that showed that his 9 siblings controlled the Netfinity documents. Id. at 62. 10 The Government argues that Lui failed to comply with the Court’s July 31, 2017 order United States District Court Northern District of California 11 because he “refused to answer follow-up questions about who possessed the summonsed Netfinity 12 documents and how he transferred those documents.” ECF No. 104 at 6. Specifically, according 13 to the Government, “Lui refused to answer questions about the transfer of Netfinity stock to his 14 siblings,” and refused to “testify concerning his signatory authority on WG and Netfinity bank 15 accounts.” Id. The Court did not order Lui to answer those questions, and he cannot be held in 16 contempt for not answering them. ECF Nos. 94 at 3, 98 at 9-10. 17 The Government also takes issue with Lui’s use of notes at the summons interview. ECF 18 No. 104 at 6. The Government cites no authority, and the Court is aware of none, holding that a 19 witness may not use materials to refresh his recollection during a summons interview. Perhaps 20 Lui was obligated to produce his notes to the IRS, Fed. R. Evid. 612, but he did that. In any event, 21 Lui’s use of notes did not convert his percipient witness testimony into “hearsay,” as the 22 Government complains. ECF No. 104 at 7. 23 Because the Government has not shown by clear and convincing evidence that Lui failed to 24 comply with the order, it concludes that Lui should not be held in contempt, and need not reach 25 the remaining steps of the contempt analysis. Bright, 596 F.3d at 694; Affordable Media, 179 26 F.3d at 1239. The Government’s contempt motion is denied. 27 28 As to Lui’s Motion for Summary Judgment, the Court is not persuaded that that form of relief is available on the facts and procedural posture of this case. Lui’s motion is also denied. 6 CONCLUSION 1 2 For the foregoing reasons, the Court denies the Government’s Motion for Contempt and 3 Lui’s Motion for Summary Judgment. 4 IT IS SO ORDERED. 5 6 7 Dated: April 17, 2018 ______________________________________ JON S. TIGAR United States District Judge 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7