Opinion ID: 77997
Heading Depth: 2
Heading Rank: 2

Heading: Payments By The Five

Text: Judge Couvillion found that, in the early 1970s, Prudential was involved in building the Embarcadero Hotel in San Francisco. Lisle and Ballard were charged with finding a company to manage the hotel. Two companies, Del Webb and Intercontinental Company (Intercontinental), were interested in the management contract. While Pritzker also was interested in the contract, Lisle initially would not accept a bid from Hyatt. However, J.D. Weaver, a high-level employee of a company that worked with Prudential in developing the Houston Hyatt Hotel, convinced Lisle to accept a bid from Hyatt. On the day in which the three management companies were to enter their bids, Intercontinental did not appear, and Del Webb's executive refused to enter a bid, stating that he had already been promised the contract but refusing further elaboration. Accordingly, as Hyatt had entered the only bid, it was awarded the hotel management contract. Thereafter, Hyatt entered into an agreement with Weaver whereby Hyatt paid Weaver's corporation, KWJ Corporation, 10% of its fees from managing the Embarcadero Hotel. Sometime after 1972, Pritzker informed Ballard that Hyatt was paying Weaver this finder's fee. Ballard informed Pritzker that if Hyatt could afford to pay a finder's fee, Prudential likely would reduce its payments under any future hotel management contracts. Pritzker assured Ballard that the finder's fee to Weaver was a unique occurrence. In 1973, Pritzker also informed Kanter of the agreement, asking him to review its terms. Sometime before March of 1976, Kanter and Weaver agreed that Weaver would transfer to IRA an option to purchase all of KWJ Corporation's shares, and the attendant right to the 10% finder's fee, in exchange for $150,000 and Weaver's continued right to receive 30% of the Hyatt payments. At the time, KWJ Corporation also had $149,000 in accumulated assets. Approximately three years later, in 1979, IRA exercised its option. In 1983, KWJ Corporation was liquidated and IRA's subsidiaries, TMT, Carlco, and BWK, received its assets. These subsidiaries formed a partnership, KWJ Company, to which they contributed the assets. TMT and Carlco each had a 45% interest in KWJ Company, and BWK had a 10% interest. In finding that the Hyatt transaction was not part of a kickback scheme, Judge Couvillion reasoned that Hyatt's payments to Weaver could not have been kickbacks to Ballard and Lisle for allowing, and accepting, Hyatt's bid because Kanter, Ballard, and Lisle did not know of the payments until months after the Hyatt/Weaver fee-sharing agreement was made. Moreover, Ballard's displeasure upon learning of the payments, and Pritzker's assurance that he would not make similar arrangements in the future, dispel[led] the notion that there was collusion between the parties. Judge Haines stated that Judge Couvillion's account of the transaction was incomplete and added the following. At trial, Ballard denied ever meeting Weaver. Pritzker did not inform any other Hyatt executives, save his two sons, of his fee-sharing agreement with Weaver. Regarding the negotiation of IRA's purchase of KWJ Corporation, Kanter testified that Weaver agreed to sell for the low amount of $150,00 because he needed the money. However, Weaver did not receive any money from the sale until four years later, in the mid-1980s. Once the sale was complete, Weaver and Kanter did not inform Hyatt of the change in ownership. Rather, Weaver simply forwarded future Hyatt payments to Kanter, and Kanter returned 30% of the fee amount to Weaver. Along with one of the checks that Weaver forwarded to Kanter, he sent a letter asking Kanter to please deposit and issue appropriate checks to the participants. Again, when KWJ Corporation was liquidated and KWJ Company formed, no one informed Hyatt of the change. Weaver continued to forward the checks to Kanter, and Kanter forwarded the money to TMT, Carlco, and BWK. On one occasion, Kanter paid TMT's and Carlco's portions in checks made out to Ballard and Lisle. Later ledger entries indicated that these checks were voided. In concluding that the Hyatt transaction was indicative of a kickback scheme, Judge Haines reasoned that Judge Couvillion clearly erred in finding that the record did not demonstrate how Weaver persuaded Lisle to allow a Hyatt bid. Specifically, Judge Haines infer[red] that Lisle allowed the bid, and that he and Ballard ultimately accepted the bid, because Weaver informed them of Pritzker's promise to share 10% of Hyatt's management fees and promised them a portion of these fees if they awarded Hyatt the contract. Later, Weaver also promised Kanter a portion of the fees if he made arrangements to hide the kickback payments. To do so, Kanter devised a plan whereby Weaver would sell to IRA KWJ Corporation and the right to a portion of the Hyatt payments for a nominal fee and IRA would then liquidate KWJ Corporation and form KWJ Company, with Ballard's TMT, Lisle's Carlco, and Kanter's BWK as partners. Judge Haines stated that Kanter's issuance of checks to Ballard and Lisle demonstrated that the Hyatt payments were earned by Ballard and Lisle personally. Judge Haines also stated that Weaver's letter referring to the participants demonstrated that IRA was not the sole recipient of the Hyatt payments. Judge Haines further reasoned that Judge Couvillion erred in crediting Ballard's and Kanter's testimony. Specifically, Judge Haines stated that Ballard's testimony that he was displeased upon learning of the fee-sharing agreement was not credible, as it was self-serving on its face and uncorroborated by other witnesses and as Pritzker wished to keep the payments secret and would not have volunteered their existence to Ballard. Judge Haines also stated that Ballard's indignation [that Pritzker would share his fees] was feigned. Likewise, Judge Haines pointed out that Ballard's denial of meeting Weaver cast doubt on his credibility, as even Judge Couvillion acknowledged that Ballard and Weaver met during the Houston Hyatt Hotel project. Regarding Kanter, Judge Haines stated that the fact that Weaver received no money from his sale of KWJ Corporation for four years cast serious doubt on Kanter's testimony that Weaver sold KWJ Corporation because he needed money. Contrary to Judge Haines's account of what led Lisle to allow Hyatt's bid, Ballard testified at trial that, although Lisle initially did not want to accept a Hyatt bid because he had heard that Pritzker was planning to build another hotel in the San Francisco area, he changed his mind when Weaver suggested that Pritzker might not build this other competing hotel if he could bid on and potentially win the Embarcadero Hotel contract. Also, the portion of the record cited by Judge Haines to illustrate Ballard's lack of credibility with regard to knowing Weaver shows that when an attorney asked Ballard if he knew whether Kanter and Weaver were acquaintances, Ballard responded in the negative. As an aside, Ballard then asked the attorney if he had ever met Weaver, to which the questioning attorney replied No. Ballard did not deny meeting Weaver, it was the attorney making this denial. Furthermore, contrary to Judge Haines's account of Kanter's testimony on Weaver's sale of KWJ Corporation, Kanter testified that Weaver wanted to sell KWJ Corporation because he needed money and was unhappy with the outcome of a recent dispute with Pritzker regarding the fee-sharing agreement. Judge Couvillion found this testimony credible.
Judge Couvillion found the following. At some point in 1978, Bruce Frey formed a partnership, BJF Development, to convert apartment complexes into condominiums for sale to individual purchasers. Frey expected to receive development and management fees from these conversion projects. He met with Kanter for tax advice on the projects. In the course of their meeting, Kanter indicated that Kanter and/or entities associated with Kanter could help raise the capital necessary for Frey's projects. In return, Kanter expected a share of any development and management fees earned. Frey became involved with Prudential in 1979, when he approached an executive in Prudential's Miami regional office and offered to purchase for $20 million an apartment complex owned by a pension fund that Prudential managed. As Prudential already had considered selling the complex and $20 million was more than its appraised market value, the regional executive consulted Ballard. Ballard advised selling, noting especially that refusing the offer might violate Prudential's fiduciary duty to the pension fund. Having purchased the complex, Frey set about converting it. Kanter arranged for several entities to invest in the project, including Zeus Ventures, Incorporated (Zeus), a subsidiary of IRA. Given the success of this project, the regional executive asked Frey to work with Prudential in converting several other apartment complexes owned by Prudential. Kanter again arranged for several entities to invest in these projects, including Zeus. In 1981, Frey and Kanter's fee-sharing agreement was formalized in a written agreement between BJF Development and Zeus. Per the agreement, Frey would pay Zeus 5% of its development fees and 20% of its profits from Prudential projects. In keeping with this agreement, Frey's partnership made payments to Zeus for several of its projects. In concluding that the payments from Frey to Zeus were not part of a kickback scheme, Judge Couvillion found that Prudential initially agreed to do business with Frey because he offered more than the market value of the complex in question. Judge Couvillion further found that any future dealings between Frey and Prudential were the doing of an un-involved Prudential regional executive. It was a sound business arrangement for both parties. Judge Haines stated that Judge Couvillion's findings were incomplete and added that Frey paid Kanter's share of the fees to Zeus only because Kanter instructed him to do so. On one occasion, Frey made a check payable to Kanter, but later voided the check and reissued it to Zeus. In concluding that the Frey payments were evidence of a kickback scheme, Judge Haines reasoned that Judge Couvillion clearly erred in finding that Kanter did not personally earn the Frey payments. Specifically, Judge Haines stated that Judge Couvillion's finding that Kanter told Frey that Kanter and/or entities associated with him could help raise the necessary capital was manifestly unreasonable. Judge Haines stated that Frey was relying solely on Kanter to help raise capital and that, aside from the investments made by Zeus, no one acting on behalf of a Kanter-related entity assisted Frey in any manner. It was only on Kanter's instructions that Frey made the payments to Kanter-related entities. Judge Haines further stated that the fact that Frey made a check payable to Kanter, rather than Zeus, indicated that it was Kanter who earned the money. Judge Haines also reasoned that, while there was no direct documentary evidence that Kanter agreed to share this money with Ballard and Lisle, he could infer from the circumstances that Kanter told Ballard and Lisle that if they could influence Prudential to do business with Frey, he would share with them a portion of the fees paid by Frey. The circumstances that Judge Haines pointed to were Ballard's role in approving the sale of the pension-fund-owned apartment complex and Prudential's extensive future dealings with Frey. Such a conclusion simply ignores the facts that were found by Judge Couvillion and supported in the record that the Frey deals with Prudential originated with a Prudential executive located in Miami, Florida, were sound business deals for all concerned, and all monies paid were fully reported on the appropriate tax returns.
Judge Couvillion found the following. William Schaffel was a mortgage broker. In 1979, Kanter invited Schaffel, Ballard, and Lisle to dinner. He indicated that he had a business opportunity to discuss with Schaffel. Schaffel, eager for potential business and to meet two senior Prudential real estate executives, accepted the invitation. At the dinner, the foursome did not discuss Prudential business. Rather, Kanter told Schaffel of a proposed casino in need of financing. Kanter told Schaffel that he and/or another entity associated with him could help Schaffel obtain the contract to arrange the casino's financing in return for 50% of Schaffel's earned fees. Sometime after the dinner meeting, in a letter addressed to IRA, Schaffel agreed to pay IRA 50% of his fees earned from any business deals that IRA or its associates were instrumental in setting up. The casino project ultimately fell through. In the year that followed, however, Schaffel was able to arrange financing with Prudential for several of his clients. Citing the aforementioned letter, Schaffel shared with IRA a portion of his broker's fees from each of these projects. Some of the projects occurred after Ballard and Lisle quit working at Prudential. Later, after Lisle left Prudential and began working at Travelers, Schaffel had substantial business dealings with Travelers. Initially, Schaffel did not share with Kanter his fees earned from these projects, taking the position that their fee-sharing agreement lapsed when Ballard and Lisle left Prudential. Kanter refuted this position and, in a letter to Schaffel, stated that he felt the agreement extended to Travelers projects because of the continuity of the very personnel to whom [Schaffel was] first introduced. Ultimately, Schaffel and Kanter agreed that the fee-sharing arrangement extended to Travelers projects. In concluding that the Schaffel payments were not kickbacks to Ballard and Lisle, Judge Couvillion found that the payments to IRA were simply Schaffel's way of repaying Kanter for having introduced him to Ballard and Lisle. Judge Couvillion acknowledged that Schaffel's letter to IRA indicated that the payments were conditioned upon IRA associates helping to arrange deals and that Ballard and Lisle both knew that Schaffel and Kanter had a fee-sharing agreement, but found that this evidence was insufficient to prove that Ballard and Lisle directed financing to Schaffel's clients in return for money. Judge Haines stated that Judge Couvillion's findings were incomplete and added the following. Lisle testified that he understood that Kanter arranged the dinner in part to see whether Schaffel might be able to do business with Prudential. When Schaffel agreed to split with Kanter a percentage of his earned fees, Schaffel insisted that Kanter's portion be paid to an individual or entity with a real estate broker's license. Schaffel was concerned with the legality of sharing broker's fees with a non-broker. Shortly after the dinner meeting, a representative of IBM, Incorporated (IBM), approached Schaffel about selling IBM's headquarters to Prudential. Schaffel arranged a meeting between himself, the representative, and Ballard. After this meeting, Ballard referred the matter to a Prudential field office which did complete the purchase. Schaffel split part of his fee for arranging the sale with Kanter. Judge Haines concluded that the evidence showed that Kanter agreed with Ballard and Lisle to share any fees he might receive from Schaffel if Ballard and Lisle influenced Prudential to direct contracts to Schaffel's clients. Judge Haines reasoned that Judge Couvillion clearly erred in thinking that IRA, rather than Kanter, earned the payments. Specifically, Judge Haines stated that Schaffel expected Kanter alone to help him obtain contracts and that no one at IRA helped arrange such contracts. Judge Haines stated that the only reason that the payments were made to IRA was Schaffel's fear that directly paying Kanter, a nonbroker, was illegal. Judge Haines likewise reasoned that Judge Couvillion clearly erred in finding that there was insufficient evidence to show that Kanter agreed to share the fees with Ballard and Lisle in exchange for their influence. While Judge Haines admitted that there was no direct evidence of this, he stated that a number of facts, namely the joint dinner meeting, Ballard's immediate role in Prudential's purchase of IBM's headquarters, Ballard's and Lisle's abilities to exert influence at Prudential, and Kanter's position during his dispute with Schaffel that the fee-sharing agreement was inextricably linked to Lisle's assistance, provided compelling circumstantial evidence of a kickback arrangement. Furthermore, although Judge Haines acknowledged that some of Schaffel's projects were initiated after Ballard and Lisle left Prudential, he stated that the inference may fairly be drawn that those projects were an outgrowth of Ballard's and Lisle's earlier decisions to do business with Schaffel, which gave Schaffel a favorable reputation at Prudential. Judge Haines draws inferences from the relationships of Kanter, Ballard, Lisle and Schaffel with no hard facts to support his conclusions. Obviously, Kanter could act on behalf of IRA with or without knowledge on the part of Ballard and Lisle. Credibility was the key factor in the facts found by Judge Couvillion and he alone heard and saw the witnesses. The findings drawn by Judge Couvillion are just as plausible as those of Judge Haines and thus they are not clearly erroneous.
Judge Couvillion found the following. Kenneth Schnitzer was a real estate developer. In the course of his development business, he met Ballard. In 1974, he acquired for $1.3 million a small real estate management company, PMS. He immediately set about expanding PMS's management business. At the time, PMS managed a relatively small number of Prudential's properties. In an effort to increase his Prudential business, Schnitzer approached Ballard and offered to give Prudential a 50% interest in PMS, believing that Prudential would award PMS additional management contracts if it had a stake in PMS's profitability. Ballard's superiors seriously considered, but ultimately rejected, Schnitzer's offer. In the course of Schnitzer's talks with Prudential executives, they told him of their interest in standardizing the operating reports prepared by management companies on properties. Although his proposal had been rejected, Schnitzer applied this knowledge and standardized his operating reports for the Prudential properties he already managed. Thereafter, his business with Prudential increased substantially. In 1977, Kanter told Schnitzer that he and/or IRA could help PMS obtain more management business, possibly with the Pritzker family. In order to obtain Kanter's and IRA's assistance, Schnitzer sold IRA a 47.5% interest in PMS for $150,000. By 1979, however, Schnitzer concluded that Kanter and/or IRA had failed to produce the additional business promised. Accordingly, Schnitzer purchased from IRA the 47.5% interest in PMS for $3.1 million, to be paid over a 10-year period with interest. In concluding that the PMS transactions were not demonstrative of a kickback scheme, Judge Couvillion found that Schnitzer did not need Kanter's, Ballard's, or Lisle's help obtaining Prudential business, as his contracts with Prudential had increased substantially after he standardized his operating reports. Judge Couvillion found that Schnitzer sold a portion of PMS to IRA because he needed help getting business from sources other than Prudential. Judge Haines stated that Judge Couvillion's findings were incomplete and added that Schnitzer conferred with Ballard before selling an interest in PMS to IRA. Judge Haines also noted that, after IRA acquired an interest in PMS, PMS's business with Prudential continued to grow and its gross income increased substantially. In concluding that Judge Couvillion erred in finding that the PMS deal was not part of a kickback scheme, Judge Haines reasoned that Judge Couvillion's finding that PMS contracted for Kanter's and IRA's services was manifestly unreasonable. Specifically, Judge Haines stated that Schnitzer was relying solely on Kanter and that there [was] no credible evidence that anyone other than Kanter brought business to PMS. Judge Haines also reasoned that Kanter, Ballard, and Lisle realized that they could earn an easy profit by acquiring PMS stock and then using Ballard's and Lisle's influence at Prudential to direct Prudential management contracts to PMS. The substantial appreciation between their $150,000 purchase price and $3.1 million sale price represented income to Ballard, Kanter, and Lisle, routed through IRA. While Judge Haines acknowledged that there was no direct evidence of such an arrangement, he argued that the surrounding circumstances strongly support[ed] an inference of such. Specifically, Judge Haines pointed to the facts that Ballard and Lisle knew that Schnitzer was so anxious to expand PMS business that he was willing to part with nearly half of PMS's stock for nothing, Schnitzer conferred with Ballard before selling part of PMS to IRA, and Ballard and Lisle were in positions to increase PMS' portfolio of Prudential contracts. In keeping with Judge Couvillion's finding that Schnitzer did not need Kanter's assistance in bringing in more Prudential business, Schnitzer testified at trial that he did not have any interest in Kanter bringing in more Prudential business, as PMS already had that relationship. Rather, Schnitzer hoped that Kanter could bring in Hyatt business. Schnitzer was willing to sell an interest in PMS for something north of nothing to bring in this extra business. Again, credibility is the key factor. Judge Couvillion heard Schnitzer's testimony, evaluated it and found accordingly.
Judge Couvillion found the following. John Eulich was a real estate developer and business acquaintance of Ballard, Lisle, and Kanter. In 1975, he started Motor Hotels Management, Incorporated (MHM). MHM began by operating small hotels, but Eulich also wished to acquire management contracts for larger hotels. He believed that Kanter could be of service in this endeavor because of his extensive contacts in the hotel industry, namely with the Pritzker family. John Connolly was employed by a separate hotel management company as the on-site manager of Prudential's Gateway Hilton Hotel (Gateway). Connolly had been instrumental in revamping the once-seedy Gateway. In 1981, he informed Prudential that he was considering leaving his position at the Gateway. Not wishing to lose Connolly, Prudential terminated its contract with Connolly's employer and aimed to award the management contract to Connolly himself. Prudential advised Connolly, however, that he establish a hotel management company of his own. Accordingly, Connolly established Gateway Hotel Management Corporation (GHM). Prudential awarded GHM the management contracts for the Gateway and Midland Hilton Hotel (Midland). Eulich and Kanter came to realize that Connolly could use assistance running GHM, as it would be uneconomical for Connolly to employ the necessary full-time financial manager and accounting staff when he managed only two hotels. They also realized that Eulich's MHM could provide the needed services. Therefore, Eulich, Kanter, and Connolly formed the Essex Partnership to provide consulting and liaison services to its partners. MHM had a 47.5% interest in the partnership, and IRA had a 26.125% interest. The Holding Company, Incorporated (THC), of which Kanter's family trusts owned substantial stock, had a 21.375% interest. Connolly had a 5% interest. The partnership received income by way of fee-sharing agreements with MHM and GHM, whereby each contributed a certain percentage of the fees earned on its management contracts. These fee-sharing agreements were continually adjusted so that MHM and GHM contributed roughly the same amounts. Also, the total fees that MHM contributed roughly equaled its distributive share of the partnership's income. As planned, employees of MHM provided most of the help Connolly needed to run GHM. MHM was not directly paid for these services. Moreover, while IRA and THC received a combined 47.5% of the partnership's income, they provided no similar assistance to Connolly. However, Eulich considered his participation in the Essex Partnership to be a tool by which MHM might obtain contracts for large hotels through Kanter and gain experience and expertise in operating a large hotel through aiding Connolly. In 1986, Eulich sold MHM to Aircoa, an unrelated company. Despite this change in ownership, MHM remained a participant in the Essex Partnership arrangements until approximately 1990. Judge Couvillion found that the Essex Partnership arrangements were not indicative of a kickback scheme. He found that Eulich and MHM participated in the partnership solely in hopes of receiving Kanter's aid in obtaining contracts for large hotels. He also noted that an unrelated company continued to contribute a percentage of MHM's fees to the Essex Partnership until approximately 1990. Judge Haines stated that Judge Couvillion's account of the facts was incomplete or inaccurate and added the following. Ballard and Lisle were instrumental in Prudential's decision to offer Connolly the Gateway management contract. When Prudential relayed this offer, but conditioned it on Connolly establishing his own management company, Ballard realized that Connolly would need assistance. Accordingly, Ballard introduced Eulich to Connolly as someone who could provide the support services Connolly needed. Thereafter, Eulich, most likely with Kanter's assistance, organized GHM for Connolly. Ballard and Lisle also were instrumental in Prudential's awarding GHM the Midland management contract. At approximately the same time as establishing GHM for Connolly, Eulich and Kanter formed the Essex Partnership. Although Connolly was a partner, he was not involved in its formation and remained largely ignorant of its operations and functions. At trial, he did not know the identity of the partners, believed he was offered a 5% interest in the partnership in exchange for referring to MHM any contracts that GHM could not handle, and did not remember that a portion of GHM's fees were paid to the partnership. In the years that followed, MHM provided most of the services needed to run the Gateway and Midland. Connolly's participation was akin to that of an on-site manager. Connolly even received a salary from the Gateway. Indeed, Eulich considered the Gateway a part of MHM's management portfolio, even though the contract for this hotel technically was awarded to Connolly and GHM. In 1984, IRA transferred to Carlco, TMT, and BWK its 26.125% interest in the Essex Partnership. Carlco and TMT each received an 11.75% interest, and BWK received a 2.6125% interest. In concluding that the aforementioned arrangements were part of a kickback scheme, Judge Haines reasoned that the Essex Partnership was a conduit through which Ballard, Lisle, and Kanter received portions of the management fees paid by Prudential for the Gateway and Midland. Judge Haines explained the following. Ballard and Lisle arranged for Prudential to award Connolly the Gateway and Midland management contracts and for Eulich to set up GHM to make it appear as if Connolly was the owner of a hotel management company. GHM, however, was a sham corporation and Connolly merely a pawn. MHM employees did all the work, which suited Eulich because he wanted the contacts and experience. And while MHM's contribution to the partnership equaled its distributive share and Connolly had only a minor distributive share, Kanter's entities took nearly half of the partnership's income. Finally, Kanter later transferred part of his interest to Ballard's TMT, Lisle's Carlco, and his own BWK, so that Ballard and Lisle could receive part of the fees. Contrary to Judge Haines's account of the matter, Eulich testified at trial that the Essex Partnership was his and Kanter's idea. Kanter wanted to get involved with hotel management, and Eulich wanted to develop a relationship with Kanter because Kanter knew the owners of several major hotels. They invited Connolly to become involved because he had the expertise to manage big hotels, which MHM lacked. Eulich believed that Kanter helped arrange for the Essex Partnership partners to get the Gateway Hotel management contract. Eulich described the Gateway Hotel as the biggest hotel with which Essex Partnership was involved. Such testimony, if believed, is certainly plausible. Again, Judge Couvillion is the one who saw and heard the witness and found the testimony credible.
Judge Couvillion generally reasoned that the Commissioner had not proved the existence of a kickback scheme because none of the witnesses at trial stated that such a scheme existed and various witnesses associated with the Five expressly denied paying kickbacks. Moreover, Ballard and Kanter had testified that they were not engaged in a kickback scheme. Judge Haines concluded that Judge Couvillion's reliance on the Five's denials of paying kickbacks to Ballard, Lisle, and Kanter was misplaced. Judge Haines reasoned that the Commissioner had argued that Ballard, Lisle, and Kanter did not disclose their scheme to the Five, such that their denials of its existence was not dispositive of the matter. Judge Haines stated, therefore, that Judge Couvillion clearly erred by giving too much weight to these denials in reaching his ultimate conclusion. How much weight was to be given the testimony of witnesses, however, was not up to Judge Haines. That was the function of Judge Couvillion.