Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-04264/USCOURTS-cand-3_04-cv-04264-1/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 26:7401 IRS: Tax Liability

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

BELFORD STRATEGIC INVESTMENT

FUND, LLC and PRESIDIO GROWTH LLC

(Tax Matters Partner), et al,

Petitioners,

v

UNITED STATES OF AMERICA,

Respondent. /

No C-04-4309 VRW

Related to Case Nos C-04-

4264, C-04-4310, C-04-4398,

C-04-4399, C-04-4964, C-05-

1123, C-05-1996, C-05-2835,

C-05-3887

ORDER

Petitioner Presidio Growth seeks readjustment of

partnership items under § 6226 of the Internal Revenue Code of 1986

(IRC) (26 USC § 6226). On August 10, 2005, petitioner Presidio

Growth LLC (“Presidio”) moved for partial summary judgment on the

following five issues:

1) Whether Cherry Tree LLC (“Cherry Tree”), which generated

large paper tax losses in the transactions at issue, was the

“first actual borrower” of a premium loan;

2) Whether the premium, interest obligation, prepayment, and

breakage fee associated with the premium loan should be

considered a liability;

3) Whether a note received by Cherry Tree can be integrated

with an interest rate swap executed by Belford Strategic

Investment Fund (“Belford”);

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4) Whether the partnership and premium loan at issue here were

part of a sham transaction; and

5) Whether the anti-abuse regulation § 1.701-2 can be employed

to unwind this transaction.

Pet Mot SJ (Doc #24) at 1; Gov’t 56(f)/Stay Mot (Doc #81-1 of 04-

4264) at 4.

On September 2, 2005, the government moved in a related

case, No C-04-4264, to stay all proceedings until the resolution of

a criminal tax fraud trial in New York involving the principals of

Presidio, John Larson and Robert Pfaff (“Larson and Pfaff”). Doc

#74-1 in 04-4264. The court denied without prejudice the

government’s motion to stay, subject to the government’s renewal

upon filing of an FRCP 56(f) affidavit. Doc #78 in 04-4264.

On October 13, 2005, the government moved for relief

under FRCP 56(f) and renewed its motion to stay the proceedings in

all related cases. Doc #81-1 in 04-4264. Presidio opposed both

motions on October 20, 2005, and the government filed a reply brief

on October 27, 2005. Doc #31; Doc #87-1 of 04-4264. For the

reasons stated below, the court GRANTS the government’s motion for

a stay on the terms hereafter described and DENIES AS MOOT the

government’s motion under FRCP 56(f).

I

“[A] court may decide in its discretion to stay civil

proceedings * * * when the interests of justice seem [ ] to require

such action.” Keating v Office of Thrift Supervision, 45 F3d 322,

324 (9th Cir 1995) (omissions in original) (quoting SEC v Dresser

Industries, Inc, 628 F2d 1368, 1375 (DC Cir 1980)) (internal

quotation marks omitted). When determining “whether to stay civil

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proceedings in the face of parallel criminal proceedings,” the

Ninth Circuit has held that the court should consider “the extent

to which the defendant’s fifth amendment rights are implicated.” 

Federal Savings & Loan Insurance Corp v Molinaro, 889 F2d 899, 902

(9th Cir 1989). Additionally, the court should consider the

following five factors:

(1) the interest of the plaintiffs in proceeding

expeditiously with this litigation or any particular

aspect of it, and the potential prejudice to plaintiffs

of a delay;

(2) the burden which any particular aspect of the

proceedings may impose on defendants;

(3) the convenience of the court in the management of its

cases, and the efficient use of judicial resources;

(4) the interests of persons not parties to the civil

litigation; and

(5) the interest of the public in the pending civil and

criminal litigation.

Keating, 45 F3d at 324-25.

Keating and Molinaro, of course, arose out of somewhat

notorious events involving savings and loan failures. Petitioners

in both cases claimed prejudice in defending civil actions because

they were simultaneously defending or being investigated on

criminal charges involving the same matters. The court of appeals

rejected both petitioners’ contentions. These holdings have little

direct application in the present context, but the factors

enumerated by the court are instructive. This court looks to those

factors here.

//

//

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A

The prejudice to Presidio of staying the case appears

largely to be monetary. Tax payments have been made under protest

and refunds sought. See, e g, Readj Pet (Doc #1-1). A delay in

these proceedings then largely consists of a delay to petitioners

in receiving monetary relief to which they claim to be entitled.

This first factor does not weigh heavily in favor of

Presidio. As Presidio acknowledges, “what we are dealing with now

is Belford SIF and a motion directed to specific issues; not every

BLIPS transaction ever entered into.” Doc #31 at 8:24-26 (emphasis

in original). In its petition in this case, Presidio requests on

behalf of Belford that it “be refunded $38,000, together with

interest as allowed by law.” Readj Pet at 21:8. Assuming Presidio

won this suit, a stay would delay when it could recoup this money.

Presidio’s potential loss is limited in at least two

ways. First, any refund that Presidio receives would likely come

with interest (to be sure the T-bill rate which may be less than

Presidio could earn, but interest nonetheless). Further, the

relatively small sum at stake here diminishes Presidio’s

opportunity cost. And even considering the total requested refund

in the ten related cases -- $991,577.45 by the court’s calculation

-- the cost to Presidio from receiving a potentially lower interest

rate seems minor when compared to the hundreds of millions of

dollars at stake in the BLIPS transactions in which Presidio

participated.

Second, as will be discussed in more detail below, the

stay that the court issues here lasts only until the firm trial

date of September 11, 2006, set in the parallel criminal

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proceedings. By tying the stay to commencement of the criminal

trial, Presidio faces a potential delay of less than eleven months.

B

The government asserts that it will suffer three types of

harm if this case is not stayed. First, the government claims that

its discovery will be hampered because the prosecutor in the

criminal case is barred from sharing certain evidence with the

government defendant here. Doc #74-1 in 04-4264 at 10. Next, the

government argues that more liberal civil discovery rules will give

petitioners an “unfair peek” at the evidence that will be used in

the criminal prosecution. Id at 14. And finally, the government

asserts that it cannot fully defend itself because several

witnesses will invoke their Fifth Amendment privilege against selfincrimination if required to testify for this civil proceeding. Id

at 17.

The government’s first argument is not persuasive. It

may be true that the prosecutor in New York may not share -- or may

even be precluded from sharing -- certain evidence with the

government lawyers in these civil cases. But that does not justify

staying this case. If the prosecutors and government civil

defendant are somehow barred from collaborating, then the defendant

here will simply have to conduct its own discovery, like every

other civil defendant must do. In other words, the government

defendant does not have a special right to the prosecutor’s

discovery or to the information used by a grand jury. Any

additional discovery obtained through a parallel criminal

proceeding is a windfall, not an entitlement.

The government’s next argument, by itself, has more force

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but also is not completely persuasive. Although the more liberal

civil discovery rules might give the criminal defendants a peek at

the evidence that would be used against them, those rules would

seem to provide the government with the same advantage. In other

words, the government could use civil discovery to preview the

evidence that the criminal defendants will use. Even so, the court

recognizes that the broad scope of civil discovery might affect the

criminal trial’s outcome. And other courts have held that “[i]f a

grand jury indicts a party for conduct that is the subject of a

civil action * * * the court is obligated to prevent that criminal

defendant from ‘using parallel civil proceedings to gain premature

access to evidence and information pertinent to the criminal

case.’” Javier H v Garcia-Botello, 218 FRD 72, 75 (WDNY 2003)

(quoting SEC v Doody, 186 F Supp 2d 379, 381 (SDNY 2002)). As

such, civil discovery might be an unfortunate intrusion on the

parallel criminal proceeding.

Moreover, allowing parties in the criminal trial to

preview evidence via civil discovery may be more troublesome when

combined with another problem highlighted by the government: The

government will not be able to obtain testimony from many relevant

witnesses because they will invoke their Fifth Amendment privilege

against self-incrimination. Because of this privilege, the

prosecutor’s preview of the criminal defendants’ case may be

limited, unlike the criminal defendants’ glimpse at the

prosecutor’s case. And to the extent that the government defendant

in this case depends more heavily on these witnesses than the

petitioners do, the government defendant will receive less

meaningful discovery. Hence, these imbalances suggest that not

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staying this case would prejudice the government in both parallel

proceedings.

As a final note, the court agrees with Presidio that the

government should have tried to depose more relevant witnesses

rather than assuming that they would invoke their Fifth Amendment

rights. Doc #31 at 1:9-10. Nonetheless, the government appears to

have complied with the discovery schedule that was set in a case

management conference on May 25, 2005. Doc #44 of 04-4264. And

the court is sensitive to the government’s concern that taking

additional depositions might have impinged on the parallel criminal

proceeding. Hence, the court does not believe that the government

has been unreasonably dilatory in its discovery efforts.

Accordingly, the court agrees with the government that it

will face substantial prejudice if this case is not stayed. The

second factor, therefore, weighs strongly in the government’s

favor.

C

The third factor requires the court to consider judicial

efficiency and management of the court’s docket. The government

correctly states that the civil and criminal cases involve “the

same transactions, the same witnesses, and similar issues.” Doc

#74-1 of 04-4264 at 24:10-12. Hence, the potential for duplicative

judicial effort cannot be ignored: “[B]y proceeding first with the

criminal prosecution, the Court makes efficient use of judicial

time and resources by insuring that common issues of fact will be

resolved * * *.” Maloney v Gordon, 328 F Supp 2d 508, 513 (D Del

2004) (quoting Javier H, 218 FRD at 75) (internal quotation marks

omitted).

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Additionally, resolution of the criminal case might

greatly simplify or even moot many of the issues in this case. For

example, because of the significant overlap between the criminal

defendants and the petitioners here -- as noted earlier, Larson and

Pfaff are Presidio’s principals -- a criminal conviction might

estop petitioners from pursuing this case. And regardless of who

wins in New York, adjudication of the criminal trial will sharpen

the issues and highlight the strengths and weaknesses of the

parties’ arguments, thus increasing the chances of settlement or

dismissal of the case. Also, dispensing with the criminal case

might make civil discovery more fruitful, because witnesses would

be less likely to invoke their Fifth Amendment privilege against

self-incrimination. The “mere possibility that a substantial

amount of the court's work, if undertaken now, may shortly prove to

have been unnecessary, cautions against undue haste in proceeding

with this civil action.” Golden Quality Ice Cream Co, Inc v

Deerfield Specialty Papers, Inc, 87 FRD 53, 57 (ED Pa 1980). On

balance, however, this factor does not weigh heavily here because

the parallel proceedings are in two different courts. The one

proceeding does not impinge on the other court’s calendar.

D

The fourth factor requires considering the interests of

persons not a party to the civil litigation. The court notes that

several non-party witnesses who were indicted in the criminal trial

might well invoke their Fifth Amendment privilege against selfincrimination if required to testify in this civil proceeding. Doc

#74-1 of 04-4264 at 19. To the extent that this would burden these

witnesses’ constitutional rights or impede discovery, the court

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agrees that this factor supports granting a stay here.

E

The final factor for the court to consider is the

public’s interest in the pending civil and criminal litigation. 

Presidio argues that the public’s interest lies in this court

determining “what [do] these Internal Revenue Code sections

actually mean?” Doc #75 of 04-4264 at 13:24. The government

instead argues that the public’s primary interest is in “effective

law enforcement and effective tax collection.” Doc #74-1 of 04-

4264 at 9:14. Defendant’s argument is, on balance, somewhat more

persuasive: “[A] trial judge should give substantial weight to

[the public interest in law enforcement] in balancing the policy

against the right of a civil litigant to a reasonably prompt

determination of his civil claims or liabilities.” Twenty First

Century Corp v LaBianca, 801 F Supp 1007, 1010 (EDNY 1992) (quoting

Campbell v Eastland, 307 F2d 478, 487 (5th Cir 1962) (Wisdom, J)). 

And the court recognizes that “[t]he public's interest in the

integrity of the criminal case is entitled to precedence over the

civil litigant.” Maloney, 328 F Supp 2d at 513 (quoting Javier H,

218 FRD at 75) (internal quotation marks omitted); see also In re

Ivan F Boesky Securities Litigation, 128 FRD 47 (SDNY 1989). 

Accordingly, the court finds that the public interest is best

served by staying the civil matter so that the criminal case may

proceed unimpeded.

F

In sum, only one factor -- prejudice to the petitioners

if the case is stayed -- weighs slightly in favor of petitioners. 

The other four factors are either inconclusive or support the

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government’s position, with the government burden and public

interest factors having the most weight. On balance, these factors

suggest that the government’s request for a stay should be granted.

II

Accordingly, the court GRANTS the government’s motion for

a stay in this case and all related proceedings and DENIES AS MOOT

the government’s FRCP 56(f) motion. The court also DENIES without

prejudice Presidio’s motion for summary judgment. The stay will

expire on September 11, 2006, at which time Presidio may renew its

motion for summary judgment. Additionally, the parties are

instructed to appear for a case management conference on September

12, 2006, at 9:00 AM, to update the court on the status of this

case and the parallel criminal proceeding.

IT IS SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge

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