Opinion ID: 764372
Heading Depth: 2
Heading Rank: 2

Heading: Weight of the Adverse Inference

Text: 22 Plaintiff contends that the district court weighted the adverse inference too heavily when it determined that Edith LiButti was her father's nominee because the court relied solely upon the inference without having before it other supporting evidence. An adverse inference may be given significant weight because silence when one would be expected to speak is a powerful persuader. See United States ex rel. Bilokumsky v. Tod, 263 U.S. 149, 153-54, 44 S.Ct. 54, 68 L.Ed. 221 (1923). But beyond that, the district court did not rely solely upon the adverse inference to conclude that Ms. LiButti was Robert LiButti's nominee. As directed by us on the previous appeal, see LiButti II, 107 F.3d at 124, the trial court tested the persuasiveness of the adverse inference against other evidence, and having done so, accorded considerable weight to the adverse inference because the record shows that the father made indiscriminate use of Lion Crest's resources and dominated its business dealings, while his daughter appeared merely as its nominal head, see LiButti III, 968 F.Supp. at 75. 23 We had already observed in LiButti II that compelling evidence exists to support drawing an adverse inference inimical to plaintiff's claim of entitlement to Devil His Due. 107 F.3d at 125. Specifically, much evidence supports the conclusion that the daughter was her father's nominee. The district court made findings that the daughter served as her father's financial conduit, and that he effectively controlled Lion Crest as shown by the facts that: 24 (1) Edith asserted that she and Lion Crest were destitute shortly before Devil His Due was purchased; (2) Edith did not know the source of the funds she used to start Lion Crest; (3) Edith did not know the purpose/use of millions of dollars of loans signed in her name; and (4) Edith did not know so much as whether the business was incorporated or not. Moreover, the IRS showed: (1) Lion Crest carried $1,013,572.64 in loans for Robert from 1984-92; (2) Robert was actively involved in the sale and management of the stable's horses; and (3) Robert expended Lion Crest funds for his personal use. 25 LiButti III, 968 F.Supp. at 73. The ruling that Edith LiButti was Robert LiButti's nominee cannot therefore be said to rest solely upon the adverse inference. As a consequence, the trial court did not abuse its discretion in assessing the weight it accorded that inference. III Restitution 26 We turn now to restitution. Generally, a party against whom an erroneous judgment or decree has been carried into effect is entitled, in the event of a reversal, to be restored by his adversary to that which he has lost thereby. Arkadelphia Milling Co. v. St. Louis S.W. Ry. Co., 249 U.S. 134, 145, 39 S.Ct. 237, 63 L.Ed. 517 (1919). But this rule is not without exceptions. Restitution is not of mere right. It is ex gratia, resting in the exercise of a sound discretion; and the court will not order it where the justice of the case does not call for it.... Atlantic Coast Line R.R. Co. v. Florida, 295 U.S. 301, 310, 55 S.Ct. 713, 79 L.Ed. 1451 (1935); accord Democratic Cent. Comm. v. Washington Metro. Area Transit Comm'n, 485 F.2d 786, 825 (D.C.Cir.1973); Restatement of Restitution § 142 cmt. a, at 568 (1937) (restitution is granted only where it is equitable so to do). 27 Hence, the simple but comprehensive question is whether the circumstances are such that equitably the defendant should restore to the plaintiff what he has received. Atlantic Coast, 295 U.S. at 310, 55 S.Ct. 713. The essence of equity jurisdiction has been its flexibility to tailor each decree to the necessities of the specific case. See Hecht Co. v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587, 88 L.Ed. 754 (1944). Because whether a party is entitled to the equitable remedy of restitution is a discretionary matter for a trial court, we review its ruling under an abuse of discretion standard. See Cathedral of the Incarnation v. Garden City Co. (In re Cathedral of the Incarnation ), 90 F.3d 28, 35 (2d Cir.1996); United States v. Bedford Assocs., 713 F.2d 895, 902 (2d Cir.1983). 28 The government asserts the district court erred in holding that it could not recover proceeds derived from Devil His Due between the August 3, 1995 order and the July 2, 1997 order. On August 3, 1995 the district court held that Edith LiButti was not her father's nominee, and thus permanently enjoined the IRS from enforcing the levy it had placed on Devil His Due. See LiButti I, 894 F.Supp. at 598-99. After appeal and on remand the same court ruled that because Edith LiButti is her father's nominee, Robert LiButti is the owner of Devil His Due. See LiButti III, 968 F.Supp. at 77. Accordingly, in a July 2, 1997 order the permanent injunction prohibiting the IRS levy was lifted. During the intervening period, Edith LiButti received substantial proceeds through the syndication and sale of shares of the racehorse, as well as money from stud fees. 29 After weighing the equities, the district court decided that restitution prior to the July 2, 1997 order would be inappropriate. It reasoned that plaintiff was not unjustly enriched because she obtained the benefits pursuant to a valid judgment, and that the government had neglected to move for a stay pending appeal. It has been long-established law that simply filing an appeal from the grant or denial of an injunction--absent a stay of further proceedings--does not enjoin the operative effect of the trial court's ruling from which the appeal is taken. See Hovey v. McDonald, 109 U.S. 150, 161, 3 S.Ct. 136, 27 L.Ed. 888 (1883) ([A]n appeal from a decree granting, refusing, or dissolving an injunction does not disturb its operative effect.); see also Brill v. General Indus. Enters., 234 F.2d 465, 469-70 (3d Cir.1956). 30 In the present case, it is clear that to protect itself from the possibility of appellant alienating money derived from Devil His Due as a result of the order enjoining the IRS levy, the government should have moved for an injunction pending appeal pursuant to Federal Rule of Civil Procedure 62(c), which states: 31 When an appeal is taken from an interlocutory or final judgment granting, dissolving, or denying an injunction, the court in its discretion may suspend, modify, restore, or grant an injunction during the pendency of the appeal upon such terms as to bond or otherwise as it considers proper for the security of the rights of the adverse party. 32 Fed.R.Civ.P. 62(c). 33 However, a party's failure to seek a stay pending appeal does not preclude the possibility of it obtaining restitution. See Fulton County Silk Mills v. Irving Trust Co. (In re Lilyknit Silk Underwear Co.), 73 F.2d 52, 53 (2d Cir.1934). Although a court deciding whether to award restitution may consider failure to seek a stay as one factor when weighing the equities, few courts have relied primarily on this factor in denying this equitable remedy. See FilmTec Corp. v. Hydranautics, 67 F.3d 931, 940 (Fed.Cir.1995); cf. Texaco P.R., Inc. v. Department of Consumer Affairs, 60 F.3d 867, 881-82 (1st Cir.1995); Thompson v. Washington, 551 F.2d 1316, 1321-22 (D.C.Cir.1977). 34 Moreover, many other equitable factors lie heavily in favor of the government. This case arises out of Robert LiButti's tax fraud and his longstanding failure to pay tax assessments of over $4 million dollars. See LiButti II, 107 F.3d at 113. The government has had to work arduously to collect on those assessments in the face of considerable resistance from him and his daughter. Indeed, the last time we heard an appeal in this case, the panel observed: 35 The record is replete ... with evidence of Robert's use of his daughter and Lion Crest for secreting his assets and as the conduits for his horse dealings, and the use of Lion Crest to support the affluent lifestyle to which he had become unaccountably accustomed. 36 Id. at 114. Devil His Due represents yet another asset that Robert LiButti sought to secrete from the government. Given this pattern of evasion and the lengths that the government has been forced to go to in response, we think the district court abused its permitted discretion when it limited the government's long-awaited recovery to that fraction of Devil His Due that remained in Edith LiButti's not-so-innocent hands on July 2, 1997. Accordingly, we reverse on this issue, and hold that the government is entitled to the discussed restitution. IV Jurisdiction Over Margaux A. Personal or In Rem 37 The government also sought restitution from Margaux, which the district court denied on the grounds that it lacked jurisdiction over that entity. See LiButti v. United States, No. 94-CV-1114, 1997 WL 570493, at  2-3 (N.D.N.Y. Aug. 4, 1997) (LiButti IV ). We review a dismissal for lack of in personam or in rem jurisdiction de novo. See Chaiken v. VV Publ'g Corp., 119 F.3d 1018, 1025 (2d Cir.1997) (in personam ); Dluhos v. The Floating & Abandoned Vessel, 162 F.3d 63, 68 (2d Cir.1998) (in rem ). 38 The trial court ruled first that it lacked in personam jurisdiction over Margaux. The exercise of in personam jurisdiction comports with the Fourteenth Amendment's Due Process Clause only where minimum contacts [exist] between the defendant and the forum State, World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 291, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980), so as not to offend traditional notions of fair play and substantial justice, International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945). 39 The central minimum contacts inquiry is whether  'the defendant's conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there.'  Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) (quoting World-Wide Volkswagen Corp., 444 U.S. at 297, 100 S.Ct. 559). The Burger King Court continues, stating: 40 In defining when it is that a potential defendant should reasonably anticipate out-of-state litigation, the Court frequently has drawn from the reasoning of Hanson [which states that] ... [t]he application of [the minimum contacts] rule will vary with the quality and nature of the defendant's activity, but it is essential in each case that there be some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws. 41 471 U.S. at 475, 105 S.Ct. 2174 (quoting Hanson v. Denckla, 357 U.S. 235, 253, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958)) (emphasis added). 42 In the case at hand, Margaux did not purposefully avail itself of the protections or benefits of New York law. Margaux is a Kentucky limited liability company. It entered into the syndicate agreement within Kentucky's borders. It never bought or sold syndicated shares for the horse in New York. Devil His Due was physically present in Kentucky when Edith LiButti and Margaux entered into the agreement and when Margaux took possession of the horse in 1995. Further, the syndicate agreement contained a Kentucky choice-of-law provision. Thus, as the district court found, Margaux did not purposefully avail itself of the benefits or protections of New York law. 43 In addition to the concept of a defendant purposefully availing itself of the protections of the law of the forum State, the Supreme Court has also found minimum contacts to exist when the defendant purposefully directed the harmful effects of his activities at the forum State. See Burger King, 471 U.S. at 472, 105 S.Ct. 2174; Calder v. Jones, 465 U.S. 783, 787 & n. 6, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984). For instance, in Calder v. Jones, the Court found minimum contacts where the defendants, journalists in Florida who wrote a libelous story about a California resident, engaged in intentional, and allegedly tortious, actions ... expressly aimed at California, and thus the effects of those actions were purposefully directed at California. Id. at 789, 104 S.Ct. 1482; see also Keeton v. Hustler Magazine, 465 U.S. 770, 774, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984) (using purposefully directed where defendants intentionally directed libelous statements at the forum State). Other cases using purposefully directed have indicated that a forum may assert personal jurisdiction over corporation[s] that deliver[ ] ... products into the stream of commerce with the expectation that they will be purchased by consumers in the forum State, Burger King, 471 U.S. at 472-73, 476, 105 S.Ct. 2174, or engage[ ] in continuous and widespread solicitation of business within [the forum] State, Quill Corp. v. North Dakota, 504 U.S. 298, 308, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). 44 It is difficult to analogize Margaux to the commercial defendants in Burger King and Quill or the defendants in Calder and Keeton who purposefully directed their activities at the forum State by intending to cause tortious injury to one of its residents. Margaux did not intend to inflict harm on or commercially effect a resident of New York. Rather, it had no role in New York, and thus cannot be equated with Calder, Keeton, Burger King, or Quill. As a consequence, the district court correctly held that it lacked in personam jurisdiction over Margaux. 45 The district court also ruled that it lacked in rem jurisdiction over Margaux. See LiButti IV, 1997 WL 570493, at  2- 3. In Shaffer v. Heitner, 433 U.S. 186, 207, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977), the Supreme Court explained that to have in rem jurisdiction it is necessary, at the very least, to satisfy the minimum contacts standard set out in International Shoe. Since Margaux did not have minimum contacts, the district court did not have in rem jurisdiction either. B. Alternate Jurisdiction Theories 46 The IRS declares there is an alternate theory involving Rule 25(c) and Rule 71 of the Federal Rules of Civil Procedure that gives the federal court in New York jurisdiction over Margaux. Rule 25(c) provides: 47 (c) Transfer of Interest. In case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party. 48 Fed.R.Civ.P. 25(c). In several cases involving the question of whether a person could be substituted or joined under Rule 25(c), various courts have held that when a person is found to be a successor in interest, the court gains personal jurisdiction over them simply as a consequence of their status as a successor in interest, without regard to whether they had any other minimum contacts with the state. See, e.g., City of Richmond v. Madison Management Group, Inc., 918 F.2d 438, 454-55 (4th Cir.1990); Explosives Corp. of Am. v. Garlam Enters. Corp., 817 F.2d 894, 906 (1st Cir.1987); Minnesota Mining & Mfg. Co. v. Eco Chem, Inc., 757 F.2d 1256, 1263 (Fed.Cir.1985); Select Creations, Inc. v. Paliafito Am., Inc., 852 F.Supp. 740, 765 (E.D.Wis.1994); Moody v. Albemarle Paper Co., 50 F.R.D. 494, 497-98 (E.D.N.C.1970). 49 Margaux maintains that this principle cannot apply in this case because the government failed to make a motion to substitute or join Margaux as a party under Rule 25(c), and failed to serve Margaux in the manner that Rule 25(c) requires. The government responds by noting that even where no motion under Rule 25(c) is filed, the judgment against the original party binds the successor in interest as though the successor had been joined or substituted. See Kloster Speedsteel AB v. Crucible Inc., 793 F.2d 1565, 1581-82 (Fed.Cir.1986). Because such a judgment would be binding, the government continues, Rule 71 applies and effectively asserts the same principle that successors in interest are subject to the personal jurisdiction of the court even without additional minimum contacts. 50 Rule 71 provides that when obedience to an order may be lawfully enforced against a person who is not a party, that person is liable to the same process for enforcing obedience to the order as if a party. Fed.R.Civ.P. 71. Because a successor in interest would be bound by a judgment regardless of whether a motion was made under Rule 25(c), the government argues that obedience to this judgment could be lawfully enforced against Margaux. Thus, the government's argument concludes, Rule 71 applies, and Margaux would be liable to the same process for enforcing obedience to the judgment as if a party. 51 Even assuming the government's argument is properly before us despite the lack of a motion under Rule 25(c), the argument still fails. In the cases the government cites, personal jurisdiction was established only where the non-resident was found to be a successor in interest to the obligations of the party. Successor liability is a question of State law, and here the district court determined that the law of New Jersey applied. See LiButti I, 894 F.Supp. at 597; see also Travis v. Harris Corp., 565 F.2d 443, 446 (7th Cir.1977). 52 In Ramirez v. Amsted Industries, 86 N.J. 332, 431 A.2d 811, 815 (1981), the Supreme Court of New Jersey adopted the traditional standard to determine whether a non-party is a successor in interest. It first acknowledged that under New Jersey law where one company transfers all its assets to another company the latter is not liable for the debts of the transferor, except where: (1) it agreed to assume them; (2) the two corporations merged; (3) the purchaser is simply a continuation of the seller; or (4) when there is fraud. See id. This rule and its exceptions as to successor liability apply regardless of whether the predecessor or successor organization was a corporation or some other form of business organization. Graham v. James, 144 F.3d 229, 240 (2d Cir.1998). Hence, even though Lion Crest Stable is a sole proprietorship and Margaux Stallions is a limited liability company, this law applies. 53 In each of the cases cited by the government, the non-resident who was subjected to personal jurisdiction met one of these exceptions. See Explosives Corp., 817 F.2d at 906-07 (parent corporation could be substituted as a party where the parent actually controlled the litigation on behalf of the subsidiary); Waffenschmidt v. MacKay, 763 F.2d 711, 717 (5th Cir.1985) (transfer was undertaken fraudulently to avoid liability); Minnesota Mining, 757 F.2d at 1265 (transfer was entered into fraudulently to escape liability); Select Creations, 852 F.Supp. at 765-66 (partnerships set up to escape liability); cf. Moody, 50 F.R.D. at 496-98 (non-party acted as the agent of the party, and thus as a representative of the party implicitly agreed to the obligations of the party). Even in cases that consider Rule 71 instead of or in addition to Rule 25(c), the non-party satisfied one of these exceptions before personal jurisdiction over it was established. 54 Margaux does not fall into any of these exceptions, and therefore it is not a successor in interest or subject to successor liability. As a consequence, the district court lacked personal jurisdiction over Margaux. See Williams v. Bowman Livestock Equip. Co., 927 F.2d 1128, 1132 (10th Cir.1991) (non-party not within one of the exceptions was not a successor in interest, and district court had no personal jurisdiction over it). 55 Because there is a lack of personal jurisdiction, we do not reach the merits of whether the government is entitled to restitution from Margaux.