Kersting v. US

• Decision Date: 08 July 1994
• Docket Number: Civ. No. 90-00304 HMF,91-00747 HMF and 92-00593 HMF.
• Citation: 865 F. Supp. 669
• Parties: Henry F.K. KERSTING, Plaintiff, v. UNITED STATES of America, Defendant. PACIFIC PARADISE, INC., et al., Plaintiffs, v. UNITED STATES of America, et al., Defendants. UNITED STATES of America, Plaintiff, v. Henry F.K. KERSTING, Defendant.
• Court: U.S. District Court — District of Hawaii

865 F. Supp. 669

Henry F.K. KERSTING, Plaintiff, v. UNITED STATES of America, Defendant.

PACIFIC PARADISE, INC., et al., Plaintiffs, v. UNITED STATES of America, et al., Defendants.

UNITED STATES of America, Plaintiff, v. Henry F.K. KERSTING, Defendant.

Civ. Nos. 90-00304 HMF, 91-00747 HMF and 92-00593 HMF.

United States District Court, D. Hawaii.

July 8, 1994.

COPYRIGHT MATERIAL OMITTED

L.T. Bradt, Houston, TX, and Matthew K. Chung, Honolulu, HI, for Kersting and the 33 corporations.

Michael Chun and Omer G. Poirier, Asst. U.S. Attys., Honolulu, HI, for U.S.

ORDER DENYING MOTION FOR RECONSIDERATION AND MOTION TO STRIKE

FONG, District Judge.

INTRODUCTION

On June 15, 1994, the court heard arguments on several motions brought by plaintiffs Henry Kersting and thirty-three corporations ("plaintiffs"). On May 19, 1994, plaintiffs filed a motion for reconsideration of the court's previous order, delivered from the bench on May 17, 1994, denying plaintiffs' "motion to disclose extent of invasion of attorney-client relationship and to prohibit use of evidence." The court hereby delivers its rulings on plaintiffs' motion for reconsideration of the following court orders: (1) the court's order denying plaintiffs' motion to disclose the extent of invasion of attorney-client privilege by the alleged government mole, Luis DeCastro, and to prohibit the government's use of evidence obtained thereby; (2) the court's order denying plaintiffs' motion to exclude evidence obtained with a 1981 search warrant (a) because of the alleged illegal use of the search warrant for civil purposes and (b) because of the failure of the government to obtain a Rule 6(e) order for disclosure of grand jury materials to civil investigators. In addition, the court hereby issues its ruling on (3) plaintiffs' motion to reconsider the court's denial of their motion to strike affidavits filed in response to plaintiffs' claims of attorney-client privilege violation; and (4) plaintiffs' motion for an order to show cause against the government and to compel the appearance of Luis DeCastro as a witness in this case. For the reasons set forth below, the court DENIES all of plaintiffs' motions.

STANDARD OF REVIEW

There are three possible grounds for reconsideration: (1) an intervening change in controlling law, (2) the availability of new evidence not previously available; and (3) the need to correct a clear error of law or prevent manifest injustice. All Hawaii Tours v. Polynesian Cultural Center Corp., 116 F.R.D. 645, 649 (D.Haw.1987) (citations omitted), rev'd on other grounds, 855 F.2d 860 (9th Cir.1988). Local Rule 220-10 provides that

Motions for reconsideration of interlocutory orders may be brought only upon the following grounds:

(a) Discovery of new material facts not previously available;

(b) Intervening change in law;

(c) Manifest error of law or fact.

Motions asserted under Subsection (c) of this rule must be filed within ten (10) days of the court's written order.

The court may reconsider its order based on new evidence not previously available. See Leong v. Hilton Hotels Corp., 689 F.Supp. 1572, 1573 (D.Haw.1988) (citation omitted). Evidence is "newly discovered" and supportive of reconsideration only if the movant shows "not only that this evidence was newly discovered or unknown to it until after the hearing, but also that it could not with reasonable diligence have discovered and produced such evidence at the hearing." Great Hawaiian Financial Corp. v. Aiu, 116 F.R.D. 612, 616 (D.Haw.1987) (citations omitted), rev'd on other grounds, 863 F.2d 617 (9th Cir.1988).

DISCUSSION

I. PLAINTIFFS' MOTION TO DISCLOSE EXTENT OF INVASION OF ATTORNEY-CLIENT PRIVILEGE ISSUE.

The court previously denied plaintiffs' "motion to disclose the extent of invasion of attorney-client relationship and to prohibit the government's use of evidence obtained directly and indirectly." Plaintiffs allege that during the tax court trial of Dixon v. Commissioner (now Dufresne v. Commissioner), they shared confidences with Joe Izen, Jr. and Luis DeCastro, attorneys for petitioners in Dixon, in order to assist in the test cases. Plaintiffs allege further that they subsequently learned that DeCastro was an IRS "mole" who was paid to illegally infiltrate plaintiffs' "camp" and violate their attorney-client privilege.

Despite plaintiffs' assertion that they only recently learned of the "mole issue" involving Luis DeCastro and the Thompsons, the government has provided the following exhibits demonstrating that Kersting has, in fact, long known of Thompson's settlement agreement: (1) a Kersting letter of July 1992 refers to a "secret deal" between Jack Thompson and McWade (the district counsel) and details the betrayal of the Kersting investors by Thompson; and (2) a Kersting letter of September 1992 describing the Thompson "double-cross" and the subsequent government motion to vacate the decision in the Thompson test case in light of the contingent settlement agreement between Thompson and the IRS.

In light of these letters, it is clear that plaintiffs have known for at least two years of the issue which they have chosen to raise only on the eve of trial. It is thus within the court's discretion to deny plaintiffs' request for discovery on this issue as untimely. In Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 609-10 (9th Cir.1992), the Ninth Circuit held that a Rule 16 pretrial schedule (establishing a discovery cut-off date) should not be modified unless the party seeking modification can show sufficient diligence to meet the "good cause" standard. Plaintiffs have not demonstrated any diligence with regard to raising this matter.

Nonetheless, the court is concerned by the effective payment of attorneys' fees for Luis DeCastro by the IRS. In its decision in Dixon (now Dufresne) issued Tuesday, June 14, 1994, the Ninth Circuit vacated the tax court decision on the basis of this issue. Dufresne v. Commissioner, 26 F.3d 105 (9th Cir.1994). The Ninth Circuit held that the government's secret settlement agreement with Thompson potentially represented a gross structural defect which would warrant voiding the judgment as fundamentally unfair. Id. Accordingly, the appellate court remanded to the tax court for a full evidentiary hearing to determine whether vacating the judgment was warranted or, alternatively, whether, despite the government's misconduct, the tax court's judgment could be upheld as harmless error. Id. The court reasoned that in moving to vacate Thompson, Cravens, and Rina,

the Commissioner presented a telling case of corruption of the process of the tax court and the rights of both the government and the taxpayers.... In effect, the government agreed to pay Thompson's legal fees.

Id.

This court is not bound by the findings of the Ninth Circuit or the tax court in Dixon/Dufresne. These are completely different pieces of litigation; this case concerns the organizer of the tax shelters and that case concerns the participants in the same tax shelters. The doctrine of "law of the case" plainly has no application. Nor is the court collaterally estopped by these findings. In order for collateral estoppel to apply, four requirements must be met: (1) identity of parties; (2) identity of issues; (3) a final judgment; and (4) a full and fair opportunity to litigate the claim. See Caldeira v. County of Kauai, 866 F.2d 1175 (9th Cir.), cert. denied, 493 U.S. 817, 110 S.Ct. 69, 107 L.Ed.2d 36 (1989). There is neither a final judgment nor an identity of parties in the instant case.

Nonetheless, the court is concerned by the findings of the Ninth Circuit in Dixon/Dufresne. Even before this decision, the court had required the government to make certain disclosures and had reopened discovery to permit the parties to depose DeCastro.

There can be little doubt of government misconduct in Dixon/Dufresne. What remains unanswered is (1) whether the government's misconduct extended to the use of Luis DeCastro as a mole (sharing trial strategy and other secrets of plaintiffs in Dixon/Dufresne with the government), and (2) if so, whether the governments misconduct in Dixon/Dufresne taints these proceedings.

If the government's misconduct was limited to making the secret settlement agreement and, as part of that agreement, paying DeCastro's fees, without more, then there is no basis for plaintiffs to assert that these proceedings are tainted. If, on the other hand, DeCastro was a mole, then there is the possibility that the government wrongfully gained access to information which it otherwise would not have gotten and which it should, consequently, be barred from using in this case.

Even if DeCastro were a mole, the court will not necessarily infer a taint. If DeCastro were a mole, then he plainly violated the attorney-client privilege of Joe Izen's clients. Plaintiffs in the instant case are, however, not clients of Izen and would have to make a further showing with regard to the breach of their privilege by DeCastro. See United States v. Layton, 855 F.2d 1388, 1406 (9th Cir.1988) ("the burden of establishing the existence of the attorney client privilege, and of presenting the underlying facts demonstrating the existence of the privilege, rests on the claimant of the privilege.").

Kersting has failed to establish that his attorney-client privilege was implicated. See United States v. Plache, 913 F.2d 1375, 1379 n. 1 (9th Cir.1990) (discussing requirements for attorney-client privilege to attach). Contrary to plaintiffs' assertions, the "common defense" privilege is not applicable in the case at bar. To establish a common defense privilege, a party must show that "(1) the communications were made in the course of a joint defense effort, and (2) the statements were designed to further that effort, and (3) the privilege has not been waived." See Matter of Bevill, Bresler, and Schulman Asset Mgt., 805 F.2d 120, 126 (3rd Cir.1986).

Nonetheless, the court has...