November 12, 2014

New York Law Journal / Written by: Harvey M. Stone, Peter R. Schlam

This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York, including those on: the RICO Liability of tobacco companies; a petitioner's 2241 motion to vacate his arson conviction. The judge said the petitioner should not be entitled to circumvent his waiver of direct appeal by collaterally challenging his conviction; a motion by the United States to dismiss a tax refund claim pending further discovery to allow plaintiff to prove that his employer had actually withheld income tax from his wages; and the grant of the government's motion to revoke a pretrial release order, because the judge found that no conditions of release contemplated by the Bail Reform Act would reasonably assure the safety of other persons and the community. Defendant was an alleged member of the Gambino organized crime family.

RICO Liability: Tobacco Firms

In Falise v. American Tobacco Co., 99 Civ. 7393 (EDNY, May 1, 2000), Judge Jack B. Weinstein held that trustees of a fund to compensate claimants suffering asbestos-related injuries (the "Trust") could proceed to trial on their claim that major tobacco companies are liable for damages to the Trust under RICO. The complaint alleges that the tobacco companies engaged in a fraudulent scheme directed at asbestos workers (and the population at large) to encourage asbestos workers to smoke, thereby causing an increased prevalence and severity of asbestos related diseases among asbestos workers. The trustee plaintiffs allege that the tobacco companies suppressed and concealed material information, and disseminated misinformation, regarding the unique health risks posed to those who both smoked and were occupationally exposed to asbestos, thereby forcing the Trust to pay larger sums to claimants who smoked.

In refusing to grant summary judgment in favor of the tobacco companies as to certain of the RICO claims, Judge Weinstein found "substantial evidence" that smoking sharply increases the risks and severity of asbestos-related diseases by working "synergistically" with asbestos. Plaintiffs put forward evidence, including internal corporate documents dating back to the 1960s, that the tobacco companies have long known about this synergy and undertaken efforts to conceal it. Plaintiffs allege that, "[r]ather than reveal the lethal nature of the smoking-asbestos synergy to asbestos workers and take steps to discourage them from smoking, tobacco allegedly conspired to deceive and mislead them about the dangers in order to maintain their profits, to shield themselves from costly liability, and to shift those costs to the Trust and other asbestos-related entities." Slip op. 23.

In connection with their RICO claims based on predicate acts of mail and wire fraud, plaintiffs must demonstrate justifiable reliance in order to establish damage causation. Judge Weinstein found that plaintiffs have not pled with sufficient particularity facts that would establish the Trust's detrimental reliance on misinformation generated by the tobacco companies when the Trust decided not to litigate against the tobacco companies at an earlier point or when the Trust established settlement values in asbestos worker suits. Accordingly, the court granted summary judgment as to the RICO claims predicated on those alleged frauds.

But the court denied summary judgment as to the RICO claims predicated on the additional liabilities incurred by the Trust in the form of increased payments to claimants who smoked. The tobacco companies urged the court to dismiss these claims as well, asserting that plaintiffs cannot identify specifically what if any misrepresentations each claimant relied upon in continuing to smoke.

Judge Weinstein held that where, as here, the fraudulent scheme is targeted broadly at a large proportion of the American public, the requisite showing of reliance is less demanding than where the fraudulent scheme is limited in scope and targeted at only one or a few individuals or entities. "Such sophisticated broad-based fraudulent schemes by their very nature are likely to be designed to distort the entire body of public knowledge rather than to individually mislead millions of people." Slip op. 39-40. As Judge Weinstein noted, it was crucial to the success of the scheme alleged that the "big lies" about the health risks of tobacco, including misinformation regarding the smoking-asbestos synergy, appear to come not from the tobacco companies themselves, but rather appear as part of a body of public knowledge. "To require reliance on specific misrepresentations where indirect channels of communication were integral to the success of the scheme would produce the perverse result of having the most massive and sinister fraudulent schemes be the ones that must escape civil-RICO liability." Slip. op. 40.

Thus, where such a broad-based fraudulent scheme is alleged, a plaintiff can establish reliance for injury causation purposes by showing that the RICO defendants intentionally engaged in a scheme to distort the body of public knowledge; defendants were successful in doing so; there was detrimental reliance on this distorted knowledge by an intended and foreseeable class of victims; such reliance was reasonable in the totality of the circumstances; and plaintiff was proximately injured by this reliance


2241: Collateral Challenge

In Pollack v. Hobbs, Warden, 99 CV 7469 (EDNY April 7, 2000), Judge Reena Raggi held that petitioner's 2241 motion to vacate his arson conviction was procedurally barred and that, in any event, his belated jurisdictional challenge to the arson count to which he had pleaded guilty lacked merit.

Petitioner maintained an active labor law practice for 40 years. In 1997, he pleaded guilty to arson, 18 U.S.C. 844 (i), plus mail fraud and conspiracy to receive kickbacks. He was sentenced to concurrent prison terms, including 71 months for the arson.

In 1992, petitioner arranged for a vacation house in Florida to be destroyed by fire. The house, which petitioner and his wife used a few months per year, was owned 80 percent by petitioner and 20 percent by a New York subchapter S corporation wholly owned by him. After the fire, petitioner filed an insurance claim.

Before pleading guilty, petitioner moved to dismiss the arson charge on the ground that there was no interstate nexus to the crime. Judge Raggi denied the motion, finding that there were disputed factual issues about the alleged commercial use of the property that a jury would have to resolve at trial.

By pleading guilty, petitioner waived a jury trial, agreed to 71 months of incarceration and waived his right to appeal any sentence of 71 months or less. In his plea allocution on the arson count, petitioner stated that his house in Florida "was used in interstate commerce." In response to the court's questions, petitioner also stated that his corporation paid many of the bills on the Florida house and conducted business transactions related to that house.

Petitioner did not raise his jurisdictional challenge on direct appeal or through a 2255 motion, which has a one-year limitation period. Instead, he waited over two years and then filed the instant motion under 2241, which spells out no such time constraints.

Having received the benefit of the plea bargain, the court noted, petitioner "is hardly in a position to cite an advantageous 'agreement' under which he promised not to appeal his conviction as an excuse for procedural default, particularly on a claim of which he was well aware before he pleaded guilty." Slip op. 9. As Judge Raggi also observed, (a) petitioner should not be entitled to circumvent his waiver of direct appeal by collaterally challenging his conviction; (b) in any event, petitioner could not explain his failure to file a timely 2255 motion; and (c) his 2241 motion does not claim actual innocence. In such circumstances, the court concluded, a petitioner cannot wait for more than two years after his conviction becomes final to seek relief under 2241.

Turning to the merits, Judge Raggi observed that to sustain a challenge to jurisdiction, petitioner had to show, on the face of the information, that the count to which he pleaded guilty failed to charge a federal offense. Here, that was plainly not the case. The arson count alleged that the Florida property was "used in an activity affecting interstate commerce, to wit: a home used as rental and business property. ..." Slip op. 15.

Given petitioner's guilty plea and allocution, moreover, as well as the government's pretrial proffer about jurisdiction, petitioner was precluded from challenging the "evidence" showing the interstate commercial use of the Florida house.

Summarizing in some detail what that evidence would have been, Judge Raggi remarked that petitioner had used the Florida house as a business asset related to two interstate commercial ventures: his law practice and his corporate activities; that he had arranged for his corporation to "rent" the property to a New York client for $4,000 per month so that petitioner could avoid reporting personal income from the client; that petitioner had conducted business dealings from the Florida house by phone and fax; and for its outlays in running the Florida property, the corporation had taken deductions which presumably would not have been available to petitioner as an individual using the property only as a residence. Slip op. 17 - 19.

Tax Refund Action

In Weisman v. Commissioner of Internal Revenue, 97 CV 5302 (EDNY, June 30, 2000), Judge David G. Trager reserved decision on a motion by the United States to dismiss a tax refund claim pending further discovery to allow plaintiff to prove that his employer had actually withheld income tax from his wages but never remitted the money to the IRS.

After pursuing administrative relief for six years without a satisfactory resolution, pro se plaintiff Weisman sued the IRS for a tax refund and an injunction preventing any further attempt to collect federal income tax for the 1990 tax year. From 1989 until September 1990, Weisman worked for International Fashions Inc. (IFI). Weisman alleged that by oral agreement with IFI his after-tax salary was about $1,000 per week, resulting in gross pay of about $1,500 per week. His W-4 claimed only two exemptions. Weisman's W-2 did not reflect this arrangement. Thus, while Weisman was paid $49,634.60, only $800 was withheld by IFI and paid to the IRS. Weisman contended that IFI had failed to pay the proper federal withholding tax.

Weisman sought an extension of time to file his Form 1040 for 1990 and contacted the IRS in an effort to negotiate a resolution. He also filed a tax fraud complaint against IFI (which has apparently never been resolved). The IRS demanded that he file a return using the income and withholding information on the IFI W-2, but Weisman continued to assert that it was incorrect. In March 1994 a Problem Resolution Officer (PRO) sent IFI a letter, which was unanswered, and then recommended that the company be audited, which was apparently never done. In June 1994 the same PRO sent a report to Weisman calculating his tax liability at $3,708, plus interest and penalties. In July, Weisman submitted a Form 1040 reflecting a refund due of $2,220 and an Offer in Compromise offering to settle his 1990 tax liability for zero dollars.

Frustrated that his complaints concerning the inaccurate W-2 were not being addressed, Weisman requested that his case be transferred to an IRS appeals officer. The Appeals Officer refused to look at Weisman's documentation, but agreed to review the IRS administrative file and re-contact Weisman before rendering a decision. One year later, in April 1996, Weisman received a Notice of Claim Disallowance from the Appeals Officer setting the amount of tax due at $5,423.

In May 1995 the IRS Procedures Unit told Weisman about Form 4598, which should be filed when a taxpayer fails to receive a W-2 or when a W-2 is inaccurate. The IRS then contacts the employer which has a 10 day response period; if the employer does not respond, the taxpayer may file his Form 1040 with his own W-2 figures and supporting documentation. On contacting the IRS District Director in Brooklyn, Weisman was told that his only recourse was to file a lawsuit in federal district court because he had already gone before the Appeals Division. After sending letters complaining about the handling of his case to the IRS Commissioner, the Northeast Regional Director of Appeals and Senators D'Amato and Hatch, Weisman filed a lawsuit.

Judge Trager dismissed plaintiff's claim for injunctive relief under the Anti Injunction Act, which prohibits lawsuits against the United States "for the purpose of restraining the assessment or collection of any tax."

Turning to the refund claim, Judge Trager held that Weisman had made a satisfactory informal refund claim, even though he never filed a properly executed Form 1040. Although he had failed to obtain his ex-wife's signature on the Form 1040, Weisman had given the IRS notice of his requested refund through a letter and the attached Form 1040 sent in July 1994. As the court also observed, that submission set forth the basis for his refund claim, i.e., his belief that his employer had withheld federal income tax from his pay which it had never paid to the IRS.

Concerning the timeliness requirement for requesting a refund, Judge Trager reserved decision pending discovery on whether the IRS applied a 1993 tax refund to Weisman's 1990 tax liability and when that application occurred. The two-year limitations period begins to run from the date of filing of a tax return or the date of payment of tax. Because Weisman never filed a properly executed tax return for 1990, any limitations period would begin on the date of the credit of an applied refund.

Next, Judge Trager concluded that Weisman had filed a lawsuit within two years from the mailing of the Notice of Disallowance, making the suit timely.

Finally, Judge Trager discussed the requirement that Weisman fully pay his 1990 tax liability prior to making a claim for a refund. In the court's view, if Weisman could prove that IFI actually withheld federal income tax for 1990, but never remitted it to the IRS, he would satisfy the "full payment" requirement. All that was required was for tax to be deducted and withheld by the employer. In light of the IRS's ability to punish a withholding agent who illegally retains payment, it would be unjust to hold the innocent taxpayer responsible. Slip op. 21.

Because of the circumstances of this case, where the plaintiff had diligently pursued his claim for nine years, Judge Trager allowed the plaintiff to develop further evidence. The court based this decision on IFI's questionable business practices, the IRS's lack of diligence and delay, its negligence in failing to inform Weisman about Form 4598, the ambiguity surrounding the small amount of withholding for Weisman in 1990 and IFI's tenuous financial situation at the time Weisman worked there.

Pretrial Release

In United States v. Agnello, 00 CR 205 (EDNY, June 7, 2000), Judge Nina Gershon granted the government's motion to revoke a pretrial release order. Judge Gershon found that no conditions of release contemplated by the Bail Reform Act would reasonably assure the safety of other persons and the community.

Defendant, an alleged member of the Gambino organized crime family, was indicted on multiple counts of racketeering, extortion and arson. After extensive proceedings, Magistrate Judge Robert M. Levy concluded that defendant was a danger to others and the community, but that proposed conditions of release gave adequate assurance of safety. These conditions included an $18 million appearance bond, cosigned by 18 sureties and secured by property valued at $8 million; home detention; electronic monitoring; video surveillance; a 24- hour guard posted outside defendant's home, which is set on a four-acre estate; consent to random searches; restriction of visitors to an approved list; and prohibition of cellular telephones or other communications devices.

Judge Gershon recognized the Magistrate Judge's "painstaking care" in eventually deciding to accept defendant's revised package of conditions. But reviewing the matter de novo, Judge Gershon determined that the proposed conditions of release, though elaborate, "do not assure the safety of other persons and the community in a manner remotely commensurate to pretrial detention in a government facility." Slip op. 11. Even with the conditions of release in place, defendant's activities inside his house would not be observed, and he could evade monitoring. The proposed security measures, the court added, are unreliable without defendant's good faith compliance. Judge Gershon could not anticipate such good faith "[i]n light of defendant's past behavior, and most strikingly, his recent attempts to locate and intimidate a witness immediately upon his release on the related state charges." Slip op. 12.

Despite the measures proposed by the defendant, and his offer to absorb the costs, government personnel would have to review surveillance tapes and monitor defendant's compliance. "[S]uch extraordinary burdens on government resources," the court stated, "are not contemplated by the bail reform act in order to allow an individual to be released who otherwise should be detained." slip op. 14. As Judge Gershon also emphasized, "[A] defendant who has demonstrated his unsuitability for pretrial release by actions calculated to subvert the criminal justice process should not be able to buy his way out by constructing a private jail, which cannot provide the same assurance of safety to the community that congress sought to secure in the bail reform act." id.

Peter R. Schlam and Harvey M. Stone are partners at Schlam Stone & Dolan.  Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.

[Reproduced with permission from New York Law Journal Volume 224, Friday, July 14, 2000.  Copyright 2000 ALM Properties, Inc.  All rights reserved.]