United States of America v. Cathcart et al

MOTION for extension of time to serve defendant and permission to serve

N.D. Cal.August 18, 2008

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 JOSEPH P. RUSSONIELLO United States Attorney THOMAS MOORE (ASBN 4305-O78T Assistant United States Attorney Chief, Tax Division 9th Floor Federal Building 450 Golden Gate Avenue, Box 36055 San Francisco, California 94102 Telephone: (415) 436-6935 HUONG T. BAILIE (NYBN 4035739) 300 E. 8th Street, Suite 601 Austin, TX 78701 Telephone: (512) 499-5759 ALLYSON B. BAKER (DCBN 478073) FREDERICK N. NOYES Tax Division U.S. Department of Justice Post Office Box 7238 Ben Franklin Station Washington, D.C. 20044 Telephone: (202) 353-8031 Facsimile: (202) 514-6770 Email: allyson.b.baker@usdoj.gov Attorneys for Plaintiff, the United States of America IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION UNITED STATES OF AMERICA ) ) Plaintiff, ) ) v. ) Civil No. 03:07-cv-4762-PJH ) ) UNITED STATES’S MOTION FOR AN ) ENLARGEMENT OF TIME IN WHICH ) TO SERVE FRANKLIN THOMASON ) WITH THE COMPLAINT AND CHARLES CATHCART et al. ) PERMISSION TO SERVE BY ) PUBLICATION ) )Defendants. Notice: No Hearing Requested Pursuant to Rule 4(m) of the Federal Rules of Civil Procedure and Local Rule 6-3, the United States respectfully requests that the Court grant it an additional sixty days in which to Case 3:07-cv-04762-PJH Document 97 Filed 08/18/2008 Page 1 of 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 2 - serve defendant Franklin Thomason with the complaint. Thus, the United States would be required to serve Franklin Thomason sixty days from August 21, 2008, which is October 20, 2008. Background Facts On April 23, 2008, the United States filed its First Amended Complaint joining Franklin Thomason and two other defendants, Charles Hsin and Optech Limited - both of which already have been served. The complaint seeks to enjoin all of the defendants and their companies promoting the 90% Loan program, which is alleged to be a tax-fraud scheme. The Complaint alleges that since 1997, defendants have organized and promoted a tax- fraud scheme. Defendants promote the 90% Stock Loan program to customers with highly- valued, low-basis stock, and defendants promote the ESOP-QRP program to customers who have sold qualified securities to Employee Stock Ownership Plans (ESOP) and then reinvested the sale proceeds in qualified replacement property (QRP) in stocks or floating rate note loans. Defendants promote these two programs as loans in which customers’ securities are transferred to defendants to provide collateral for a loan equal to 90% of the securities’ value. Defendants falsely tell customers that (i) this transaction is a loan; (ii) that customers who transfer their securities to defendants will incur no tax liability, because the transfer is collateral for a loan and not a sale of the customers’ securities; and (iii) that defendants will help preserve the value of the customers’ transferred securities through the use of sophisticated hedging techniques, developed by Charles Cathcart. These transactions are actual sales, disguised as transfers of collateral for purported loans, and these transactions are designed so that a customer can avoid the payment of taxes otherwise incurred from the sale of their securities. Specifically, it is estimated that the tax loss resulting from these programs is as much as $234,567,700. First Am. Compl. ¶86. Indeed, one of the defendants, Charles Cathcart has stated that over 1,700 individuals participated in these programs and in transactions totaling more than $1 billion. Id. ¶85. Case 3:07-cv-04762-PJH Document 97 Filed 08/18/2008 Page 2 of 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 3 - The United States has been trying to serve Franklin Thomason since early May. Neither the United States nor its process server is able to ascertain Mr. Thomason’s location. Mr. Thomason’s last known residential address is in Casa Grande, Arizona, and all searches to date indicate that he still resides at this location. See Declaration of Marie Allen, Revenue Agent,¶2, Ex. A. IRS Revenue Officers attempted service at this address on numerous occasions. See id. There are no other known addresses for Mr. Thomason. In early July 2008, the Department of Justice retained Apple Attorneys and its Arizona- based affiliate to attempt service and to conduct another address search for Mr. Thomason. See Declaration of Nina Conigliaro, Ex. B. This process server attempted service on Mr. Thomson on at least five or six occasions, to no avail. Id. Each time, however, the process server “has observed various vehicles,” in front of the home where Mr. Thomason is believed to reside. Id. In addition, the process server tried numerous times to capture the attention of an occupant of the home. Id. He spoke with a neighbor who indicated that she did not know who lives at the address. The process server also “performed various searches [on address databases] that indicate that this address is still” where Mr. Thomason seems to reside. Id. Because the United States has not been able to serve Franklin Thomason at the address where he is believed to reside, the United States respectfully requests an enlargement of time in which to serve the complaint, and for permission to serve Thomason by publication. Relevant Law A. The United States Has Shown Good Cause for Obtaining an Enlargement of Time In Which to Serve Thomason A district court has “broad discretion” to grant an extension for a party to serve a complaint for good cause shown. See Fed. R. Civ. P. 4(m). See also EFAW v. Williams, 473 F.3d 1038, 1041 (9th Cir. 2007). Good cause “at a minimum means excusable neglect” and good cause also may require that a plaintiff show that “(a) the party to be served personally received actual notice of the lawsuit; (b) the defendant would suffer no prejudice; and (c) plaintiff would be severely prejudiced if his complaint were dismissed.” Lira v. Director of Corrections of the Case 3:07-cv-04762-PJH Document 97 Filed 08/18/2008 Page 3 of 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 4 - State of California, 2007 WL 43675 at * 2(N.D. Cal., Jan. 8 2007) (quoting Boudette v. Barnette, 923 F.2d 754, 756 (9th Cir.1991)). A district court also has broad discretion to enlarge the time for service, even in the absence of good cause. Mann v. Am. Airlines, 324 F.3d 1088, 1090 (9th Cir. 2003). As described above, the United States has clearly made a showing of good cause, having attempted service on Mr. Thomason on numerous occasions at the address where he is likely to reside and at the only address for which there is a record for him. Enlarging the time for service will not prejudice any of the parties, including Franklin Thomason, who likely has notice of the lawsuit. Thomason is a principal of Optech Limited, which is the company through which the 90% Loan is organized, promoted and maintained to customers. If the United States’ request for an enlargement of time is not granted, it will suffer substantial prejudice. In addition, because the estimated damage from defendants’ abusive tax shelters runs into the hundreds of millions of dollars, it is necessary to halt defendants’ unlawful conduct as quickly as possible. Moreover, there is little reason to think that Thomason would not continue to evade service in any subsequent suit filed against him. B. Service By Publication Is Appropriate The United States has met all of the requirements for effecting service by publication. The Federal Rules of Civil Procedure provide that service upon an individual “maybe effected in any judicial district of the United States pursuant to the law of the state in which the district court is located, or in which the service is effected, for the service of summons upon the defendant in an action brought in the courts of general jurisdiction of the State.” Fed. R. Civ. P. 4(e)(q). California’s Code of Civil Procedure, in turn, provides that “a summons may be served by publication if upon affidavit it appears to the satisfaction of the court in which the action is pending that the party to be served cannot with reasonable diligence be served in another manner specified . . . and that . . . [a] cause of action exists against the party upon whom service is to be made.” Cal. Civ. P. Code § 415.50. Case 3:07-cv-04762-PJH Document 97 Filed 08/18/2008 Page 4 of 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 5 - The United States’ inability to locate Franklin Thomason, in spite of numerous attempts at trying to locate and serve him, necessitates serving him through publication. See Allen Decl., Ex. A; Conigliaro Decl., Ex. B. Service by publication through a newspaper based in or nearby to Phoenix, Arizona, where Thomason is known to reside currently, is necessary to ensure that the United States is able to prosecute its case. CONCLUSION For all of the foregoing reasons, the United States respectfully requests that the Court grant it an additional sixty days in which to serve defendant Franklin Thomason with the complaint, extending the time for service until October 20, 2008. The United States further requests permission to serve Thomason by publication in accordance with the California Rules of Civil Procedure. Dated: August 18, 2008 Respectfully submitted, JOSEPH P. RUSSONIELLO United States Attorney /s/ Allyson B. Baker ALLYSON B. BAKER FREDERICK N. NOYES Tax Division U.S. Department of Justice Post Office Box 7238 Ben Franklin Station Washington, D.C. 20044 Telephone: (202) 353-8031 Case 3:07-cv-04762-PJH Document 97 Filed 08/18/2008 Page 5 of 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 6 - CERTIFICATE OF SERVICE I hereby certify that on August 18, 2008 I electronically filed the foregoing with the Clerk of the Court using the CM/ECF System which will send notification of such filing to the following: Farley J. Neuman (fneuman@jgn.com) Tom Prountzos (tprountzos@jgn.com) Jenkins Goodman Neuman & Hamilton LLP 417 Montgomery Street, 10th Floor San Francisco, CA 94104 Attorneys for Defendant, Robert Nagy David Bujannoff Porter, Jr. (porter@woodporter.com) Wood & Porter 333 Sacramento Street San Francisco, CA 94111 Attorney for Scott Cathcart Eric Webb (ewebb@elwlaw.com) Bartsch & Webb 9157 West Sunset Boulevard, Suite 310 Los Angeles, CA 90069 Attorney for Charles Cathcart Edward O.C. Ord (ordeoc@sbcglobal.net) Ord & Norman 233 Sansome Street, Suite 1111 San Francisco, CA 94104 Attorney for Charles Hsin and Optech Limited Yuri Debevc (pro se) 1483 Burningtree Road Charleston, SC 29412 ydebevc@attglobal.net /s/ Allyson B. Baker ALLYSON B. BAKER Case 3:07-cv-04762-PJH Document 97 Filed 08/18/2008 Page 6 of 6