United States v. Stonehill

• Decision Date: 28 September 2011
• Docket Number: No. 10–35789.,10–35789.
• Citation: 660 F.3d 415,108 A.F.T.R.2d 2011,11 Cal. Daily Op. Serv. 12395,2011 Daily Journal D.A.R. 14735
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. Harry S. STONEHILL, the ESTATE OF; Robert P. Brooks, the Estate of, Defendants–Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

108 A.F.T.R.2d 2011-6436

11 Cal. Daily Op. Serv. 12,395

2011 Daily Journal D.A.R. 14,735

660 F.3d 415

UNITED STATES of America, Plaintiff–Appellee,

v.Harry S. STONEHILL, the ESTATE OF; Robert P. Brooks, the Estate of, Defendants–Appellants.

No. 10–35789.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 18, 2011.Filed Sept. 28, 2011.

Randolph Lyons Hutter, Frank Phillip Cihlar, Charles Duffy, Bethany B. Hauser, U.S. Department of Justice, Tax Division, Washington, D.C., for the appellee.

Robert Eldon Heggestad, Jonathan Cohen, John Richard Gerstein, Troutman Sanders, LLP, Washington, D.C., Paul L. Gale, Troutman Sanders, LLP, Irvine, CA, for the appellants.

Appeal from the United States District Court for the District of Oregon, Owen M. Panner, Senior District Judge, Presiding. D.C. No. 3:65–cv–00127–PA.Before: ALEX KOZINSKI, Chief Judge, THOMAS M. REAVLEY,^* and WILLIAM A. FLETCHER, Circuit Judges.

OPINION

W. FLETCHER, Circuit Judge:

Harry Stonehill and Robert Brooks (“Taxpayers”) appeal the district court's denial of their Rule 60(b) motion to vacate a 1967 tax judgment against them. Based on evidence discovered through the Freedom of Information Act (“FOIA”), Taxpayers argue that the government committed fraud on the court during their 1967 suppression hearing, United States v. Stonehill, 274 F.Supp. 420 (S.D.Cal.1967) (“ Stonehill I ”), and their subsequent appeal to this court, Stonehill v. United States, 405 F.2d 738 (9th Cir.1968) ( “ Stonehill II ”). We conclude that, although the evidence uncovered by Taxpayers shows some misconduct on the part of the government, it is insufficient to demonstrate fraud on the court. Taxpayers also argue that the judgment should be vacated under United States v. Throckmorton, 98 U.S. 61, 25 L.Ed. 93 (1878), because William Saunders, Taxpayers' business associate who sometimes served as their attorney, gave information to the government. Because Taxpayers have not shown Saunders was their attorney rather than their business associate at the time he informed on Taxpayers, we reject Taxpayers' Throckmorton claim.

As will become apparent during the course of this opinion, this litigation has been extraordinarily protracted. We have written an unusually detailed opinion in the hope that we may thereby finally lay this litigation to rest. For the reasons that follow, we affirm the district court.

I. Background

We begin with a general overview of the facts and procedural history. We then discuss in more detail the evidence uncovered at each stage of the litigation.

A. General Overview

Harry Stonehill was stationed in the Philippines during World War II. During and shortly after the war, Stonehill made tens of thousands of dollars buying and reselling army surplus cars, and importing Christmas cards from the United States. After the war, Stonehill briefly returned to his native Chicago, but returned to the Philippines several years later. Upon his return, Stonehill began what became an enormously successful business career, eventually becoming Robert Brooks's partner.

The Philippines became independent on July 4, 1946. The early years of Philippine independence were notable for their tumultuous politics and extensive corruption. Taxpayers began their business ventures during these years. Taxpayers eventually owned sixteen different corporations in the Philippines, the most prominent of which was the United States Tobacco Company (“U.S. Tobacco”). U.S. Tobacco was the first company to produce American-style cigarettes in the Philippines. U.S. Tobacco's success was aided by the Philippine government's drastic limitation of the importation of American cigarettes in 1949. Stonehill, not surprisingly, supported (and, according to some, purchased) this limitation. U.S. Tobacco, as well as Taxpayers' many other business ventures, were extremely successful, and Taxpayers became wealthy and influential figures in the Philippines.

Taxpayers' success attracted attention from both Philippine and U.S. authorities. The U.S. State Department became interested in Stonehill's operations as early as 1950. The State Department requested that the U.S. Embassy in Manila conduct a “discreet investigation” into Stonehill's operations. In its report to the State Department, the Embassy observed that Stonehill's businesses were conducted “just within or just beyond the limits imposed by law,” and that Stonehill “has the reputation of not paying his full income tax.” Over the next decade, U.S. authorities became convinced that Stonehill did not pay income taxes he owed to the United States. In 1960, the IRS sent Stonehill's 1958 tax return for audit to Robert Chandler, the IRS representative to the Far East stationed in Manila. However, Chandler took no action because he had insufficient resources to conduct an extensive investigation.

Philippine attention to Taxpayers began in the late 1950s. It intensified after the election of President Diosdado Macapagal in 1961. Macapagal was elected on a reformist, anti-corruption platform. Although, as we discuss below, Macapagal and his party were not free from corruption themselves (including corruption involving Stonehill), Macapagal focused, at least rhetorically, on rooting out the influence of corrupt foreign businessmen. During this period, the Philippine government conducted wiretaps of Taxpayers' activities.

In late 1961, Menhart Spielman contacted Robert Hawley, an FBI agent stationed as the Legal Attache in Manila. Spielman had been the Executive Vice President of U.S. Tobacco, but had recently resigned from that position after a violent altercation with Taxpayers. Spielman told Hawley that he had confronted Taxpayers about massive illegalities in U.S. Tobacco. It is equally or more likely, however, that Spielman had attempted to blackmail Taxpayers by threatening to go to the authorities if they did not give him an ownership share in the company. Either way, Taxpayers responded by beating Spielman unconscious, resulting in his hospitalization.

Spielman told Hawley that he could give the FBI information concerning illegal activity at U.S. Tobacco. Hawley concluded that, to the extent Spielman's information suggested violations of U.S. law, it was U.S. tax law. Hawley therefore asked if Spielman would speak to IRS Agent Chandler. Spielman agreed to do so. Although Spielman's information suggested violations of U.S. tax law, it primarily suggested violations of Philippine law. Chandler and Hawley therefore told Spielman that he should talk to the Philippine National Bureau of Investigation (“NBI”), the Philippine equivalent of the FBI. Spielman was reluctant to do so for fear that the NBI was in league with Taxpayers. Spielman said that if Taxpayers found out he was talking to the authorities, they would kill him.

Hawley and Chandler eventually convinced Spielman to talk to Colonel Jose Lukban, the Director of the NBI. In a series of discussions at Chandler's house, Spielman gave Lukban significant information about where Taxpayers kept records and illegally imported material for making cigarettes that would demonstrate various violations of Philippine law. Some of these meetings were attended by Philippine Secretary of Justice Jose Diokno. The information provided by Spielman eventually led to a massive NBI raid on all of Taxpayers' businesses on March 3, 1962. Approximately two hundred NBI agents raided approximately seventeen different corporations.

After the raid, the NBI made many of the seized documents available to U.S. officials. The extent of U.S. access to the documents is contested, and we discuss the evidence concerning U.S. access in detail below. The documents to which U.S. officials had access were analyzed by Chandler, with William Ragland, an IRS Agent, and Sterling Powers, an IRS Assistant Revenue Service Representative. Ragland and Powers had been sent to Manila shortly before the NBI raid specifically to aid Chandler in the Stonehill investigation.

On April 22, 1962, Menhart Spielman disappeared. Spielman had apparently been dissatisfied with his treatment by the NBI and had approached Stonehill's lawyers in search of some sort of deal. Spielman then attempted to flee the Philippines, assisted by men associated with Stonehill. Philippine authorities eventually obtained confessions from the crewmen of a boat called the “Kingdom.” The crewmen claimed they attacked Spielman on the boat while he was asleep and threw him semi-conscious into the shark-infested waters of the Sulu Sea. The U.S. government was somewhat skeptical of this story. It is, however, certain that Spielman disappeared.

Philippine enforcement proceedings against Taxpayers were complicated by Philippine politics, by a Philippine Supreme Court decision that the March 3 raid violated the Philippine Constitution's equivalent of the Fourth Amendment, and by the disappearance of Spielman, their primary witness. After negotiations with Philippine authorities, Taxpayers agreed to leave the country voluntarily in exchange for the government's agreement not to pursue criminal charges. Taxpayers left the Philippines on August 4, 1962.

The documents seized in the March 3 raid were sufficient, even without testimony from Spielman, to trigger a series of legal actions in U.S. courts against Taxpayers, as well as against Ira Blaustein, Taxpayers' New York agent. The United States filed a civil tax case against Taxpayers in January 1965 in the District Court for the Southern District of California. The government sought federal tax liens securing federal income tax liabilities outstanding against Taxpayers for the years 1958 through 1961. Taxpayers moved to suppress the documents seized in the NBI raid. The proceedings in that motion form the basis of the present dispute.

B. Suppression Proceedings and Opinions

At the time the U.S. government filed this case against Taxpayers, the Philippine Supreme Court had already held that the raid...