Amended 2255 Motion 22-26

Hemming Morse, Inc.

11160 Spear Streel Suile 1900

Sail Francisco, CA 94105

II

T'

i

"one 14151 B36-4000

.Iile 14151 m-2062

[email protected]

Celtified Public AccoulTtant5 Utigstion end forensic CDnsultants

Frederick S. Wyle, Esq. Trustee in Bankruptcy

We have compiled the following financial statements, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants, for the following Companies substantively consolidated in bankruptcy including: a) Hamilton Taft & Company (a California corporation in bankruptcy); b) Knightsbridge Companies, Inc. (aTexas corporation in bankruptcy); c) Remington Companies, Inc. (a Texas corporation in bankruptcy); and d) Dresdner Enterprises, Inc. (a Texas corporation in bankruptcy): Consolidated Statement of Cash Receipts and Disbursements for the Cumulative Post-Petition Periods ended September 15, 1999; Consolidated Schedule of Cash Balances and Projected Disbursements as of September 15, 1999 These financial statements have been prepared on the cash basis of accounting, which is a comprehensive basis of accounting other than generally accepted accounting principles. The accompanying financial statements include both the consolidated Post-Petition periods and the periods of Trustee adn-.inistration for each debtor. For HarniHon Taft, both of these periods begin on March 20, 1991 (even though the T(Ustee was not appointed until March 26, 1991). The term 'Texas Debtors" is used in these financial statements to refer to Knightsbridge Companies, Inc., Remington Companies, Inc. and Dresdner Enterprises, Inc. For the Texas Debtors, the Post-Petition period begins on April 19, 1991 for Knightsbridge and on April 29, 1991 for Remington and Dresdner Enterprises. For the Texas Debtors, the period of Trustee administration begins on July 22, 1991, which is when Frederick S. Wyle, Esq. was appointed as interim trustee. The Trustee's appointment was made permanent on November 4, 1991 and also on that date the Bankruptcy Court ordered the SUbstantive consolidation of Hamilton Taft and the Texas Debtors. A Plan Of Reorganization for the bankruptcy estate has been confirmed by Court Order entered on October 25, 1994.

000133 II San Francisco

1 Los Angeles

Frederick S. Wyle Trustee in Bankruptcy Page Two

A compilation is limited to presenting, in the form of financial statements. information that is available to the Trustee. We have not audited or reviewed the accompanying financial statements and supplementary information referred to above and. accordingly, do not express an opinion or any other form of assurance on them. As required by generally accepted accounting principles, a complete financial statement includes a statement of assets. liabilities and equity, a statement of cash flows and substantive disclosures to further describe amounts included on the related financial statements. These disclosures have not been included with the accompanying statements. If these disclosures and a statement of cash flows were included in the financial statements, they might influence the user's conclusions about the Company's 'financial position, results of operations, and cash flows. Accordingly. these financial statements are not designed for those who are not informed about such matters.

~:299~~#'

9r1L

San Francisco, California

000134

Consolidated Hamilton Taft & Company and Texas Debtors (A Group of Affiliated Companies In Bankruptcy) Statement of Cash Receipts and Disbursements Cumulative Post-Petition Periods Ended September 15, 1999 (See Accompanying Accountant's Compilation Report)

EXHIBIT 1

000128

Consolidated Hamilton Taft & Company and Texas Debtors (A Group of Affiliated Companies In Bankruptcy) Statement of Cash Receipts and Disbursements Cumulative Post-Petition Periods Ended September 15,1999 (See Accompanying Accountant's Compilation Report)

Cumulative for Post-Petition Periods Hamilton Taft

Texas Debtors

Consolidated

Consolidated

To 10/31/91

To 10/31/91

Since 11/01/91

Total

Detail of Other Litigation and Claims Recoveries: $25,000

Recovered from Connie C. Armstrong, Jr. AI-Ibrahim settlement CIGNA settlement Dresdner Petroleum, Inc. Bankruptcy distribution Gulftex settlement payment received Godwin, Carlton settlement Grambling settlement Hadid settlement BartletuCosteIIolLitch fi eld settlements Paille settlement Weir Brothers bankruptcy distribution David McCall settlement Meadow Owens settlement ?arker Automotive settlement Preference settlement ~ Rosenberg settlement S & S Credit Corporation settlement Sandia Corporation recovery Total Litigation and Claim Recoveries

$0

$25,000

$345,106 475,000

$370,106 475,000

1,800,000

1,800,000

134,429

134,429

38,888

38,888

30,000

30,000

51,500

51,500

550.000

550,000

59,500

59,500

5,000

5,000

112,037

112.037

325,000

325,000

400,000

400,000

465,004

465,004

19,450,527

19,450,527

400,000

400,000

160,091

160,091

932,076

932,076

$25,734,158

$25,759,158

EXHIBIT 1-1

000129

Consolidated Hamilton Taft & Company and Texas Debtors (A Group of Affiliated Companies In Bankruptcy) Statement of Cash Receipts and Disbursements Cumulative Post-Petition Periods Ended September 15, 1999 (See Accompanying Accountant's Compilation Report)

Cumulative for Post-Petition Periods Hamilton Taft

Texas Debtors

Consolidated

Consolidated

To 10/31191

To 10/31/91

Since 11/01/91

Total

Detail of Other Receipts: Gross sale - real estate projects

$711,250

Gross sale - ranch $203,117

Gross sale -livestock (HTC Ranch)

$3,170,250

$3,881,500

4,300,000

4,300,000

158,300

361,417

Gross sale - ranch equipment & vehicles

116,645

116,645

Gross sale - rodeo partnership interest

250,000

250,000

Gross sale - stadium box Gross sale - vehicles

210,000

210,000

137,575

Gross sale - other assets

69,427

167,412

35,900

173,475

11,007

247,846 42,990

42,990

Expense reimbursements Monthly service fees

3,735

$32,109 24,974 97,455

Net customer funds (Tax Agency funds) Returned customer checks (Pre-Petition) Reimbursement-Ranch insurance claim Receivables recovered through distribution offset Recovery of Unclaimed Property

107,343 42,080 55.008 143,554

Recovery of costs allocated to other affiliates Other receipts (including insurance and other refunds, rental income, forfeited purchase deposits)

35,844 24,974 97,455 107,343 42,080 55,008 143,554

31,842

53,793

265,491

351,126

$596,499

$1,076,010

$B.768,749

$10,441,258

Balance as of bankruptcy petition Ranch cash balance as of August 1, 1991

$5,856,509 1,730

$74,133

Total Beginning Cash Balances

$5,858,239

$74,133

Total Other Receipts

Detail of Beginning Cash Balances

EXHIBIT 1-2

$5,930,642 1,730

$0

$5,932,372

000130

Consolidated Hamilton Taft & Company and Texas Debtors (A Group of Affiliated Companies In Bankruptcy) Statement of Cash Receipts and Disbursements Cumulative Post-Petition Periods Ended September 15, 1999 (See Accompanying Accountant's Compilation Report)

Cumulative for Post-Petition Periods Hamilton Taft To 10/31/91 Detail of Operating Costs Paid: Employee costs Employee costs - Ranch (Since 8/01191) Subtotal: Employee costs

$445.270 37,136 482,406

Cost of sale - livestock Cost of sale - ot.her assets Cost of sale - ranch Cost of sale· real estate projects Cost of sale - Rodeo Equipment leases Insurance Litigation costs Office supplies & expenses Other costs of operations Outside services Penalty for early withdrawal Portion of distribution returned on behalf of DPI Prepaid expenses & deposits Property and equipment PUblication costs Ranch operating costs Real Estate holding costs Relocation costs Rent

Texas Debtors Consolidated To 10/31/91 Since 11/01/91

Consolidated Total

$268,805

$531,802

268,805

196,317 728,119

$1,245.877 233,453 1,479,330

10,943 50,046 158,875 9.979 78,741 0 11,873 192,096 0

_,---

h? .... t:i??

4.947 234 30,699 36,397 5,814

5,490

Total operating costs paid

37.500 4,340 71,173

15,030

16.844 12,961

16.114

288,408

304,522 51,589

51.589 15,905 72,658

35.327

264.888 2,131 233,117

15,573

Travel & auto expenses Trustee's bond Trustee's miscellaneous costs Work-In-Process: Real Estate

193,693 446,338 23,179 4,800 22,470 37,500 4,340 3,161

1,814 12,961

Return of reimbursed expenses Taxes: Property & business Telephone

260,748 301,765 567

10,943 50,046 260.748 460,640 567 14,926 272,434 446,571 65,752 233,293 28,284

9,875 17,453 600

2,131 233,117 38.820

12,647

46,925 12,195 242,437

26,407 47,525 18,596 255,084

$587,163

$3,205,726

$4.832,921

6,401

$1,040.032

13,372 8,954

15.905 372,873

EXHIBIT 1-3

000131

Consolidated Hamilton Taft & Company and Texas Debtors (A Group of Affiliated Companies In Bankruptcy) Consolidated Schedule of Cash Balances And Projected Disbursements as of September 15, 1999 (See Accompanying Accountant's Compilation Report)

Cash Balances Operating Account: Union Bank Account No. 2190000551 Distribution Account: Union Bank Account No. 2190000004 Interest Bearing Accounts: Union Bank Money Market Account No. 1270009308 Union Bank Time Deposit Account No. 2199001302

Cash Balance - as of September 15,1999

$1,114,582 5,669

Closed Closed

$1,120,251

Projected Disbursements Professional Fees: Trustee and Trustee's Professionals Feldman, Waldman & Kline Shaver, Suntag & Feuerstein Garfield & Hecht Subtotal

24,990 6,149 7,090 38,229

Hemming Morse, Inc. Frederick S. Wyle Subtotal: Professional Fees

23,415 19,988 81,632

U.S. Trustee Fees Advance payment for future Annstrong collection efforts Contingency reserve

4,750 75,000 4,500 165,882

Subtotal: Projecled Disbursements Amount available for distribution to Class 4 Creditors

EXHIBIT 1-4

$954,369

000132

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L:\UnHTAFT\(DISTCUMjCum

HAMILTON TAFT & COMPANY Former Clients Included in Class 4 Claims Claims Outstanding After Fifth (Final) Distribution

0 0 0

Combined Claims Accepted Client Action Instruments Co., Inc. 4 Advo~System,

Inc,

Affiliated Computer Services, Inc. Air Cable, Inc. All American Gourmet Company Allen Foam Corporation America West Airlines, Inc. American Microsystems. Inc, American Nukem Corporation Analytikem Argo Partners (Genstar) Argo Partners (Pullman) Associated Coin Amusement Co. Atlas Hotels Inc, Balcor Payroll Company Blue Cross & Blue Shield Of Texas Brinkmann Instruments Brunswick Seat Company BW I LP International, Inc. C & R Clothiers California Pacific Medical Center Cartex Corporation Chase Manhattan Mortgage Corporation Chase Manhattan Mortgage Corporation Claris Corporation Clevite Bridgestone Co. Coast Fedral Bank Coherent, Inc. Commerical Credit Corporation Cavia Partnership Customer Company Cyar-l'em =nergy Services C'r

Class 4

Remaining

Cumulative

Balance Due on Client Claims

Allowed

Preference

Combinl;d

Distributions

Claim

Claim

Claims

Through Final

$96,654 1,796,288

$10,243 49,100

24,966 509,441 3,226 834,725 268,238 32,799 31.184 518,023 686,112 10,219 166,607 12,211 1,145,074 72,034 1,097 373,701 324,523 11 102,264 24 1663 850 156,040 164,333 2,734

122,980 673,873 59,221

549,990

196,986 56,882 112,144 335,973 3,454,766

1,792,402 102,935 49,063 4,000

$106,898 1,796,288 4B,100 24,966 509,441 3,226 834}25 268,238 32,799 3'1,184 51B,023 686,112 10,219 289,587 12,211 1,818,947 13'1,255 '\,097 373,701 324,523 1,652,255 24,663 850 353,027 22'\ ,215 2,734 112,144 335,973 3,454,766 1,792,402 102,935 49,063 114,000

$67,430 1,220,872 8,330 16,969 86,434 2,193 567,333 182,311 22,292 21,195 352,082 466.325 6.945 134,102 8,300 892,597 59,007 746 253,991 220,567 842,483 16 1 763 577 139,476 121,342 1,858 19,027 57,002 586,149 1,218 1 231 17,464 33,346 19,342

\

$39,467 575,416 40,769 7,998 423,007 1,033 267,393 85,926 10,507 9,989 165,942 219,786 3,273 155,485 3,912 926,349 72,249 351 119,710 103,956 809,772 7.900 272 213,550 99,873 876 93,118 278,971 2,868,617 574,171 85,470 1'" - ~ 7

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.....

L:lLlT\HTAFT\(DISTCUMICum

HAMILTON TAFT & COMPANY Former Clients Included in Class 4 Claims Claims Outstanding After Fifth (Final) Distribution

0

Q

Q

Combined Claims Accepted Client Degussa Corporation Del Manufacturing Company Delaware Seat Company Delhi Gas Pipeline Corporation Diamond Walnut Growers, Inc. Dole Foods (Castle & Cooke) Donnelley Receivable Inc. Dublin San Ramon Services Dist. Electric Power Research Institute ENSR Corporation Delaware • Federal Express Corporation First Capital Life Insurance Co. First Interstate Bank Glendale Adventist Medical Center Guckenheimer Enterprises, Inc. Guckenheimer Of Texas, Inc. H.D. Hudson Manufacturing Co. HBO & Company Of Georgia Healthquest Ltd. JBB Spirits Inc. • Jim Beam Brands Co. Kaytea Rose Inc. King Bearing, Inc. Lucasarts Entertainment Co. Lucasfilm, Ltd. Mabon, Nugent & Company McCutchen, Doyle Brown & Enersen Metromedia Company Mills College Monroe Systems For Business Mt. Diablo Medical Center, Inc. Natir~""l Data Corp. Union Fire Insurance Co. Nc-

Allowed Claim 774,491 22,851 14,905 47,210 3,142,907 108 45,353 117,734 710,511 30,387,795 139,054 $306,127 625,710 95,403 9,073 100,147 421,925 230,626 894 157,863 16,422 21 B,066 21,432 956,799 100,960 61,317

Preference Claim

81,866 125,006

232,167 8,879,948

578,154 92,604

55,747 237,832 11,657 331,657

83,263 660,778 160,725 84,148 10,145,712

61,114

..,

_.1 ..

Combined Claims 774,491. 22,851 14,905 47,210 81,866 3,267,913 108 45,353 349,901 710,511 39,267,744 139,054 $306,127 1,203,864 188,007 9,073 100,147 421,925 230,626 894 213,610 16,422 237,832 229,723 21,432 1,288,456 100,960 61,317 83,263 660,778 221,839 84,148 10,145,712

Class 4

Remaining

Cumulative

Balance Due

Distributions Through Final 526,394 15,531 10,131 32,087 13,890 2,157,329 74 30,825 119,410 482,908 22,160,093 94,510 208,063 523,364 80,554 6,166 68,067 286,767 156,748 608 116,752 11,162 40,352 150,189 14,567 706,572 68,619 41,675 14,127 449,107 119,608 57,192 6,895,674

on Client Claims 248,098 7,320 4,775 15,123 67,976 1,110,583 35 14,528 230,491 227,602 17,107,650 44,544 98,063 680,500 107,453 2,906 32,OB1 135,158 73,878 287 96,858 5,261 197,481 79,534 6,866 581,884 32,341 19,642 69,136 211,671 102,231 '2C' ""'C;6 3,2

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HAMILTON TAFT & COMPANY Former Clients Included in Class 4 Claims Claims Outstanding After Fifth (Final) Distribution

Client NEC Electronics, Inc. Neiman-Marcus Group, Inc. Northland Plastics Inc. Norwest PUblishing Co. Nukem Acquisition Corporation Nukem Technologies Corp. Oakland Athletics Baseball Company Payless Shoe Source Polytechnic University 4 RR. Donnelley & Sons Co. Reckitt & Coleman Inc. Richmond Wholesale Meat Co. Riverside Seat Company, Inc. Rochester Institute Of Technology Root-Lowell ManUfacturing Co. Ross Stores, Inc. S & S Credit Companies, Inc. SCM Chemicals, Inc. SCM Metal, Inc. • Scott Paper Co. Signet Armorlite, Inc. Signetics Company Sinai Hospital Of Detroit Sinai Management Services Co. Sitka Corporation Sony Corporation Of America SOS Environmental Technology Southland Corp. Employees Trust Springfield Sugar & Products Co. Springfield Terminal Rail. Co. Stanford University Hospital Statp qar of California St; \rkansas

a

0

0 0

Combined Claims Accepted Preference Combined Allowed Claim Claim Claims 520,136, 284,206 235,930 553,251 1,129,769 1,683,020 7,235 7,235 45,237 45,237 80 80 24,700 24,700 90,499 201,359 291,858 270,558 2,584,875 2,855,433 640,705 290,260 930,965 4,270,423 21,406 4,291,829 2,263,957 2,263,957 45,223 45,223 16,829 16,829 103,799 103,799 35,745 35,745 701,.943 701,843 158,930 9,428,449 9,587,378 161,498 207,834 369,332 49,347 37,661 87,008 253,807 253,,907 50,106 108,434 158,540 6,212,016 6,212,016 1,378,310 695,032 2,073,342 17,658 17,658 12,588 12,588 563,774 563,774 8,363 8,363 178,993 178,993 351,368 175,566 526,'335 279,009 279,009 3,512,722 1,068,095 4,580,0317 36,787 185,174 221,961 45,465 45,465 " :\ nf 4

Class 4 Cumulative Distributions Through Final 233,193 567,706 4,917 30,746 54 16,788 95,672 622,449 484,711 2,906,084 1,538,730 30,736 11,438 70,549 24,295 477,018 1,707,686 168,658 39,929 172,504 52,453 4,222,083 1,054,709 12,002 8,556 383,177 5,684 121,655 268,600 189,633 2,568,688 56,420 30,901

Remaining Balance Due on Client Claims 286,943 1,115,314 2,318 14,491 25 7,912 196,185 2,232,985 446,254 1,385,745 725,227 14,487 5,391 33,251 11,450 224,826 7,879,692 200,674 47,079 81,304 106,086 1,989,933 1,018,633 5,657 4,032 180,597 2,679 57,338 258,335 89,377 2,012,130 16&:: ~41 I Drpn:

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HAMILTON TAFT & COMPANY Former Clients Included in Class 4 Claims Claims Outstanding After Fifth (Final) Distribution

0 ~

0

Combined Claims Accepted Combined Allowed Preference

Client Sun Microsystems Federal, Inc. Sun Microsystems Of California Sun Microsystems, Inc. Sun Microsytems Europe, Inc. • Sunbelt Beverage Corp. Sunsweet Growers, Inc. Sybon Transition Corporation T.D.S. Foods, Inc. Tandem Computers, Inc. Texas Oil & Gas Corporation The Chronicle Publishing Co. The Cooper Companies. Inc. The EVB Company • The Kendall Company The Vintage Club Thermalkem Ungermann-Bass, Inc. United Savings Bank Verbatim Corporation Waste Chern Corporation WBF Technologies William Marsh Rice University Woodbridge Corp. Woodbridge Foam Fabricating Woodbridge Holdings, Inc. Woodbridge INAGC, Inc. Woodbridge Sales & Engineering Claims of Former Clients

Claim 24,072 3,071 791,228 991 235,423 13,141 8,803 11.306 2,036,652 34,562 1,088,632 18,289 27,318 1,021,088 23,614 57,304 1,030,845 96,676 390,760

Claim

5,240,057 43,717

48,935 170,640 25,902 210,590 89,654

22.386 421 829 1202 88,031 18.529 458 30.779 4286

361,364 83,090

.~--

$90,0.46,313'

$39,717,006-

Class 4 Cumulative Distributions

Claims 24,072. 3,071 791,228 991 235,423 13,141 8,803 11,306 7.276,709 78,279 1,088,632 18,289 76,253 1,191,728 49,516 57,304 1,241,435 186,330 390,760 22,386 421 1,190,565 171,121 18,529 458 30.779 l1,286

Through Final 16,361

$129.763,319

$67,939,768

2,087 537,769 674 160,008 8,931 5,9S3 7,684 2,273,287 30,908 739,904 12,431 26,870 722,948 20,444 38.947 736,358 80,918 265,586 15,215 286 624,889 73,929 12,593 312 20,920 2,913

Remaining Balance Due on Client

Claims 7,711 984 253,459 318 75,414 4,210 2,820 3,622 5,003,422 47,371 348,728 5,859 49,383 468,780 29,072 18.356 505,078 105,412 125,175 7,171 135 565,677 97,192 5,935 147 9,860 1,373 $61,823,550

•

HemmingMorselnc Certilted PublIc AcrolinTiJ·-~:

"

•

I

S.n Mltl. Dfliee , 160 BO,,"1 Aa.~ founh floo' Sen Male". CA 9t402

•

T~I.~hon,

I( 1~1 57'·19u~ f.J ,,':,\ l7fi·409~

• Frederick S. Wyle, Trustee for Hamilton Taft & Company

•

ACCOUNTANrs REPORT

•

We have compiled the accompanying consolidated statements of cash receipts and disbursements of Hamilton Taft & Company (a California corporation in bankruptcy), Knightsbridge Companies, Inc. (a Texas corporation in bankruptcy), Remington Companies, Inc. (a Texas corporation in bankruptcy), and Dresdner Enterprises, Inc. (a Texas corporation in bankruptcy) and the statement of cash receipts and disbursements of Dresdner Petroleum, Inc. (a Texas corporation in bankruptcy) for the Post-Petition and Trustee periods ended December 31, 1991 in accordance with standards established by the American Institute of Cenified Public Accountants. A compilation is limited to presenting, in the form of financial statements, information that is the represenllltion of management. We have not audited or reviewed the accompanying

•

financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

1f"'~tt m~-M) Qfl<:.-.

•

San Mateo, California February 19 1992 I

• 1./

• •

I'

I

A-Ol

'.

• •

CONSOLIDATED HAMILTON TAFT & COMPANY AND TEXAS DEBTORS (A Group of Affiliated Companies In Bankruptcy) Statement of Cash Receipts Bnd Disbursements For the cumulative Post-Petition periods ended December 31,1991 (See Accountant's Compilation Report)

•

• •

• •

Cumulative for Post-Petition Periods Consolidated Hamilton Taft Texas Debtors Consolidated Total To 10/31/91 To 10/31/91 Since 11/01/91 Receipts: Gross real estate sales Less sales costs Net proceeds from sale of real estate

711,250 (158,875) 552,375

Net proceeds 1rom sale of livestock - HTC Ranch Net proceeds 1ram sale of other assets Interest received Meadow Owens settlement Other receipts (See Detailed SchedUle) Total Receipts Disbursements: Employee costs: Ranch (Since 8/01191) Employee costs: Other Subtotal: Employee costs

Beginning Cash and Cash Equivalent Balances Balance as of bankruptcy petition Ranch cash balance as of August 1, 1991 Transfer of Texas Debtors' cash balances Ending Cash and Cash Equivalent Balances

•

•

167,412 284

186,380 704,564

37,136 445,270 482,406

489,098 Other operating costs (See Detailed Schedule) Professional Fees: Trustee and Trustee's Professionals Trustee's Attorney & Accountant 634,404 20,811 Trustee's Appraiser and Consultants 104,088 Trustee's fees Professional Fees: Creditors' Committee 14,536 Professional Fees: Debtor-in-Possession Ranch operating costs 16,114 Settlement Bank One furniture lease 188,945 Trustee's administrative costs 5.835 Trustee's bond 4,500 U.S. Trustee fees Disbursements for operations 1,940,737 Net transfers to Petroleum Total disbursements 1,940,737 Excess of Disbursements over Receipts

•

192,174 156,956 169,054

A-02

120,000 (20,937} 99,063

831,250

(179,812) 651,438 331,623

78,793 798,865

139,449 17,680 14,403 400,000 19,490 690,085

183,741 400,000 284,663 2.193,5T3

268,805 268,805

20,179 21,415 41,594

57,315 735,490 792,805

16.829

79,009

564,936

342,399 13,664

976,803

7.570

23,394

13,516

6,435 20,360 452

342,048

'.

42,045 104,088-: 'i'm...,ff.( 37,930

19,951

36,494 188,945 6,287

600 2,100 309,420 60,000 369,420

527,327

2,m,484

527,327

60,000 2,837.484

(1,236,173)

429,445

162,758

5,856,509

74,133

5,930.642 1,730

503,Sn

(503,Snl

0

$5,125,643

$0

I

600 6,600

'1,730

$162.758

(643,971)

$5,288,401

•

•

CONSOLlDATED HAMILTON TAFT & COMPANY AND TEXAS DEBTORS (A Group of Affiliated Companies In Bankruptcy) Statement of Cash Receipts and Disbursements For the cumulative Post-Petition periods ended December 31,1991 (See Accountant's Compilation Report) Cumulative for Post-Petition Periods Consolidated Texas Debtors Consolidated Total To 10/31/91 To 10/31/91 Since 11/01/91

•

Hamilton Taft

D.9t!'.il. of. Ot."'!!~

• •

• •

R!!OOi,~t.!::

Monthly service fees Returned customer checks (Pre-Petition) Net customer funds [fax Agency funds) Other receipts 1 clal Other Receipts Detail of Other Operating Costs Paid: Equipment leases Insurance Utigation costs Office supplies &. expenses Other costs of operations Outside services Postage,freight & shipping Publication costs Relocation costs Rent Supplies Telephone Travel &. auto expenses Work-In-Process: Real Estate Affiliate expenses paid Accrued liabilities: Post- Petition Costs allocated to other affiliates Prepaid expenses & deposits Property and equipment

78,793

19,490

$32,109 97,455 24,974 130,125

$186,380

$78,793

$19,490

$284,663

$9,979 78,741 1,411 0 51,006 0 4,283 12,961 15,905 72,658 11,873 15,573

$4,947

62.522 1,814

Total other operating costs

$469,098

• A-03

$14,926 86,626 12,632 37,074 87,527 21,212 4,601 12,961 15,905 121,684 11,873

234 30,699 36,397 5,814

$7,885 10,986 6,375 124 15,398 516

35,327

13,699

9,875 17,453

1,573

27,021

ass

14,147

20,550

18,30B 34,697

2,946 127,426

•

•

$32,109 97,455 24,974 31,842

2,946

609 (143.554) 5,490 435 $16,829

$79,009

128.035 (143,554) 68,012 2,249 $564,936

'.

•

• •

• •

• •

•

CONSOLIDATED HAMILTON TAFT & COMPANY AND TEXAS DEBTORS (A Group of Affiliated Companies In Bankruptcy) Statement of Cash Receipts and Disbursements For the cumulative periods of Trustee Administration ended December 31, 1991 (See Accountant's Compilation Report) Cumulative Trustee Periods Hamilton Tett Texas Debtors Consolidated Consolidated To 10/31/91 To 10/31/91 Since 11/01/91 Total Receipts: Gross real estate sales Less sales costs Net proceeds from sale of real estate

$593,750 (134,192) 459,558

Net proceeds from sale 01livestock-HTC Ranch Net proceeds from sale 01 other assets Interest received Meadow Owens settlement Other receipts (See Detailed Schedule) Total Receipts Disbursements: Employee costs: Ranch (Since 8/01/91) Employee costs: Other Subtotal: Employee costs Other operating costs (See Detailed SchedUle) Professional Fees: Trustee and Trustee's Professionals Trustee's Attorney & Accountant Trustee's Appraiser and Consultants Trustee's fees Professional Fees: Creditors' Committee Professional Fees: Debtor-in-Possession Ranch operating costs Settlement Bank One furniture lease Trustee's administrative costs Trustee's bond U.S. Trustee fees Disbursements for operations Net trans1ers to Petroleum Total disbursements

$713,750 (155,129) 558.621

331,623 342,048 183,741 400,000 281,067 2,097.101

192,174 156,956 169,054

167,412 284

186,380 704.564

75,197 702,452

139,449 17,680 14.403 400.000 19,490 690,085

37,136 445,270 482,406

195,523 195,523

20,179 21,415 41,594

57.315 662,208 719,523

469,098

(58,645)

79,009

489,483

7,570

342,399 13,664

976,803 42,045 104,088

23,394

37,930

6,435 20,380

, 9.851 36.494 188,945

452

6,287

634,404

20,811 104,088 14,536

13.416 16,114 188,945 5,835

600

600

1,94{),137

2,100 160,565 70,500 231 ,065

527,321

6,600 2,628,629 70.500 2,699,129

Excess of Disbursements over Receipts

(1,236,173)

471,387

162,758

(602,028)

Beginning Cash and Cash EqUivalent Balances Balance as of appointment of Trustee Ranch cash balance as of August 1,1991 Transfer 01 Texas Debtors' cash balances Adjusted beginning balances

5,856,509 1,730 503,Sn

32,190 (503,Sn)

$5.125,643

$0

Ending Cash and Cash Equivalent Balances

• •

$120,000 (20,937) 99,063

A-04

4,500 1,940,737

527,327

5,B88 ,699 1,730 0

$162,758

$5,288.401

•

•

•

CONSOLIDATED HAMILTON TAFT & COMPANY AND TEXAS DEBTORS (A Group of Affiliated Companies In Bankruptcy) Statement of Cash Receipts and Disbursements For the cumulative periods of Trustee Administration ended December 31, 1991 (See Accountant's Compilation Report) Cumulative Trustee Periods Hamilton TaJ! Texas Debtors To 10/31/91 To 10131191

•

.

Di;!t;\i1 01 Other Receipts: Monthly service fees Returned customer checks (Pre-Petition) Net customer funds (Tax Agency funds) Other receipts Total other receipts

•

•

•

Detail of Other Operating Costs: Equipment leases Insurance litigation costs Office supplies & expenses Other costs of operations Outside services Postage,freight & shipping Publication costs Relocation costs Rent Supplies Telephone Travel & auto expenses Work-In-Process: Real Estate

19,490

$186,380

$75,197

$19,490

$28',067

27,382 261

7,885 10,988 6,375 124 15,398 518

31,994

13,699

4,291 5,507 12,735

1,573 855 20,550

$9,979 86,626 12,399 33,757 51,391 15,398 4,801 12,961 15,905 118,351 11,873 21,437 6,362 33,285

(143,554)

609

2,946 (15,519)

0

4.283 12,961 15,905 72,658 11,873 15,573

2,946 127,426

• •

75,197

°

•

A-OS

Total $32,109 97,455 24,974 126,529

51,006

Total other operating costs

Consolidated

$32,109 97,455 24,974 31,842

$9,979 78.741 1,411

Affiliate expenses paid Accrued liabilities: Post - Petition Costs allocated to other affiliates Prepaid expenses & deposits Property and equipment

Consolidated Since 11/01/91

62,522 1,814

2.740

$469,098

($58,645)

65,262

435

2,249

$79,009

$489,463

•

• •

DRESDNER PETROLEUM, INC. (A Texas Corporation in Bankruptcy) Statement of Cash Receipts Bnd Disbursements For the cumulative Post-Petition Period and the cumulative period of Trustee Administration ended December 31,1991 (See Accountant's Compilation Report)

•

• •

• •

•

Post - Petition Period: 4/29/91 Through

Through

12/31[91

12/31/91

$667,915 416.422 251,493

$415,613 332,750 82,863

Interest received from Affiliates Other receipts Refund of legal fees Receipts before transfers from Affiliates

151 5,341 7,759 264,742

1,850 7,759 92,622

Transfers From Affiliates: Transfers from Knightsbridge Repayment of Petroleum transfer to Remington Total receipts

60,000 10,500 335,242

Receipts: Oil and gas revenues Less costs of production Net proceeds from 011 and gas revenues

Disbursements: Employee costs Insurance Interest paid to affiliate Office expenses Property taxes Purchase offield equipment Rent Telephone Travel and entertainment Trustee's bond U.S. Trustee fees Disbursements for operations Transfers To Affiliates: Transfer to Remington Total disbursements

151

60,000

10,500 163,122

259.421 9,941 78 767 403

134,331 9,941

6,633 14,887

6,633

6,995 182 300 3,000 :302,607

597 300 2,250 163,681

10,500 313.107

163,6B1

78 746 403

8,220 182

Excess receipts (disbursements)

22,136

Beginning cash balance

25,023

47,718

$47.'59

$47,159

Ending cash balance

• •

Trustee Period: 7/22{91

A-06

(559)

o

•

~. CONSOLIDATED ES~ArE HAMILTON !rAI"T CUSroMER CLAIMS

o

•

•

• •

CREDITOR ACTION INSTRUMENTS CO., INC. ADVO-SYSTEM, INC. AIR CABLE, INC. ALLEN FOAM CORPORATION AMERICA WEST AIRLINES, INC. AMERICAN MICROSYSTEMS, INC. AMERICAN NOXEM CORPORATION AMERICAN RESIDENTIAL ESCROW AMERICAN RESIDENTIAL MORTGAGE ANALYTIKEM ARRAY TECHNOLOGY CORP. AS~OC!~~EP corN AMUSEMENT co ATLAS HOTELS INC. BALCOR PAYROLt.. COMPANY BARCLAY HOLLANDER CORP BEEBE ORCHARD CO. 9~UE CRCZS & BLUE SHIELD OF TX BLUE GOOSE GROWERS INC. BLUE GOOSE GROWERS, INC. BOARD OF TRUSTEES, STANFORD BOSTON & HAINE CORPORTATION BosrON & HAINE CORPORTATION BOYLE MIDWAY INC, BOYLE-MIDWAY BRINKMANN INSTRUMENTS BRUNSWICK SEAT COMPANY BUD ANTLE, INC. BUD ANTLE, INC. BW / IP INTERNATIONAL, INC. C & R CLOTHIERS CALIFORNIA PACIFIC HED. CTR. CARTEX CORPORATION CASTLE & COOKE CASTLE & COOKE PROPERTIES CASTLE & COOKE RESIDENTIAL CASTLE ~ COOKE, INC. CASTLE COOKE RETAIL, INC. CITY OF PIEDMONT CITY OF PINOLE CITY OF PINOLE CLA.~:G CORPORATION CLEVITE BRIDGESTONE CO. COAST FEDERAL BANK caVIA PARTNERSHIP CYANOKEH

• •

CORPORATION DEL MANUFACTURING COMPANY DELAWARE SEAT COMPANY DELHI GAS PIPELINE CORPORATION DIAMOND WALNUT GROWERS DOLE FOOD COMPANY, INC. DONNELLEY RECEIVABLE INC. DUBLIN/SAN RAMON SRVCS DSTRCT ELECTRIC POWER RESEARCH INST. ENSR CORPORATION DELAWARE

D~GUSSA

MAXIMUM

SCEiEDULED I ~ I( AMOUNT <11~~d " .] . ~.,11'

POTENTIAL CLAIM

---------------

592,092.84 $1,779,836.08 524,966.22 $3,226.23 S834,725.41 $267,401.62 $32,798.85 $849.68 $156,040.21 $31,184.29 . 535,106.01 S8,407.32 5167,024.91 $12,211.47 $3,617.50 $14,489.18 51,156,576.76 $274,931.33 $6,285.72

$268,237.64 $32,798.85 $175,862.00 $31,184.29

$10,218.74 $166,607.00

S1,257,~23.47

$296,991.4B $845.20 $5,572.54 $4,314.91 $7,618.24 $72,034.16 $1,096.88 $229,477.87 $890,046.07 $370,697.23 $324,523.13 $1,106,353.90 $24,663.04 $1,BB9.86 $28,848.13 $74,588.42 5223,640.91 $27,522.14 $3,578.58 $2,843.17 $164,378.45 $2,733.94 $1,793,303.Bl $49,063.07 P46,6BO.78 $22,552.14 $14,905.38 $47,209.72 $5,986.84 $1,592,062.34 $108.26 545,012.29 5117,950.60 $110,506.19

$386,932.78 $1,102,264.05

$1,211. 71 $3,232.54 $164,332.89 $7,476.29 $1,792,401.81 $49,063.07 $977,077.10 $22,851.14

$50,209.72 $7,421.34 $3,142,906.64 $45,352.57 SUB, 982.22 $ilO. 506.56 /1/....

•. J

..

j

.'

..... ,

r - ,---

02/19/92

•

596,654.31 $1,796,28B.32 $24,966.22 $3.,226.23 $834,725.41 $268,237.64 $32,798.85 S849.68 $175,862.00 $31,184.29 $35,106.01 $10, 21B. 74 $166,607.00 $12,211.47 $3,617.50 $14,489.18 $1,257,623.47 $274,931.33 $6,285.72 $296,991. 48 $845.20 55,572.54 _ $4,314.91 $7,618.24 $72,034.16 $1,096.88 $229,477.87 S890,046.07 $366,932.78 $324,523.13 $1,102,264.05 $24,663.04 $1,889.86 $28,848.13 $74,588.42 S223,640.91 $27,522.14 53,578.58 $1,221.71 $3,232.54 $164,332.89 $2,733.94 $7,476.29 $1,792,401.81 $49,063.07 $977,077.10 $22,851.14 $14,905.38 $50,209.72 $7,421.34 $3,142,906.64 5108.26 $45,352.57 $138,982.22 $710,506.56

596,654.31 $1,796,288.32

C-3

c

• CONSOLIDATED ESTATE

HAMILTON TA!"".r CUSTOMER CLAIMS

•

•

CREDITOR FEDERAL EXPRESS CORPORATION 3.J,>-.l\ FIRST CAPITAL LIFE INSRNCE CO. GENSTAR STONE PRODUCTS COMPANY GLENDALE ADVENTIST HED. CTR. GUCKE~IKER ENTERPRISES, INC. GUCKENHElKER OF TEXAS, IHC. H.D. HUDSON MANUFACTURING CO. HBO & COMPANY OF GEORGIA REALTHQUEST LTD. J.E.G. FOODS, INC.

•

•

JBB SPIRITS INC. JIM BEAM BRANDS co. KAYTEA ROSE, INC. KEMPER SECURITIES GROUP LANAI COMPANY, INC. LANAI COMPANY, INC. LONG BEACH CONTAINER TERMINAL LUCASARTS ENTERTAINMENT co. LUCASFILH, LTD. KASON, NUGENT & COMPANY KADON, NUGENT & OOHPNAY KAINE CENTRAL AAILROADS CO. HCCUTCHEN,DOYLE,BROWN& ENERSEN MC! TELECOMUNICATIONS CORP. HETROMEDIA COMPANY

MILLS COLLEGE MONROE SYSTEMS FOR BUSINESS INC MT. DIABLO HOSPITAL NATIONAL DATA CORP.

•

• •

•

NATIONAL DAT~ PAYMENT SYSTEMS NEC ELECTRONICS, INC. NEIMAN-MARCUS GROUP, INC. NORTHLAND PLASTICS I~C. NORWEST PUBLISHING CO. NUKEM ACQUISITION CORPORATION NUJ'-EM TECHNOLOGIES COlU'ORATION OAHU TR1\NSPORT CO., LTD. OAKLAND ATHLETICS BASEBALL co. OBS FINANCIAL SERVICES OCEANIC CONSTRUCTION COMPANY PAYLESS SHOE SOURCE POLYTECHNIC UNIVERSITY R.R. DONNELLEY & SONS COMPANY RECKITT & COLEMP.N INC. RECKITT & COLEMAN INC. RICHMOND WHOLESJU.E MEAT CO. RIVERSIDE SEAT COMPANY I INC. RKO GENERAL INC. RM MARKETING INC. ROCHESTER INSTITUTE OF TECH. ROOT-LOWELL MANUFACTURING CO. ROSS STORES, INC. 5 & 5 CREDIT COMPANIES, INC. 5.0. WARREN CO.

SCHEDULED

PROOF OF CLAIM

AMOUNT

AMOUNT

530,432,796.91 $127,193.73 $51B,023.25 $625,353.80 $95,403.19 $9,072.69 $100,556.49 $420,311.80 $203,803.91 $1,027.79 S894.46 $157,862.79 S16,422~4e 51,078.'73 $114,888.19 $3,550.91 $9,899.80 $218,065.99 $21,432.34 5954,798.68 $2,000.00 $411.01 $99,993.14 $102.95 $60,685.10 $2,163.98 $660,777.55

$28,319,089.05 S139,054.00 $603,765.00 $625,109.80 S98,091.81 59,414.00 $101,862.64 $421,924.80 $230,626.01

$146,033 .47 $68,911.30 $14,454.42 $285,282.60 $2,686,127.26 $7,234.95 $45,237.26 $79.62 S24,700.27 $2,209.85 $90,365.04 $4,779.92 $38,607.53 $271,349.37 5581,564.39 $4,243,286.64 $1,888,208.34 $246,309.17 $43,424.27 $16,828.57 $4,420.63 $5,231.14 S105,673.57 $35,745.10 $701,843.46 $158,929.53 53,206,607.68

$160,724.60 $84,147.82

02/19/92

•

C-4

$894.46 $157,862.79 $16,814.98 $1,078.73

$9,786.79 $231,851.32 $22,175.84

5985,407.53 $100,959.51 $51,317.00 $11,508.89 5660,777.55

5330,591.69 $553,250.70 $1,690.18

$24,700.27 $90,499.4"2

$1,052,856.30 5640,704.98 $5,143,366.45 $2,471,860.77 $45,222.87 $4,643.63

$36,340.00 5701,843.46 $3,206,607.68

MAXIMUM POTENTIAL CLAIM $26,319,089.05 5139,054.00 5603,165.00 $625,709.80 $98,091.81 $9,474.00 $101,862.64 $421,924.80 $230,626.01 $1,021.79 $B94.46 $157,862.79 $16,814.98 $1,078.03 $114,888.19 $3,550.91 $9,786.79 $231,857.32 $22,175.84 $985,407.53 $2,000.00 $411.01 $100,959.51 $102.95 $61,317.00 $11, 5D8. 89 $660,777.55 $160,724.60 $84,147.82 $14,454.42 $330,591.69 $553,250.70 $7,690.18 $45,237.26 579.62 $24,700.27 $2,209.85 $90,499.42 $4,779.92 $38,607.53 $1,052,856.30 $640,104.98 $5,143,366.56, $2,411,860.77 $246,309.17 $45,222.87 $16,828.57 $4,643.63 $5,231.14 S105, 673.57 $36,340.00 $701,843.46 $158,929.53 $3,206,607.68

'I

• CONSOLIDATED ESTATE HAMILTON TAP'T CUSTOMER CLAIMS

•

•

•

CREDITOR SANDI~ NATIONAL LABORATORIES SCM CHEMICALS, INC. SCM METAL PRODUCTS, INC. SCOTT CONTAINER PRODUCTS GROUP SCOTT PAPER COMPANY SCOTT PAPER COMPANY

SCOTT POLYMERS

SCOTT WORLDWIDE, INC. SIGNET ARHORLITE, INC. SIGNETICS COMPANY SINAI HOSPITAL OF DETROIT SINAI MANAGEMENT SERVICES co. SITKA CORPORATION SONY AVIATION SERVICES SONY CAPITAL CORP. SONY CHEMICAL CORP. OF AMERICA SONY CLASSICAL

•

• •

SONY CORPORATION OF AMERICA SONY USA INCORPORATED SONY US~, INC. SOS CALIFORNIA DIVISION 50S ENVIRONMENTAL TCHNLG, INc. SOSTM SOUTHLAND CORP. EMPLOYEES TRU. ·SPRINGFIELD SUGAR & PRDCTS CO. SPRINGFIELD TERMINAL RAIL. CO. SPRINGFIELD TERMINAL RAIL. CO. STANFORD UNIVERSITY HOSPITAL STATE OF ARKANSAS

•

PROOF OF CLAIK

AMOUNT

AMOUNT

$206,809.05 $49,347.49 $53,553.33 $7,086,801.47

$44,471.87 $6,294.42 $830.33 550,105.99 $6,212/016.45 $1,377,666.01 $17,195.19 $12,047.50 $2,539.67

$982.72 $967.24 $420.24

$414,189.15 $5,978.17

$300,000.00

$65.785.93 $53/553.33

$65,785.93

$7 .OB6, B01.47 $44,471.87

$7, OB6, 801. 47 $44,471. B7

$6,294.42 $830.32

$6,212/016.45

$6,294.42 $830.32 $50,105.99 $6.212,016.45

$1,567,207.70 $17,773.73

$1,567,207.70 $17,773.73

$12,5B8.32 $2,638.13

$12,588.32

$1,572.72

$1,572.72 $967.24

$967.24 $1,010.24 $541,129.92 $10,347.03 $2,366.56

$1,010.24 $541,129.92 $10,347.03 $2,366.56

$351,368.47 $51,705.83

$446,261.18

$17B,993.14 $446,261.18 $51,705.83

$188,420.35 $3,512,722.32

$296,014.77 $3/512,722.32

$296,014.77 53,512,722.32

$50,011.56 524,071. 78

$50,011.56 $24,071. 78

$8,362.82

$6/306.52

$3,070.86

$3,070.86

$791,227.64

$791,227.64

$7,814.25 $235,422.69

$991.44 $9,163.44 $239,938.37

$9,163.44

$13,141.02

$14,925.70

$8,671.81

$8,803.44

$528.51

$11,306.08

$12,235.50

$2,794.142.85

TEXAS OIL Iio GAS CORPORATION

THE ALL AMERICAN GOURMET CO. THE CHRONICLE PUBLISHING CO. THE COOPER COMPAlIIES, INC.

$830.74 $1,088,632.47 $IB,316.15

KENDALL COMPANY KENDALL COMPANY OF NEVADA PULLMAN COMPANY STATE BAR OF CALIFORNIA THE VINTAGE CLU8 THERMALKEH TRANS-ADVO SYSTEMS, INC. UNGERMANN-8ASS, INC. UNITED SAVINGS BANK VALLEY FIG GROWERS

$2,838.13

$1,590.29

$1,960,838.18 $40,708.11 $30, S81. 22

THE THE THE THE

$53,553.33

$8,362.82 $6/306.52 $176,993.14

SUN-MAID GROWERS OF CALIFORNIA SUNBELT BEVERAGE CORP. SUNSWEET GROWERS, INC. SYBRON TRANSITION CORPORATION T.D.S. FOODS, INC. TANDEM TELECOMMUNICATIONS SYST

$207,834.04

-5675.53 $3,836.03 $178,993.18

$23/660.37 $3,085.14 S801,887.97

-TANDEM COMPUTERS, INC.

MAXIMUM POTENTIAL CLAIM

$300,000.00 $207,834.04

$1,590.29

SUN MICROSYSTEMS FEDERAL, INC. SUN MICROSYSTEMS OF CALIFORNIA SUN MICROSYSTEMS, INC. SUN HICROSYTEHS EUROPE, INC.

THE Eva COMPANY

•

SCHEDULED

$53,299.35 $33,974.00 $1,163,471.01

$1,018,911.86

$18,289.24 $32,566.74 $1/320,460.00

$331. 74 $687,920.28

$736,111. 75

$11,455.66

$36,787.19

$20,328.05 $57,303.54 $11,169.40 $1,030,844.77 $95,731.15 $5,988.90

$23,613.57 $57,303.54

$991. 44 $239,938.37 $14,925.70 $8,803.44

$12,235.50 $2,794,142.85 $40,106.11 $53,299.35 $33,974.00

$1, Hi3.471.01 $18,289.24 532,566.74 $1,320,460.00 $331. 74 $136,111. 75 $36,787.19 $23,613.57

$57,303.54 $11,169.40

$1/101,703.57 $96,675.75 $7,227.26

$1,101,703.57 596,675.75 $7,227.26 ~. ~

02/19/92

•

C-5

..

o

•

c· COMSOLIDATBD BBTATE HAMILTON 'rAPT CUSTOMER. CLAIMS

•

• •

CREDITOR VERBATIM CORPORATION WAHIAWA WATER CO., INC. WAIALUA SUGAR CO., !NC. WAIALUA SUGAR CO., INC. WASTE CHEH CORPORATION WBF TECHNOLOGIES WILLIAM KARSH RICE UNIVERSITY WILLIAM HARSH RICE UNIVERSITY WINCUP, INC. WOODBRIDGE CORP. WOODBRIDGE FOAM FABRICATING WOODBRIDGE HOLDINGS, INC. WOODBRIDGE INOAC, INC. WOODBRIDGE SALES & ENGINEgRING Total:

PROOF OF CLAIM

AMOUNT

AMOUNT

$391,051.78 $473.90 $46,407.38

$451,398.96

$451,398.96 $473.90 $46,407.38 $43,377.27

$22,385.78

$22,385.78 $421.44 $34.26 $B29,201.50 $980.19 $88,031.42 $18,528.81 $209,353.81 $30,799.40 $4,285.96

$43,377.27 $22,385.78 $421. 44

$34.26 $829,167.24 $980.19 $88,031.42

$18,528.B1 $458.47

$829,201. 50 $980.19

$209,353.81

$30,799.40

$4,285.96

==;====.:::::=::;:::=::==

===:::======:::==::======

$91,925,180.61

$90,790,426.62

•

• •

• • 02/19/92

•

MAXIMUM POTENTIAL CLAIM

SCHEDULED

C-6

==========:======

$95,123,932.26

Memorandum

To

SAC, San Francisco ({'f(..I1-SF-Q1)'5'5)(P)

From

S~

f

3/8/92

b7C

Connie Chip Armstrong, et al dba, Hamilton Taft and Company, et al San Francisco, Ca. FBW (B); Mail Fraud, Bankruptcy Fraud,

Subject

DlIle

(A)j

OO:SF

On the afternoon of March 5, 1992 a meeting was held at the office of AUSA Michael Yamaguchi to discuss prosec~u~t_~_'o __n ~ __ strategy in the above referenced matter. Present werel~====~==~= ESQ. representing the bankruptcy trustee. Also present was Mr. Ronald -Smetana, Deputy Attorney General, Major Fraud unit of the california state Attorney General's office. SA's Will Hatcher and I represented the FBI. ' •• - '

,t:.;..::..'

'c

,J

,.-

~ ~--"

......-

)J.. I.'J .'Y.

.-1--il" ~

I

;::;.,.

/.

l' r f' Or.':

2

On February 27, 1992 the accountant for the trustee finished his second interim report for the bankruptcy which

includes among other thing a tracing of over $4,000,000 directly into the pockets of Armstrong himself. The report cites payments funds to a stripper' and the use of over $225,000 to purchase Dallas Cowboy "skyboxes lt •

by Armstrong using Hamilton Taft

The next investigative step is to apply for an ex parte order for Armstrong's personal tax returns for 1988, 1989, and 1990. Also several interviews of former Armstrong associates will

be conducted in Texas. Finally due to the continuing effort being expended by SA will Hatcher and his anticipated involvement in this matter it

is requested that he be designated co-case agent for the remainder of the investigation of this case.

2

•

1"\\ ",,'I

• • 1

FELDMAN, WALDMAN & KLINE

A Professional Corporation 2

•

3

4 5

•

•

6

PATRICIA S. MAR L. J. CHRIS MARTINIAK 2700 Russ Building 235 Montgomery street San Francisco, CA 94104 Telephone: (415) 981-1300 Attorneys for Frederick S. Wyle, Trustee

7 8

UNITED STATES· BANKRUPTCY COURT

9

NORTHERN DISTRICT OF CALIFORNIA

10

11

In re

) ) ) )

Chapter 11 SUbstantively Consolidated or Jointly Administered

HAMILTON TAFT & COMPANY KNIGHTSBRIDGE COMPANIES, INC. THE REMINGTON COMPANIES, INC. DRESDNER PETROLEUM, INC. DRESDNER ENTERPRISES, INC.

) ) )

No. No. No. No.

12

13

14

•

15 16

Debtors. 17

) ) ) )

91-3-1077 LK

91-3-2448 LK 91-)-2449 LK 91-3-2450 LK

No. 91-3-2451 LK

---------------)

18

• •

19 20

SECOND INTERIM REPORT OF FREDERICK S. WYLE, TRUSTEE

21

February 20, 1992

22

23 24

• •

25

26

•

• •

TABLE OF CONTENTS

1

2

• • •

3

SECTION

4

I.

5

II.

INTRODUCTION AND SCOPE OF THIS REPORT

1

STATUS OF THE BANKRUPTCY CASES . . . . . . . . . . . . . • . . • . . . . . . . 2

6

A.

Entry of Order for Relief

2

7

B.

Appointment of Creditors Committee

3

B

C.

The Texas Debtors and Substantive Consolidation

3

Appeals by Hamilton Taft, as Debtor

6

9

D. 10

III.

STATUS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . • 6

11 A•

Hamilton Taft

6

B.

Texa s Debtors

B

12 13

IV.

FINANCIAL CONDITION OF THE ESTATES

10

14

A.

Consolidated Estate

B•

Dresdner Petro leum

,

10

15

•

12

16

V.

RECOVERY AND LIQUIDATION OF ASSETS . . . . . . . . . . . . . . . • . . . 12

17

A.

Physical Assets

_"

13

18

•

1. -- Double C Cattle Ranch

2.

Seventh of Sonterra . . . . . . . . . . . . • . • . . . . . • . . . 16

3.

Whispering Meadows and Glade Meadows

18

20

21

•

22

4.

Oil and Gas Leases

18

23

5.

Luxury Automobiles

19

Promissory Notes and Guarantees

20

25

1.

Mohamed Hadid

20

26

2.

Stanley Rosenberg

22

24

•

B.

-i-

•

13

19

•

• • 3.

1

c.

2

• •

Parker Automotive

23

other Claims Against Third Parties .....•........ 26

3

1.

Criminal Defense Legal Fees . . . . . . . . . . . . . • . . 26

4

2.

McCall Notes .•.....•.......•....•.......... 27

5

3.

Potential Recoveries To Be Investigated . . . . . . . . . . . . . . . • . . . . . . . . • . . . . . . 29

6

D.

Assets still·in Armstrong's Possession

31

7 1.

Rodeo Interests

2.

Texas Stadium Box . • • . . . . . . . . . . . . . . . . . . . • . . . 32

3.

Coffea International

4.

Plaza Realty Note

5.

Personal Possessions . . . . . . . . . . . . • . . . . . . . . . . 35

31

B

•

9

33

10

_

33

11

VI.

LITIGATION AGAINST ARMSTRONG

35

13

A. 14

• •

• •

35

15

B.

status of Litigation and Settlement

40

16

c.

Injunctions and Contempt Proceedings

41

17

1.

TROs and Preliminary Injunctions ..•........ 41

18

2.

contempt Proceedings . . . . . . . . . . . . . . • . . . . . . . . 43

D.

19 20

•

Analysis of Armstrong's Personal Financial Transactions

VII.

criminal Investigation .................•.•.••... 44

OTHER CLAIMS AND LITIGATION •.........•......•........ 45

21

A.

Fidelity Bonds . . . . . . . . . . . . . . . . . . . . • . . . . • . . . . . . . . 45

22

B.

Preference Claims

46

23

C.

Sandia Refund

47

24

D.

Tax Penalties . . . . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . 49

25

E.

other Potential Claims

26

-ii-

50

c

• • 1

•

Claims Against Consolidated Estate . . . . . • . . . . . . . . 51

3

B.

Claims Against Dresdner Petroleum

52

4

C.

steven solodoff Claim

52

IX.

CONCLUSION AND FUTURE ACTIVITIES . . . . . . . . . . . . • . . . . . . . . 54

6

7

APPENDICES APPENDIX A:

STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS FOR THE DEBTORS AS OF DECEMBER 31, 1991

APPENDIX B:

ACCOUNTANTIS REPORT ON SOURCE AND APPLICATION OF FUNDS FOR CONNIE C. ARMSTRONG, JR. JANUARY 1, 1989 - JULY 15, 1991

APPENDIX C:

CREDITORS CLAIMS

9 10 11

12 13 24

15

•

16

17

18

•

19 20

21

•

22 23 24

•

25 26

-iii-

•

50

A.

8

•

CREDITORS CLAIMS ANALySIS

:2

5

•

VIII.

•

•

• • 1

2

• • •

I.

3

On May 28, 1991, Frederick S. Wyle, trustee of Hamilton

4

Taft & company ("Hamilton Taft"), filed a First Interim Report.

S

At that time the Hamilton Taft bankruptcy case was two months old.

6

The report focused on the background and business of Hamilton

7

Taft, the diversions of Hamilton Taft funds from customers'

8

payroll tax deposits to the Texas enterprises of Hamilton Taftts

9

principal, Connie C. Armstrong, Jr., the reSUlting $90 million in

10

unpaid payroll tax liabilities, and the preliminary analysis of

11

the trustee's accountant as to how Armstrong used over $50 million

12

of Hamilton Taft funds for his other business ventures and for

13

personal expenditures.

14

• •

• •

INTRODUCTION AND SCOPE OF THIS REPORT

At the time of the filing of the First Interim Report,

15

only Hamilton Taft was under the control of the trustee.

16

Second Interim Report is filed by Frederick S. Wyle as trustee not

17

only of Hamilton Taft, but also of Knightsbridge Companies, Inc.

18

("Knightsbridge"), The Remington companies, Inc.

19

Dresdner Petroleum, Inc.

20

Inc.

21

substantively consolidated or jointly administered with the

22

Hamilton Taft case.

23

information on the status of the bankruptcy cases, the trustee's

24

efforts to recover and liquidate assets, the multi-faceted

25

litigation that has been undertaken to pursue claims from various

26

parties, and the financial status of the estates.

("Remington"),

("Petroleum") and Dresdner Enterprises,

(I'Enterprises"), whose bankruptcy cases are now either

SECOND INTERIM REPORT

•

This

The Second Interim Report will provide

-1-

•

• •

• •

•

1

This Second Interim Report will also contain an analysis

2

by the trustee's accountant of the personal financial transactions

3

of Connie c. Armstrong, Jr., from January 1, 1989 to June 15,

4

1991, which includes the period that he was in control of Hamilton

5

Taft.

6

not have access to any of the personal financial records of

7

Armstrong, which had been withheld on Fifth Amendment grounds.

8

Certain financial records of Armstrong have now been made

9

available to the trustee, which enables the trustee and his

10

accountants to trace the disposition of Hamilton Taft funds

11

through Armstrong personally, as well as through his corporations.

At the time of the First Interim Report, the trustee did

12

• •

13

bankruptcy case, much of the focus of the trustee's attention was

14

on learning what Armstrong did with Hamilton Taft's money and on

15

recovering assets under Armstrong's control that had been acquired

16

with Hamilton Taft's money.

17

been completed, by the end of 1991 the focus of the bankruptcy

18

case had expanded to pursuing claims against other parties, and to

19

realizing on assets that have already been recovered from

20

Armstrong.

21

• •

During the first few months of the Hamilton Taft

II.

STATUS OF THE BANKRUPTCY CASES

22

A.

Entry of Order for Relief

23

On May 31, 1991, the Bankruptcy Court issued an order

24

for relief in the Hamilton Taft bankruptcy case, which was

25

commenced through the filing of an involuntary Chapter 11 petition

26

on March 20, 1991.

In granting a motion for summary jUdgment

SECOND INTERIM REPORT

•

Although that program has not yet

-2-

•

• •

•

• •

• •

• •

•

1

filed by the petitioning creditors, Federal Express corporation,

2

Stanford University and stanford University Hospital, the

3

Bankruptcy Court rejected the arguments of Hamilton Taft as Debtor

4

that a "bona fide" dispute existed as to the petitioning

5

creditors' claims against Hamilton Taft. Appointment of Creditors committee

6

B.

7

After the order for relief was entered, the Office of

8

the

9

(IiCreditors committee") consisting of the following 11 creditors:

U. S.

Trustee appointed a---Co1llll\ittee of Unsecured Creditors

10

Federal Express corporation (chair), Scott Paper co., Signetics

11

Company, R.R. Donnelley & Sons, Castle & Cook (now Dole Foods),

12

Stanford University Hospital, Neiman-Marcus Group, Tandem

13

Computers, Advo-System, Inc., Cavia Partnership, and Blue Cross

14

and Blue Shield of Texas.

15

collectively hold claims of approximately $67 million against

16

Hamilton Taft, or about two-thirds of the total claims.

17

Creditors Committee has employed Murphy, Weir and Butler of San

18

Francisco as its counsel.

The members of the Creditors Committee

The

19

C.

The Texas Debtors and Substantive Consolidation

20

The bankruptcy cases of Knightsbridge, Remington,

21

Enterprises and Petroleum (sometimes collectively referred to as

22

the "Texas Debtors"), 'were commenced by voluntary Chapter 11

23

petitions filed in the Bankruptcy Court for the Northern District

24

of Texas, Dallas Division, on April 19 and 29, 1991.

25

1991, on motion of the trustee, the Bankruptcy Court in San

26

Francisco ordered the bankruptcy cases of the Texas Debtors SECOND INTERIM REPORT

-3-

On June 7,

• •

• •

•

• •

• • •

1

transferred to the Northern District of California, pursuant to

2

Bankruptcy Rule l014(b), which provides that bankruptcy cases of

3

affiliated entities may be transferred to a single court. Following the change of venue of the Texas cases, the

4

5

trustee on June 26, 1991 filed a motion for substantive

6

consolidation of the Knightsbridge and Remington cases with the

7

Hamilton Taft case.

8

means of recovering for the Hamilton Taft estate the assets which

9

had been transferred from, or acquired with funds transferred

This appeared to be the most expeditious

10

from, Hamilton Taft to the Texas Debtors.

The motion was based on

11

a showing that all of the assets of the Texas Debtors were

12

traceable to Hamilton Taft funds, and their liabilities were

13

primarily intercompany payables, which ultimately ended up as

14

payables to Hamilton Taft.

15

stock of the other Texas Debtors, Enterprises and Petroleum, as

16

well as other sUbsidiary entities.

17

consolidation of Knightsbridge and Remington with Hamilton Taft

18

would enable the trustee of Hamilton Taft to control not only the

19

entities being consolidated, but all of their subsidiaries as

20

well.

21

11 trustee for all four Texas Debtors.

Knightsbridge and Remington owned the

Therefore, substantive

Alternatively, the trustee sought appointment of a Chapter

22

On July 22/ 1991, the Court, with the consent of the

23

Texas Debtors, ordered the intermediate step of appointment of

24

Frederick

25

Petroleum and Enterprises.

26

request of the Creditors Committee,

s.

Wyle as interim trustee of Knightsbridge, Remington,

SECOND INTERIM REPORT

The intermediate step was taken at the

-4-

50

that a claims bar date

•

•

•

•

1

could be established and claims reviewed before a sUbstantive

2

consolidation decision was made.

3

as a claims bar date for all five Debtors, Hamilton Taft as well

4

as the Texas Debtors.

•

(See section VIII.)

The trustee subsequently am~nded the substantive

5

•

The Court set September 30, 1991

6

consolidation motion to include Enterprises in the consolidation.

7

Petroleum was not included in the consolidation, because the oil

B

and gas operations of Petroleum contain at least some inherent

9

risks of liability such that consolidation of Petroleum's assets

10

and liabilities with those-of the other Debtors would not be

11

prudent.

12

On November 4, 1991, the Court ordered substantive

13

consolidation of the Hamilton Taft, Knightsbridge, Remington, and

14

Enterprises estates, effective October 31, 1991.

The

15- consolidation was not opposed by any party, inclUding any of the

• • • •

16

Debtors.

Frederick S. Wyle was appointed trustee of the

17

consolidated estate, and his appointment as trustee of Petroleum

18

was made permanent.

19

As a result of substantive consolidation, all assets and

20

liabilities of the four consolidated Debtors were combined and are

21

now treated as if the Debtors were a single entity.

22

assets and liabilities remain separate, but its bankruptcy case is

23

jointly administered with that of the consolidated estate.

24

trustee believes that substantive consolidation has resulted in

25

significant savings to the consolidated estate in administrative

26

costs, as well as substantial savings in litigation costs that

SECOND INTERIM REPORT

•

-5-

Petroleum's

The

•

• •

• • •

1

otherwise would have been required to obtain the assets of the

2

Texas entities.

3

D.

4

Hamilton Taft, as Debtor, filed appeals to the District

Appeals by Hamilton Taft. as Debtor

5

Court from the order appointing a trustee entered on March 26,

6

1991, from the order approving the appointment of FrederiCk S.

7

Wyle as trustee entered on March 26, 1991, from the order for

8

relief entered on May 31, 1991/ and from the order-authorizing the

9

trustee to shut down Hamilton Taft's business entered on June 21, The appeals were all assigned to Judge John P. Vukasin of

10

1991.

11

the District court. On February 13, 1992, the District Court dismissed all

12

I

• • • •

13

the appeals as moot, on motion of the appellees (Federal Express,

14

Stanford University and Stanford University Hospital as to three

15

of the appeals and the trustee as to the fourth appeal).

16

District court ruled that the Debtor's failure to seek a stay of

17

the orders and the SUbstantial changes of circumstances that had

18

occurred in the bankruptcy case since the orders were entered made

19

it inequitable to consider the appeals.

20

to be acting on authority of Armstrong as "Chairman of the Board"

21

of Hamilton Taft, has indicated that it plans to appeal the

22

dismissals to the Ninth Circuit.

23

III.

STATUS OF OPERATIONS

A.

25

Following a hearing on --_. May ---"16,..

Hamilton Taft

_-

199~,

...•..

.:"_-:-

the Bankruptcy

court authorized the trustee to close Hamilton Taft's business

SECOND INTERIM REPORT

•

The Debtor, which claims

24

26

The

-6-

•

• •

•

• •

• • • •

Hamilton Taft had not conducted any significant

1

operations.

2

payroll tax processing business since the public disclosure of the

:1

missing funds, the consequent abrupt cessation of funds

4

transferred to Hamilton Taft by its customers, and the filing of

S

the Chapter 11 petition on March 2O, 1991.

6

authority to close the business after canvassing the Hamilton Taft

7

clients and ascertaining that few clients would continue a

8

business relationship with Hamilton Taft even under the

9

supervision of a court-appointed trustee.

•

10

.

~,'

After the Court approval was obtained, the trustee

11

commenced an orderly shutdown of Hamilton Taft's operations which

12

took place over the next several months.

13

operations and terminated employees progressively, at a rate that

14

would permit the processing of client records, establish what

15

deposits were made and what taxes were paid and not paid, respond

16

to inquiries from tax agencies, organize and store records to

17

enable them to be retrieved as needed, secure'computer records,

18

and dispose of tangible assets of the company.

The trustee ceased

Hamilton Taft closed its 1 Market Plaza, San Francisco

19

20

offices on June 30, 1991, and moved its remaining staff to smaller

21

offices.

22

tangible assets of Hamilton Taft were sold at auction on

23

August 17, 1991.

24

office staff of three full-time employees in San Francisco, for

25

accounting purposes, to perform data stUdies, to monitor

26

activities in Texas, and to provide support services for the

Most of the office equipment, furniture and other

At present Hamilton Taft maintains a small

SECOND INTERIM REPORT

•

The trustee requested

-7-

~

"

'f

I', "

•

•

• ·1 2

• •

•

• • •

• •

bankruptcy case and litigation.

Four additional employees are

maintained in Texas, three of them at the Double C Ranch. Texas Debtors

3

B.

4

At the time of the trustee's interim appointment on

5

July 22, 1991, Remington maintained a large suite of offices with

6

some 16 employees at 3811 Turtle Creek Boulevard in Dallas.

7

Remington provided administrative, accounting and payroll services

8

for all of the Armstrong entities in Texas.

9

infusion of Hamilton Taft money to pay its operating costs,

Without the continued

10

Remington was running out of money and unable to pay even its

11

Chapter 11 trade debts.

12

Remington had not paid its rent or insurance premiums

13

since the filing of its Chapter 11 petition in April, 1991, and

14

was under a Bankruptcy Court order, obtained by the landlord, to

15

vacate its offices by July 31, 1991.

16

relocating the offices.

17

appointment, new offices had to be found and a move of Remington's

lB

offices arranged and completed.

19

No plans had been made for

Within one week after the trustee's

The trustee within days of his appointment reduced the

20

Remington payroll from 16 to 10, and further staff reductions took

21

place over the next three months.

22

and the other Texas Debtors did not have, and had not had,

23

operations requiring the level of staff and administrative

24

expenses that Remington had maintained.

25

conducted by the Texas Debtors was Enterprises' efforts to sell

26

SECOND INTERIM REPORT

-8-

It was apparent that Remington

The only ongoing activity

------------- ----------

•

•

• • • •

1

townhouses in San Antonio (See section V.A.2) and Petroleum's

2

unprofitable oil and gas operations (See Section V.A.4).

3

4

be more economically managed by an. outside management company;

5

that Enterprises required' only one employee on site in San

6

Antonio; and that the rest of Remington's administrative and

7

accounting services could be combined with that of Hamilton Taft

B

in San Francisco, thereby eliminating the need for a Dallas office

9

and achieving substantial savings.

10 11

•

•

• • •

The trustee determined that Petroleum's operations could

On october 31, 1991,

Remington's offices in Dallas were closed. Remington's office equipment, furniture and furnishings

12

have been sold or moved to the Double C Ranch, which was taken

13

over by the trustee on August 1, 1991.

14

files have been, or will be, moved to San Francisco.

15

the VOluminous files and records located at Remington's offices

16

and at a storage facility has taken and continues to take

17

substantial effort.

18

over which records belonged to Armstrong personally or Armstrong

19

entities not under the control of the trustee.

Remington's records and Sorting out

It also required negotiations with Armstrong

20

Records retained by Armstrong have been made available

21

to the trustee for copying, except for documents which have been

22

withheld by Armstrong1s criminal defense counsel as SUbject to a

23

Fifth Amendreent or attorney-client privilege.

24

seeking to work out with Armstrong's counsel any remaining

25

disputes over documents claimed to be privileged.

26

SECOND INTERIM REPORT

-9-

The trustee is

Any unresolved

•

• • • • •

1

disputes will be submitted to the Bankruptcy court for resolution

2

pursuant to an order previously obtained by the

3

IV.

• • • •

FINANCIAL CONDITION OF THE ESTATES Consolidated Estate

4

A.

5

Appendix

A

contains schedules of the postpetition

6

receipts and disbursements of the Debtors in the

7

estate, i.e., Hamilton Taft, Knightsbridge, Remington and

8

Enterprises, as of December 31, 1991.

9

also been prepared for receipts and disbursements during the

consolidat~d

Separate schedules have

10

period of the trustee's administration, which commenced on

11

July 22, 1991 for the Texas Debtors. The postpetition revenue of the Debtors comprising the

12

•

truste~.

13

consolidated estate totalled $2,193,513, as of December 31, 1991.

14

For the period of the trustee's administration, total revenues

15

were $2,097,101.

16

a townhouse by Enterprises prior to the trustee's appointment.)

17

The major sources of postpetition receipts have been sales of

18

townhouses ($651,438), livestock at the Double C Ranch ($331,623),

19

and luxury automobiles, office equipment, furniture and

20

furnishings ($342,048); a settlement with Armstrong's criminal

21

defense counsel for recovery of legal fees ($400,000); and bank

22

account interest ($183,141).

23

activities producing them are provided in other sections of this

24

report.

25 26

(The difference is due primarily to the sale of

Details of these receipts and the

Postpetition disbursements by the Debtors comprising the consolidated estate totalled $2,837,484, as of December 31, 1991. SECOND INTERIM REPORT

-10-

• •

• •

1

Disbursements during the period of the trustee's administrai

2

totalled $2,699,129.

3

operating expenses paid by Remington prior to the trustee's

4

appointment.)

5

were for operating expenses, including substantial employee

6

salaries, primarily for Hamilton Taft operations in the early

7

stages of the bankruptcy case before the trustee closed the

B

Hamilton Taft business.

9

substantial continuing costs of the Double C Ranch since August 1,

10 11

• •

• •

•

&

•

Of the total postpetition disbursements,

$1,357,741

The operating expenses include the

1991, when the trustee took over the ranch. Professional fees of the trustee and his attorneys and 4q~)

12

accountants account for $1,080,891 of the post-petition

13

disbursements.

14

appraisers and consultants employed by the trustee, and attorneys

15-

employed by the Creditors Committee and the Texas Debtors.

16

professional fees do not include fees accrued but not paid as of

17

December 31, 1991.

Additional professional fees were paid to

The

18

The beginning cash balances for the Debtors in the

19

consolidated estate, at the commencement of their respective

20

bankruptcy cases, totalled $5,930,642, of which $5,856,509 was for

21

Hamilton Taft and $74,133 for Knightsbridge/ Remington and

22

Enterprises combined.

23

by $643/971, the consolidated estate had a cash balance of

24

$5,288,401 as of December 31/ 1991.

25

26

with total disbursements exceeding receipts ~

The trustee's goal is maintain a level of operating expenses (i.e., rent, employee salaries and other office expenses)

SECOND INTERIM REPORT

•

(The difference is due primarily to

-11-

-----

-~---_._----------------

.'

&

• •

• • •

• •

1

for the consolidated estate, if possible, on a level which could

2

be funded from current interest income.

3

however, include the professional fees and expenses, which will be

4

the primary Chapter 11 costs in the future, and which will in time

5

diminish the existing funds of the estate unless substantial new

6

recoveries are had, and sales are reade.

•

•

Dresdner Petroleum

7

B.

B

A summary of Petroleum's postpetition cash receipts and

9

disbursements through December 31, 1991, is also contained in

10

Appendix A.

11

totalled $667,915 through December 31, 1991.

12

total cash receipts exceeded total disbursements by $22,136 for

13

the postpetition period, the cash receipts

14

advanced from Remington.

15

Petroleum had a negative cash

16

postpetition period, through December 31, 1991.

17

Section V.A.4 below for current situation.)

18

balance, as of December 31, 1991, was $47,159.

19

V.

20

•

Such expenses would not,

The postpetition revenue from oil and gas production While Petroleum's

i~clude

$60,000

Without the interc_~.!flQ...~11Y.-a~.~ance..,h'''':'' 1:>J)~'/LJ,J
from operations during the (However, see

Petroleum's cash

RECOVERY AND LIOUIDATION OF ASSETS Through substantive consolidation, most of the assets

21

acquired by Armstrong and his companies with Hamilton Taft funds

22

have been recovered, to the extent that they are available to be

23

recovered.

24

SUbstantial portion of the funds diverted from Hamilton Taft were

25

spent for investments which became defunct within months of the

26

investments or for other reason have no realizable value, for

As discussed in the First Interim Report, a

SECOND INTERIM REPORT

-12-

•

•

•

• • •

• •

•

1

unrecoverable operating costs of Armstrong's Texas operations, and

2

for personal expenditures of Armstrong.

3

held by the Texas Debtors or their subsidiaries, the trustee has

4

also recovered the major asset that had been held by Armstrong

5

personally, the Texas ranch.

6

control are discussed in section V.D below.)

7

•

(The assets remaining in Armstrong's

The assets that have been recovered are a collection of

8

physical assets which Armstrong bought with Hamilton Taft funds as

9

"investments," and promissory notes and other contract rights against third parties.

11

assets are expected to require litigation to collect.

12

time, the trustee cannot provide any estimate of the amount that

13

will be realized from the assets which have been turned over by

14

Armstrong or through the takeover of the Texas companies.

15

will depend on the outcome of litigation against third parties to

16

whom Armstrong and the Armstrong entities transferred funds

17

through "investments," loans and other advances, and on the

18

financial ability of these third parties to respond to judgments.

19

Most of the necessary litigation has been commenced and the

20

remainder will be commenced shortly.

21

third party liability continues.

22 23

A.

All

of

10

24

•

In addition to the assets

the assets other than physical At this

Much

Investigation into potential

Physical Assets 1.

Double C Cattle Ranch

The single most expensive acquisition by Armstrong was a

25

1,700 acre ranch, Which he called the "Double C Ranch."

26

purchased by Armstrong in February, 1990 as a "hobby ranch," by

SECOND INTERIM REPORT

-13-

It was

•

•

•

• •

•

• • •

•

1

Armstrong's own description, meaning a combination cattle and

2

horse operation and personal residence.

3

13,000 square feet in size, with indoor swimming pool, sauna, and

4

exercise facilities.

5

Hamilton Taft's funds on the ranch, including $6.5 million for the

6

purchase price, $1.1 million for capital improvements, $600,000

7

for livestock and equipment, and $1 million to fund operating

8

deficits of the cattle operation.

Armstrong spent over $9.3 million of

To acquire the ranch, Armstrong had Hamilton Taft

9

10

advance $9.8 million to Winthrop Realty Company ("Winthrop"), one

11

of his Texas companies.

12

the $9.8 million to Armstrong, who acquired the ranch in his own

13

name.

14

the ranch.

15

Hamilton Taft, secured by a lien on Armstrong's note to Winthrop.

16

Winthrop, in turn, simultaneously loaned

Armstrong gave Winthrop a note for $9.8 million, secured by Winthrop, in turn, executed a $9.8 million note to

In June, 1991, the trustee declared a default on

17

Winthrop's note 'to Hamilton Taft and foreclosed on the collateral,

18

namely Armstrong's note to Winthrop.

19

note to Winthrop, the trustee then commenced foreclosure

20

proceedings on the ranch, which secured the note.

21

foreclosure, Armstrong offered to transfer the ranch to the

22

trustee through a deed in lieu of foreclosure.

23

transferred the livestock on the ranch, consisting of

24

approximately 600 head of cattle and 2S horses collateralized to

25

Hamilton Taft, ranch equipment and vehicles and other personal

26

property associated with the ranch, and the ranch bank accounts.

SECOND INTERIM REPORT

•

The residence is over

-14-

As holder of the Armstrong

Facing

He also

•

• •

•

• •

1

The trustee took possession of the ranch effective August 1, 1991,

2

although title was not recorded until September.

J

4

substantial deficit, which was funded by Hamilton Taft money

5

funnelled through Winthrop.

6

Armstrong owned the ranch, the operating deficit of the ranch, not

7

counting the household expenses for Armstrong's residence,

8

totalled over $1 million.

9

•

• •

After acquiring the ranch, the trustee sold the cattle and horses over a several month period, obtaining net proceeds,

11

after direct costs of sale, of $331,623.

12

to sell ranch equipment and vehicles not needed for full

13

maintenance.

14

other structures will not be sold until the ranch is sold.

The trustee also intends

Furniture and furnishings in the main residence and

In December, 1991, the trustee signed an exclusive one

16

year listing agreement with Town and country Estates of Center,

17

Texas, to serve as broker for the sale of the ranch.

18

the nature of the property, and the economic conditions and

19

depressed real estate market in Texas, the trustee cannot predict

20

when, or for what price, the ranch will be sold.

21

•

During the lB-month period that

10

15

•

The cattle operations on the ranch operated at a

Because of

The carrying costs of the ranch are estimated at

22

approximately $300,000 per year, of which half is for insurance

23

and property taxes and half for maintenance costs.

24

maintenance of the ranch grounds and improvements

25

essential for the sale of the ranch.

26

residence of more than 13,000 square feet, the ranch improvements

SECOND INTERIM REPORT

-15-

Proper 1S

costly, but

In addition to the main

•

•

•

•

•

1

include a guest house with 3,400 square feet, three foremen's

2

residences each with three bedrooms, and a large "state of the

3

art lt show horse arena, which also contains large offices and a

4

saloon replica.

5

as well as several miles of fencing and other ranching facilities,

6

require maintenance.

7

considerably, three employees remain at the ranch for maintenance

Approximately 75,000 square feet of improvements,

While the ranch staff has been reduced

& and security purposes.

•

9 10

grazing rights for consulting services currently paid by the estate.

11

• •

Armstrong also owned a 121 acre adjoining parcel, known

12

as the stiefer property, which he purchased from Julius D. Stiefer

13

in December, 1989 for $72,429 cash (from Hamilton Taft funds) and

14

a $181,912 note, secured by the property.

15

that the probable value of the stiefer property was less than the

16

balance owing on the note, and ownership of the small parcel would

17

not enhance the sale value of the larger ranch.

18

therefore declined to take title to the stiefer property and

19

consented to Armstrong executing a deed in lieu of foreclosure to

20

return the property to stiefer.

21

•

•

2.

22

The trustee determined

The trustee

Seventh of Sonterra

The Seventh of Sonterra project consists of 23 single-

23

family townhouses and 2B developed single family pad sites near

24

the seventh hole of the Sonterra Country Club in San Antonio,

25

Texas.

26

Resolution Trust Corporation for $1.9 million in January, 1991.

The project was purchased by Enterprises from the

SECOND INTERIM REPORT

•

The trustee is negotiating to exchange

-16-

•

•

•

• •

• •

•

1

The acquisition was financed with Hamilton Taft funds,

2

through Knightsbridge.

J

on July 22, 1991, only two townhouses had been sold.

4

• • •

At the time of the Trustee's appointment

The trustee has continued to sell the single family

5

townhouses individually to retail buyers, having determined that

6

the net revenue to the estate would probably be greater than from

7

a bulk sale, although a bulk offer for the entire project would

8

also be considered.

9

appraised at $118,000 to $142,00 each, after repair and buildout

The townhouses have been individually

10

work (at $8,000 to $15,000 per townhouse) are completed.

11

23 townhouses, eight have been sold, seven of them post petition.

12

Several more townhouses are under contracts for sale.

13

November, 1991, the

14

general authority to sell the townhouses, without the necessity of

15

a court order for each sale, provided that the gross sales price

16

is for an amount not less than 90 percent of the appraised value

17

of the particular townhouse.

18

•

funnelled

tr~stee

Of the

In

obtained a Bankruptcy Court order for

During the post petition period, net proceeds from

19

townhouses sales, after deduction of direct selling costs, total

20

$651,438 through December, 1991, representing proceeds of six

21

townhouses.

22

out work and repairs required for each townhouse, which work is

23

performed by subcontractors of Enterprises at the time of sale.

24

The townhouse sales program and construction work are supervised

25

by one remaining Enterprises employee on site in San Antonio.

Selling costs include the $8,000 to $15,000 of finish

26

SECOND INTERIM REPORT

-17-

•

•

•

1

3.

•

3

residential tracts located in Arlington and Grapevine,

4

respectively, near Dallas.

5

Enterprises from the Resolution Trust Corporation, Whispering

6

Meadows in April, 1990, and Glade Meadows in May, 1990.

7

of $1.1 million was spent on the projects.

B

•

9

• • •

A total

There has been

considerable interest in the properties, and several offers have

10

been made and accepted, sUbject to court approval after

11

contingencies are removed.

12

feasibility or financing contingencies which have not been met.

13

Thus, the two projects, while again under contract, remain unsold. 4.

However, all the offers have included

oil and Gas Leases

Dresdner Petroleum owns oil and gas leasehold interests

15

•

The properfies were both purchased by

Both properties are for sale.

14

•

Whispering Meadows and Glade Meadows

Whispering Meadows and Glade Meadows are undeveloped

2

•

•

16

on a 560 acre tract in Howard County, and on a 1,000 acre tract in

17

Fisher County, in Texas.

18

an exploration project, with minor producti?n to date on one

19

producing well.

20

sUbstantial new investment.

21

Fisher county property if a reasonable price can be obtained.

The Fisher County interest is primarily

continuing the exploration program would require The trustee intends to sell the

The Howard County property is a leasehold which has had

22 23

its primary recovery.

The profit potential of the field is

24

dependent on the results of an ambitious "secondary recovery"

25

program to be accomplished by water injection into the underlying

26

area.

MeanWhile, there is some production at this time, which

SECOND INTERIM REPORT

-18-

•

• •

•

• •

• • •

1

provides gross revenue of $75,000 to $100,000 per month.

:2

Petroleum had operated at a loss since its inception; the

3

continuing operational

4

to excessive overhead and salary costs (including a salary of

5

$200,000 per year for the president of Petroleum).

the trustee believes, was due largely

7

were closed, the trustee turned over management of Petroleum's oil

8

and gas operations to an outside contractor, KCM Management, Inc.,

9

of Dallas.

KCM is providing production, accounting, contract

10

administration, reporting, tax and other services at a

11

substantially lesser cost than Petroleum was incurring in

12

performing these services with in-house employees.

13

savings in administrative costs, the trustee expects Petroleum to

14

show a small operating profit, except for professional fees.

15

delinquent post-petition trade debts have now been retired out of

16

the savings of administrative costs, except for professional fees.

17

Petroleum also has not yet repaid Remington for $60,000 in

18

postpetition advances.

19

with the

The

The "secondary recovery" water injection program is

20

expected to be completed in six months to a year.

21

completion of that program, when the flow of oil resulting from it

22

can be properly evaluated, the trustee intends to sell the Howard

23

County property.

25 26

5.

After the

Luxury Automobiles

At the time Armstrong deeded the ranch to the trustee, he also transferred two automobiles, a 1990 Rolls Royce Silver SECOND INTERIM REPORT

•

1055,

Effective November 1, 1991, when the Remington offices

6

24

•

•

-19-

•

•

• • •

1

spur I I and a 1990 Jaguar "XJS, both of which were purchased at

2

charity auctions with Hamilton Taft funds and used by Armstrong as

3

personal vehicles.

4

Lincoln stretch limousine owned by Remington.

5

were sold by the trustee for a total of $139,000.

6

9

•

•

Promissory Notes and Guarantees 1.

Mohamed Hadid

The trustee has filed an adversary proceeding in the Bankruptcy Court against Mohamed Hadid, a Washington, D.C. real

11

loans totalling approximately $8.8 million by Hamilton Taft and

12

Remington to Hadid. In March, 1988, when Hamilton Taft was owned by

14

MaxPharma, Inc., Hamilton Taft loaned $3 million to Hadid, which

15

was to be repaid in 30 days, but was never repaid.

16

the same lawsuit against MaxPharma through which he acquired

17

ownership of

18

Hadid had "conspired with other defendants to convert funds from

19

Hamilton Taft by, among other things, borrowing the $3 million

20

from Hamilton Taft.

Ha~ilton

Armstrong, in

Taft in 1989, also sued Hadid, claiming that

In September, 1990 Armstrong settled the litigation

22

against Hadid for cash of $50,000 and a new $1.75 million note,_

23

with principal payable in two installments in September, 1991 and

24

September, 1992.

25

Hadid an additional $6.5 million, notwithstanding his failure to

26

repay the earlier $3 million loan.

Armstrong also agreed in September, 1990 to lend

SECOND INTERIM REPORT

•

The three vehicles

estate developer, and other persons and entities, arising out of

21

•

The trustee also took possession of a 1989

10

13

•

B.

7 8

•

•

-20-

•

• •

• • •

1

• •

•

Hadid executed a promissory note dated September 11,

2

1990 to Remington for $6.5 million, which was guaranteed by his

3

wife, Mary Butler Hadid.

4

and his wife executed a security agreement pledging all of their

5

interests in numerous corporations and partnerships which

6

purportedly owned, among other real property, four Ritz Carlton

7

hotels located or under construction in washington, D.C., New York

8

City, Houston and Aspen, Colorado.

9

UCC-l financing statements for the security interests, despite his

10 11

•

•

However, Hadid never executed

representation that he would do so. Despite Hadid's refusal to execute and deliver financing

12

statements, Armstrong authorized the funding of the $6.5 million

13

promissory note.

14

occurred on March 13, 1991, Remington advanced a total of

15

$5,796,300 to Hadid.

16

either these advances or the $1.75 million note.

In a series of transfers, the last of which

No repayment has been made by Hadid of

l?

The trustee has filed suit against Hadid, Mary Butler

18

Hadid and certain Hadid entities to collect on the $6.5 million

19

note, the $1.75 million and the

20

Remington's lien rights under the security agreement.

21

has learned that in June, 1991, Hadid may have transferred his

22

interest in the collateral to a business associate, Abdulaziz bin

23

Ibrahim AI-Ibrahim of Saudi Arabia, commonly referred to as the

24

"the Sheik".

25

seeks a determination that any rights of the Sheik in the property

26

transferred by Hadid are subject to Remington's security interest.

orig~nal

$3 million and to enforce The trustee

The trustee has joined the Sheik as a defendant and

SECOND INTERIM REPORT

•

To secure the $6.5 million note, Hadid

-21-

•

• 1

• •

•

•

2

investigators indicate that Hadid is being pursued by numerous

3

creditors, his Washington, D.C. office has been closed,

4

his real property interests (including his Washington, D.C. home)

5

have been foreclosed, and he may no longer be residing in the

6

United states.

7

united states, but the trustee does not have any information as to

B

whether she has independent assets to satisfy a jUdgment.

9

•

Mary Butler Hadid appears to be residing in the

The trustee is seeking to effectuate service on all of the defendants through various means.

11

yet responded to the lawsuit.

12

discovery from third parties to obtain information on the assets

13

in which Hadid purportedly held an ownership interest and granted

14

Remington a security interest.

15

estimate what recovery, if any, will be obtained on the Hadid

16

notes.

18

•

2.

None of the defendants have

The trustee also intends to seek

At present, the trustee cannot

Stanley Rosenberg

The trustee has filed an adversary proceeding against

19

Stanley Rosenberg, a San Antonio attorney and businessman, on a $1

20

million guarantee he executed in favor of Remington on

21

September 19, 1989.

22

developing a combined restaurant and gambling facility known as

23

River city Fair in San Antonio.

24

invested $2 million in the project, of which $1 million was for

25

purchase of a 49% interest in the stock of River City Fair, Inc.

26

("RFCI") and $1 million for a loan to RFCI, guaranteed by

Rosenberg was involved in promoting and

SECOND INTERIM REPORT

•

certain of

10

17

•

Media reports as well as reports of the trustee's

Through Remington, Armstrong

-22-

•

•

.

- - - -- - - - - - - -

- ..

- - - --

•

• • •

•

1

Rosenberg.

:2

petition.

•

4

denied liability on his guarantee.

5

agreed to release him from the guarantee, that Armstrong agreed to

6

and failed to subsidize all necessary expenses to keep the project

7

operational, and that Rosenberg advanced additional money to the

8

project in reliance on Armstrong's representations, all of Which,

9

Rosenberg contends, discharges his obligations under the

• •

He claims that Armstrong

10

guarantee.

11

Bankruptcy Court abstain from jurisdiction over the claim on the

12

ground that it should be filed as a state court action in Texas.

Rosenberg has also filed a motion requesting that the

The trustee cannot predict at this time the likely

14

outcome of the Rosenberg adversary proceeding.

15

defenses he has asserted, Rosenberg has communicated to the

16

trustee that there are other claims and jUdgments against

17

Rosenberg and that he will not be able to satisfy any judgment

18

obtained by the trustee.

19

trustee, Rosenberg has not provided any documentation of his

20

financial condition.

21

•

In response to the trustee's lawsuit, Rosenberg has

3

13

•

The restaurant failed and RFCI filed a Chapter 7

22

3.

In addition to the

However, despite a request by the

Parker Automotive

In February, 1991, Armstrong invested $3 million,

23

through Remington, in Parker Automotive Corporation, a publicly

24

traded company in Costa Mesa, California, Which manufactured and

25

distributed a machine and chemical compound designed to clean

26

automobile engines, and which was in serious financial SECOND INTERIM REPORT

-23-

•

•

--.- - - - - - -

-

---------

•

•

•

• •

•

1

difficulties.

2

lien on all assets of Parker, junior to a lien for approximately

3

$700,000 owed to Home Bank.

4

stock options and voting rights which gave it immediate control of

5

Parker and the right to acquire up to 66 percent of the stock of

6

the company.

7

became chairman of the board and chief executive officer of

8

Parker.

9

•

•

Upon the closing on February 14, 1991, Armstrong

Despite Remington's infusion of $3 million in cash, Parker remained in financial difficulty.

11

resigned as CEO, and he and other Remington nominated

12

representatives resigned from the Parker board.

13

facing numerous lawsuits by unpaid vendors, Parker filed a Chapter

14

11 petition in the Bankruptcy Court for the Central District of

15

California.

16

closed Parker's business shortly thereafter.

In June, 1991, Armstrong

On JUly 26, 1991,

A Chapter 11 trustee was appointed in September, and

The Parker trustee has contracted for sale of most of

18

Parker's assets, including its manUfacturing equipment, domestic

19

inventory located in the United states and patent and trademark

20

rights, for $1.5 million, payable $500,000 at closing and the rest

21

over a one-year period, secured by the assets to be sold.

22

Inventory located in Europe and accounts receivable are not

23

included in the sale and may bring additional revenue.

24

•

Remington was also granted certain

10

17

•

Remington received a convertible note, secured by a

If the pending sale is completed, and the maximum amount

25

is collected under the sale, Remington could realize up to

26

$700,000 from the sale proceeds, based on its second priority lien

SECOND INTERIM REPORT

-24-

•

• • • •

•

1

on Parker assets.

2

sale of the foreign inventory.

3

first position with respect to the Parker patent, without which

4

Parker's tangible assets have substantially reduced value, as Home

5

did not perfect a security interest in the patent.

6

• •

•

Additional amounts may be realized from the

However, Remington's secured position is being challenged by the Parker trustee, who seeks equitable

B

subordination of Remington's interest on the ground of inequitable

9

conduct by Armstrong in acquiring Remington's interest and/or in

10

managing the company.

11

Remington may not be secured as to part of its debt (which is of

12

little importance as Remington's debt exceeds the likely value of

13

Parker's assets), and may not have perfected a security interest

14

in the inventory located in Europe.

The Parker trustee also claims that

The parties have agreed to expedited discovery and

16

resolution of Remington's claim in the Parker bankruptcy case

17

through relief from stay proceedings that have been filed on

18

behalf of both Remington- and Home--Bank.

19

have reached a tentative agreement, Which has not been finalized

20

or approved by the Bankruptcy Court, on allocation between them of

21

any proceeds received by either of them from the Parker assets.

22

An agreement between Remington and Horne Bank would eliminate any

23

disputes between them on lien priorities or the allocation of sale

24

proceeds to the patent, and enable Remington and Home to cooperate

25

in pursuing their mutual interest as secured creditors.

26

SECOND INTERIM REPORT

•

Furthermore, Remington may be in

7

15

•

•

-25-

Remington and Home Bank

•

• •

• • •

The trustee cannot estimate at this time what, if

1 2

anything, the estate will recover from the Parker investment.

3

Protectinq the estate's interest in Parker has consumed

4

substantial time and legal expense, and has been one of the most

5

costly activities of the estate in relation to the potential

6

recovery.

7

potential for significant recovery for the estate, the trustee

8

believes that the time and resources devoted to Parker is

9

necessary and justified.

10

•

• •

Nevertheless, because the Parker asset does have the

C.

11

•

•

Other Claims Against Third Parties 1.

Criminal Defense Legal Fees

12

On September 4, 1991, the trustee filed an adversary

13

proceeding against Armstrong's criminal defense attorneys, the

14

Dallas firm of Meadows, Owens, Collier, Reed and Coggins, for

15

recovery of $735,000 in legal fees paid to the firm, of which

16

$700,000 was paid on March 27, 1991, the day after the trustee was

17

appointed.

18

proceeds of a sale of a helicopter by Winthrop, an Armstrong owned

19

company, on March 25, 1991.

20

less than a month before, with funds advanced by Knightsbridge,

21

which in turn obtained the funds from Hamilton Taft.

22

The trustee traced the $700,000 payment to the

The trustee sought recovery of the payments to the

23

Meadows firm on the ground that the payments came from fraudUlent

24

conveyances from Hamilton Taft and Knightsbridge and were

25

recoverable from the law firm as a subsequent transferee of an

26

avoidable transfer under Section 550 of the Bankruptcy Code.

SECOND INTERIM REPORT

•

Winthrop had purchased the helicopter

-26-

•

•

• •

•

1

Under section 550, the trustee may recover fraudulently

2

transferred property not only from the initial transferee, but

J

also from a sUbsequent transferee who received the property

4

without consideration and with knowledge of the fraudulent

5

transfer.

6

•

•

• • •

•

After the adversary proceeding was filed, the trustee

7

agreed to a settlement of the claim for $400,000 cash, which was

8

paid by the Meadows firm in December, 1991.

9

2.

McCall Notes

10

On January 25, 1991, Rnightsbridge transferred a total

11

of $600,000 to three members of the McCall family, David McCall,

12

Jr., and his sons, David McCall, III and Brian McCall.

13

the McCalls executed a $200,000 note to Armstrong personally, with

14

a maturity date of January 25, 1992.

15

guaranteed the notes of his sons.

16

certain real estate interests in Plano, Texas, as well as stock in

17

an insurance agency owned by David McCall, Jr.

18

personal friends of Armstrong and his family.

19

David MCCall, Jr. also

All three notes are secured by

The McCalls are

The trustee recently learned that on November 27, 1991,

20

in violation of a preliminary injunction then in effect (See

21

Section VI.C.l), Armstrong executed an agreement to transfer the

22

$600,000 McCall notes to David McCall, III in return for payment

23

to Armstrong of $275,000, Which Armstrong received and retained

24

for his own benefit.

25

in July, 1991 to Chenal Corporation, a new company under which

26

Armstrong now conducts business, $55,000 in October, 1991 to

SECOND INTERIM REPORT

•

Each of

The $275,000 was paid as follows: $120,000

-27-

•

• •

•

• •

• •

• •

•

1

Armstrong, and $100,000 in November, 1991 to Armstrong.

2

of the transaction was that Armstrong and Chenal gave David

3

McCall, III notes for the $175,000 transfers in July and October

4

1991.

5

MCCall, and the $175,000 in notes were cancelled.)

In November, 1991, Armstrong obtained another $100,000 from

A letter agreement of November 27, 1991, signed by

6 7

Armstrong and David McCall, III memorializing the transaction,

S

conditioned the transfer of the $600,000 notes on Armstrong

9

reaching a settlement with the trustee. occur.

11

cash and returned the notes to David MCCall, III at the time the

12

letter agreement was signed, when obviously no settlement with the

13

trustee had been reached.

14

purporting to extend the maturity date of the McCall notes from

15

January 1992 to January 1994.

16

(See Section VI.B.)

That settlement did not

10

Armstrong nevertheless received the

Armstrong also signed documents

Upon learning of the transactions between Armstrong and

17

David McCall, III, the trustee commenced contempt proceedings on

18

February 10, 1992 against Armstrong for violation of the

19

preliminary injunction and obtained a temporary restraining order

20

prohibiting any further transfers of funds or assets by Armstrong

21

and Chenal, except for certain limited expenditures, pending the

22

contempt hearing.

23

SUbpoenaed the financial records of Armstrong and Chenal to

24

determine what Armstrong did with the $275,000 obtained from

25

McCall in return for the McCall notes.

(See Section VI.C.l.)

26

SECOND INTERIM REPORT

•

(The form

-28-

The trustee has

•

•

•

• • •

• •

• •

•

The trustee also filed an adversary proceeding against

1

2

the McCalls on February 7, 1992, seeking recovery of the $600,000

3

they received from Knightsbridge as fraudulent conveyances from

4

Knightsbridge, imposition of a constructive trust on the notes,

5

security interests, guarantees and other contract rights Armstrong

6

received from the McCalls, and for declaratory relief that

7

Armstrong's November 27, 1991, agreement with David McCall, III is

8

invalid because 'it violates the preliminary injunction and the

9

automatic stay.

10

3.

Potential Recoveries To Be Investigated

11

The trustee is continuing to investigate other potential

12

claims that the estate may have against third parties for recovery

13

of funds or other assets transferred to them by Armstrong or the

14

Armstrong entities, or for other reasons.

15

such recoveries to the extent it would be cost effective to do so. Among the transfers that will be reviewed are retainers

16 17

paid to attorneys by Hamilton Taft and Remington in March and

18

April, 1991, after the Hamilton Taft involuntary petition was

19

filed.

20

criminal defense attorneys, he caused $480,000 in retainers to be

21

paid by Hamilton Taft or Remington to four other law firms, for a

22

total of $1,215,000 in advance payments to lawyers representing

23

Armstrong's interests.

24

$145,000 in retainers paid to Creel and Atwood of Dallas,

25

bankruptcy counsel for the Texas Debtors, which retainers were

In addition to the $735,000 paid by Armstrong to his

The $1,215,000 total does not include

26

SECOND INTERIM REPORT

•

The trustee will pursue

-29-

•

•

• •

•

• •

• • •

•

1

sUbsequently returned to the Debtors' estates or credited against

2

earned fees approved by the Bankruptcy Court. The trustee has already settled with Armstrong's

3

4

criminal defense attorneys for return of a portion of their fees

5

to the estate.

6

the remaining $480,000 were Johnson & Gibbs of Dallas, attorneys

7

for Hamilton Taft as Debtor

a

Francisco, attorneys for both Hamilton Taft as Debtor and

9

Armstrong personally ($175,000), Eppright and Golembeck of Dallas,

(See Section V.C.1.)

The four law firms receiving

($200~UOO),

Long & Levit of San

10

attorneys for Armstrong, Remington and other Armstrong entities

11

($80,000), and Hance and Gamble of Dallas, who have identified

12

themselves as attorneys for Knightsbridge and Remington ($25,000).

13

None of these attorneys have been approved as counsel for a Debtor

14

in the bankruptcy cases, nor have they filed disclosures of their

15

fee arrangements as required by Section 329 of the Bankruptcy Code

16

and Bankruptcy Rule 2016, nor have their retainers been reviewed

17

or approved by the Court, although all or a portion of their

18

services were performed postpetition.

19

The trustee has not yet sought return of the retainers,

20

or any portion of them, to the estate, or made any decision to do

21

so.

22

retainers paid to the attorneys should be reviewed by the Court,

23

and an accounting required of the services performed and applied

24

against the retainers.

25

accounting and review by the Court under Section 329 of the

26

Bankruptcy Code and Bankruptcy Rule 2017, regardless of Whether

However, the trustee believes that, at a minimum, the

SECOND INTERIM REPORT

The trustee intends to request such an

-30-

•

• •

•

1

the trustee decides to seek recovery of the retainers, or any

2

portion thereof.

3

attorneys involved may seek additional fees from the estate,

4

beyond their retainers.

5

•

•

•

•

Hance and Gamble received a $25,000 retainer not only in April, 1991, but also for each of the months of January, February

7

and March, 1991, for a total of $100,000.

8

trustee's inquiry, Hance and Gamble has stated that the firm was

9

retained to perform legislative lobbying services for a flat fee of $25,000 per month.

11

Hance, a former Congressman who received substantial political

12

contributions from Armstrong in his unsuccessful campaign for

13

governor of Texas.

14

supporting information to show that it performed services

15

commensurate with the $100,000 fees it received, and has advised

16

the firm of his intention to seek recovery of the fees if such

17

backup is not provided.

19

-D.

One of the principals of the firm is Kent

The trustee has asked Hance and Gamble for

Assets still in Armstrong's Possession

Armstrong still has possession of a number of assets

20

Which were purchased with Hamilton Taft funds and which are held

21

in his name or

22

control of the trustee.

23

notes, such assets include the following:

25

26

in the name of Armstrong companies not under the

2,

In addition to the McCall promissory

Rodeo Interests

Armstrong owns a 49% stock interest in Pro Rodeo, Inc" and either Armstrong or Winthrop owns a 33% limited partnership

SECOND INTERIM REPORT

•

In response to the

10

2~

•

The trustee has been advised that some of the

6

18

•

•

-31-

•

•

•

• • • •

1

interest in Rodeo Partners.

2

Mesquite, Texas, near Dallas. Pro Rodeo is controlled by a rodeo performer, Don Gay,

3

4

and its primary business is supplying livestock for rodeos,

5

principally at the Mesquite Arena, a rodeo arena serving the

6

Dallas area.

7

to acquire a 49% percent interest in Pro Rodeo in January, 1991.

8

Rodeo Partners is a closely held limited partnership which owns

9

the Mesquite Arena.

11

~990.

The trustee has obtained financial and operating

13

information on Pro Rodeo and Rodeo Partners through the sUbpoena

14

process available under Bankruptcy Rule 2004.

15

operating businesses, but their current profitability and value

16

are uncertain.

2.

•

Texas stadium Box

19

at Texas Stadium, home of the Dallas Cowboys football team, from a

20

bankruptcy estate for a total of $390,000.

21

to the stadium boxes personally, and the purchase price was booked

22

as a loan from Remington to Armstrong.

23

Remington also paid for improvements for the stadium boxes.

Armstrong took title

After the acquisition,

In March and April, 1991, Armstrong sold two of the

24

•

Both entities have

In March, 1990, Remington purchased three stadium boxes

18

•

Armstrong invested $1.5 million, also

obtained from Hamilton Taft, in Mesquite Partners in September,

17

•

Armstrong invested $350,000 of Hamilton Taft's money

10

12

•

Both entities are located in

25

stadium boxes for a total of $265,000, which was paid to

26

Remington.

Armstrong retained the third box, which, according to

SECOND INTERIM REPORT

-32-

•

•

•

•

•

1

deposition testimony of his assistant, Teri Robins l

2

his "personal" box.

3

Texas Stadium boxes, the trustee understands that the remaining

4

box has a resale value of at least $150,000.

5

• •

• •

3.

6

• •

Based on information from a broker who sells

Coffea International

In 1989 and 1990 Remington loaned a total of $89,000 to

7

Armstrong's brother, Robert Chad Armstrong, and to Coffea

a

International, Inc., a distributor of imported coffee beans

9

controlled by Robert Chad Armstrong.

On February, 11, 1991,

10

Knightsbridge advanced an additional $250,000 to Chad Armstrong or

11

Coffea International. The $250,000 advance, plus the prior

12

advances of $89,000 with interest, were then booked as a $341,225

13

investment by Remington in the stock of Coffea International.

14

stock appears on the books of Remington as an asset of Remington,

15

but the trustee has been advised that Armstrong also claims the

16

stock as his personal asset.

17

obtaining information on the financial status and operations of

18

Coffea International through the subpoena process, and does not at

19

this time have information on the value of Remington or

20

Armstrong's interest in Coffea International.

21

•

he treated as

4.

22

The

The trustee is in the process of

Plaza Realty Note

CCAJ Corporation, an Armstrong company still under the

23

control of Armstrong, holds a $5 million note of Plaza Realty

24

Company ("Plaza Realty"), an affiliate of Gulftex Financial

25

corporation and its principals, Jimmy E. Nix and Richard F.

26

Watkins.

Armstrong (through CCAJ) and MaxPharma, prior owner of

SECOND INTERIM REPORT

-33-

----------

•

• •

• • •

• •

• •

1

Hamilton Taft, invested a total of $6 million of Hamilton Taft

2

funds in 1989 in a joint venture with Gulftex, called Professional

3

Investment Fund ("PIF"), which owned shopping center interests.

4

In February, 1990, CCAJ sold its interest in PIF to Plaza Realty

5

for $1 million in cash and a $5 million note executed by Plaza

6

Realty and .secured by certain stock and partnership interests

7

owned by Nix and watkins.

8

after making one $400,000 payment.

9

Plaza Realty defaulted on the note

In 1990, CCAJ corporation filed suit in Texas state

10

court against Plaza Realty on the note and against Gulftex, Nix

11

and Watkins and related entities for fraud arising cut of the

12

original investment in PIF.

13

Corporation did little to prosecute the action.

14

1991, with a trial date imminent but no capacity or intention in

15

CCAJ corporation to prosecute the action, and no standing by the

16

trustee to take over the litigation, CCAJ Corporation, with the

17

trustee's consent, filed a dismissal without prejudice of the

18

Plaza Realty lawsuit.

19

within the statute of limitations period.

20

After filing the suitt CCAJ In December,

Under Texas law, the lawsuit can be refiled

The trustee has been advised that the prospects of

21

recovering from Plaza Realty or the collateral securing the Plaza

22

Realty note are not promising.

23

independently investigated the financial condition of Plaza Realty

24

or the value of the collateral.

25

investigated the background or merits of the fraud claim against

26

Gulftex, Nix and Watkins.

SECOND INTERIM REPORT

•

•

However, the trustee has not yet

Nor has the trustee yet

-34-

•

•

•

• 5.

1

Although Armstrong has turned over to the trustee most

2

• •

3

of his luxury automobiles, he still retains two personal

4

automobiles purchased by Remington and booked to Armstrong as

5

"advances".

6

1990 Jaguar returned to the trustee) and a 1990 Ford Lariat pickup

7

truck, which were appraised in mid-1991 at $37,000.

B

•

9

They are a 1989 Jaguar (not to be confused with a

Armstrong also has furniture and home furnishings which Knightsbridge purchased for $35,000 for a four bedroom Aspen,

10

Colorado condominium which Armstrong had contracted to purchase

11

jointly with Mohamed Hadid (See section V.B.l.)

12

purchase was not completed, Armstrong forfeited $300,000 in down

13

payments (paid by Remington), and shipped the furniture and

14

furnishings to Dallas.

15-

•

Personal Possessions

16

VI.

The condominium

LITIGATION AGAINST ARMSTRONG

A.

Analysis of Armstrong's Personal Financial Transactions

17

At the time of the First Interim Report, the trustee did 18

•

not have access to any of Armstrong's personal financial records, 19

as compared to those of corporate entities controlled by him. 20

Armstrong had refused to produce any personal records on Fifth 21

•

Amendment grounds. 22

In late July and August, 1991, Armstrong produced his 23

personal bank account records and certain supporting documentation 24

for the period of January 1, 1989 through June 15, 1991.

•

25

(Armstrong acquired Hamilton Taft in March, 1989.) 26

SECOND INTERIM REPORT

•

-35-

With the

I

--~-----

•

I.

• •

• •

•

• •

_

•

personal financial records, together with the records of the

2

Armstrong entities which show transfers of funds to or on behalf

3

of Armstrong, the trustee's accountants have prepared an analysis

4

of Armstrong's personal receipts and

05

1989 through June 15, 1991.

6

Appendix B.

7

e~penditures

for January 1,

The analysis is contained in

During the two and a half year period, which covers the

S

period of Armstrong's ownership of Hamilton Taft, over $16.5

9

million of Hamilton Taft funds, mostly routed through

10

Knightsbridge, Remington or Winthrop, was paid to Armstrong or by

11

the Armstrong entities to third parties for Armstrong's benefit.

12

Of the $16.5 million, about $4.7 million was cash paid to

13

Armstrong.

14

entities for assets, investments and other expenditures which

15

Armstrong held in his own name, including over $9 million related

16

to the Double C Ranch.

The remaining $11.9 million was paid by the Armstrong

Of the $4.7 million in cash transferred to Armstrong,

18

$1.2 million was booked as compensation or directors' fees

19

($852,385 net of withholding taxes) or reimbursement of expenses

20

($396,703).

21

cash "advances" froIn Remington, Knightsbridge or Winthrop, Which

22

Armstrong has never repaid, or as repayments to Armstrong of a

23

$1.5 million "loan tl he purportedly made to Remington in February,

24

1990.

25

obtained from Winthrop, Which in turn obtained the funds from

26

Hamilton Taft.

Most of the rooney, over $3 million, was recorded as

Armstrong made the "loan" to Remington with funds he

In the first three months of 1991 alone, just

SECOND INTERIM REPORT

•

0

1

17

•

_ _ _ _ _ _ _ _ _ _ _

-36-

•

•

•

•

• •

•

1

before the pUblic disclosure of Armstrong's diversions of Hamilton

2

Taft money, over $1 million in cash was transferred from

3

Knightsbridge to Armstrong's personal accounts. Armstrong's personal financial records verify that he

4

5

had no significant source of income or receipts, other than

6

Hamilton Taft money, during the two and half year period.

7

$4.8 million in total cash flow through his personal bank accounts

8

over the two and a half year period, all but $127,606 can be

9

definitely traced to Hamilton Taft and the Armstrong entities who,

•

• •

Of

10

in turn, received their funds from Hamilton Taft.

11

he received in the first quarter of 1989, before he acquired

12

Hamilton Taft, can be traced to Hamilton Taft funds.

13

in the Accountant's Report, during the first quarter of 1989, as

14

well as earlier, Remington, which was the primary source of

15

Armstrong's funds, obtained its money from loans which were repaid

16

with Hamilton Taft money after Armstrong's acquisition of Hamilton

17

Taft.

Even the money

As discussed

Likewise, all but an estimated $78,000 of the

18

•

•

19

approximately $4.7 million that Armstrong received in cash from

20

Hamilton Taft and the Armstrong entities appears to have been

21

deposited into and can be traced through his personal accounts.

22

On January 1, 1989, he had $52B in his accounts.

23

1991, the last date for which the trustee has bank account

24

information for Armstrong, he had an estimated $85,000 in his

25

account.

On June 15,

Between those dates, nearly $4.7 million of Hamilton

26

SECOND INTERIM REPORT

-37-

•

• • •

•

• •

~ent

1

Taft funds

2

expenditures.

3

into and out of his accounts for personal

The withdrawals from Armstrong's personal accounts

4

include substantial cash withdrawals ($175,138) and credit card

5

payments ($465,398) for which supporting documentation has not

6

been provided and the trustee's accountants therefore cannot

7

provide further analysis.

8

expenditures from Armstrong's personal accounts were by check

9

transactions or wire transfers, for Which the payee is identified.

11

paid from his personal accounts during the January I, 1989 through

12

June 15, 1991 period out of funds traceable to Hamilton Taft,

13

were: 1.

Political and charitable contributions totalling

15

$964,701.

16

contributions and $361,000 was for political contributions.

17

Payments characterized as charitable contributions in Armstrong's

18

records include $200,000 paid at-a charity auction for a 1990

19

Rolls Royce and $100,000 paid to the Dallas Opera Ball.

20

largest political contribution was to Texas gubernatorial

21

candidate Clayton Williams, who received $100,000.

22

Of this amount, $603,701 was for charitable

2.

The

Professional fees of $742,735, of which $735,000

23

was paid in March and April, 1991, to Meadows, Owens, Collier,

24

Reed and Coggins, Armstrong's criminal defense attorneys.

25

section V.C.1.)

26

SECOND INTERIM REPORT

•

However, most of the transfers and

Among Armstrong's significant personal expenditures,

10

14

•

•

•

•

-38-

(See

•

•

--~

-

-

-- - - - - - -

•

• 1

•

•

was for purchase of a 49% interest in Pro-Rodeo, Inc., a company

3

which supplies livestock for rodeos.

4

classified as an "investment expense" was a payment for a $105,000

5

cashier's check dated November 5, 1990, the recipient of which was

6

not identified in the Armstrong records made available to the

7

trustee.

9

• •

•

4.

Also

Gifts, loans and other transfers to friends,

relatives and employees totalling $295,571, including $70,301 to his ex-wife (exclusive of payments identified as child support or

11

child care), $46,575 for an automobile loan and other payments to

12

his personal assistant at Remington, $42,500 to his fiance, and

13

$37,186 for his mother1s medical expenses.

5.

Household expenses totalling $274,089 for

15

Armstrong's personal residence, inclUding $79,352 for repairs and

16

maintenance, $56,121 for domestic payroll, $40,734 for utilities,

17

$15,354 for interior decorating, $22,883 for groceries and

18

beverages and $10,329 for flowers.

19

6.

Purchases from jewelers, clothiers, furriers,

20

boutiques and other retailers totalling over $183,000, not

21

counting purchases which may have been made with credit cards.

22

Acquisitions, investments or expenditures financed by

23

the $11.9 million which Armstrong entities paid for Armstrong's

24

benefit with Hamilton Taft funds inclUded, in addition to the

25

ranch, $847,738 for costs associated with his acquisition of

26

Hamilton Taft (consisting primarily of $615,000 paid to Stanley

SECOND INTERIM REPORT

•

(See Section V.D.l.)

10

14

•

Investments totalling $494,017, of which $350,000

2

8

•

3.

-39-

• • • •

•

• • • • •

•

1

Rosenberg, a former MaxPharma shareholder, as part of the

2

MaxPharma settlement, and $232,730 for legal fees), $390,000 for

3

the Texas Stadium skyboxes, $600,000 for loans to the McCalls,

4

$335,000 for the down payment and furniture for a condominium in

5

Aspen, Colorado (which Armstrong did not ultimately purchase),

6

$295,000 for investments in Coffea International, Armstrong's

7

brother's company, and $132,767 for automobiles.

8

B.

status of Litigation and Settlement

9

commencing in June, 1991, the trustee has had

10

substantial and ongoing discussions with Armstrong regarding

11

settlement of the Hamilton Taft estate's claims against Armstrong.

12

Such settlement discussions have generally involved a

13

under which most assets still remaining in the possession of

14

Armstrong and entities under his control would be returned to the

15

Hamilton Taft estate, and Armstrong would stipulate to a

16

nondischargeable jUdgment for a specified amount, with forbearance

17

on execution if Armstrong paid an agreed upon portion of his

18

future income and receipts to the estate for a specified period of

19

years.

20

frame~ork

While the parties appeared close to reaching a

21

settlement from time to time, the settlement discussions were

22

terminated in late January, 1992.

23

unable to reach agreement on several aspects of the settlement

24

that were of importance to one party or the other.

25

26

The trustee and Armstrong were

No further settlement discussions are planned.

The

trustee intends to proceed with the pending adversary proceeding

SECOND INTERIM REPORT

-40-

•

• •

• •

•

•

• •

----~-----

•

against Armstrong to seek recovery of all remaining assets in

2

Armstrong's possession traceable to Hamilton Taft funds, or to

3

transfers from any of the other Debtors.

4

will seek a money jUdgment against Armstrong for the full amount

5

of Hamilton Taft's loss, after adjustment for any amounts realized

6

from recovered assets.

7

In addition, the trustee

Armstrong sought to remove the adversary proceeding from

8

the Bankruptcy Court to the District Court on the ground that he

9

had demanded a jury and the Bankruptcy Court could not conduct

10

jury trials.

11

withdrawal of reference, ruled that the Bankruptcy Court could

12

conduct jury trials in "core" proceedings, Which included the

13

trustee's main claims for fraudulent conveyance, constructive

14

trust, turnover orders and injunctive relief.

15-

core claims inclUded in the trustee's complaint, namely the breach

16

of fiduciary duty, conversion and breach of contract causes of

17

action, were removed to the District Court. C.

19 20

•

-

1

18

•

-'-

The District Court,

on

Armstrong's motion for

However, the non-

Injunctions and Contempt Proceedings 1.

TROs and Preliminary Injunctions

On April 4/ 1991, after the adversary proceeding against

21

Armstrong and related entities was filed, the Bankruptcy Court

22

issued a temporary restraining order ("TROII) prohibiting any

23

transfers, encumbrances or other dispositions of assets by

24

Armstrong or any Armstrong companies "except to meet day to day

25

ordinary operating expenses".

26

several times. SECOND INTERIM REPORT

The TRO was extended by agreement

-41-

•

•

•

• 1

•

• •

•

On July 22, 1991, when the trustee was appointed interim

2

trustee of the Texas Debtors, Armstrong agreed to entry of a

3

preliminary injunction against him, with the TRO continued as to

4

the remaining Armstrong entities not under the control of the

5

trustee.

6

existing as of July 22, 1991, and any proceeds and products

7

thereof (called the "pre-existing assets"), and future earnings or

8

income of Armstrong, and assets acquired from future earnings

9

(called the "new assets").

•

absolute prohibition against any transfers, encumbrances and

11

dispositions of pre-existing assets, except that Armstrong was

12

allowed to use his remaining cash, up to $100,000, for "ordinary

13

day to day operating expenses and reasonable living expenses".

14

Armstrong's future earnings and income, and assets acquired with

15

future earnings and income, were released from the TRO and not

16

sUbject to the preliminary injunction. On November 4, 1991, the TRO against the remaining

18

Armstrong entities (which for practical purposes consisted of

19

Winthrop), was converted to a preliminary injunction.

20

preliminary injunction against the entities was SUbstantially the

21

same as the TRO, i.e., it prohibited all transfers of assets

22

except for "ordinary day to day operating expenses."

23

preliminary injunctions, the July 22, 1991 injunction against

24

• •

The preliminary injunction provided an

10

17

•

The preliminary injunction differentiated between assets

25

I

The

The two

Armstrong personally and the November 4, 1991 injunction against the remaining Armstrong entities, are currently in effect.

26

SECOND INTERIM REPORT

-42-

•

• •

• • •

• •

• •

•

1

sought recovery of $11,000 from proceeds of cattle sales which

:2

Armstrong transferred from the ranch operating account to his

3

personal account. After a hearing on January 24, 1992, the Bankruptcy

4

5

Court ruled that Armstrong had violated the TRO and ordered him to

6

pay $37,725 to the trustee over a 90 day period.

7

provides that if payment is not made, the Bankruptcy Court will

8

recommend that the District Court issue an order of contempt.

9

The second contempt proceeding Was filed by the trustee

10

on February 10, 1992 arising out of Armstrong's transactions with

11

respect to the McCall promissory notes.

12

trustee contends that Armstrong violated the preliminary

13

injunction by (i) spending or otherwise disposing of $275,000

14

received fron David McCall, III,

15

sell the notes, which total $600,000, to David McCall,

16

exchange for the $275,000 he received from McCall, and (iii)

17

executing an agreement to extend the maturity date on the notes by

18

two

19

order requiring Armstrong to show cause on March 13, 1992 why he

20

should not be held in contempt for violating the preliEinary

21

injunction.

yea~s.

(Section V.C.2.)

The

(ii) executing an agreement to III in

On February 11, 1992, the Bankruptcy Court issued an

22

D.

Criminal Investigation

23

The trustee has been advised that the

u.s.

Department of

24

Justice is conducting an investigation to determine whether

25

criminal charges should be filed against Armstrong or other

26

persons on account of the transfers of Hamilton Taft funds.

SECOND INTERIM REPORT

•

The order

-44-

The

•

•

• • •

•

1

trustee has cooperated with law enforcement officials in their

2

investigation, by providing information and documents in his

3

possession or under his control, when and as requested by such

4

officials.

5

results or timing of the criminal investigation.

6

VIi.

•

•

•

The trustee has no control or influence over the

OTHER CLAIMS AND LITIGATION Fidelity Bonds

7

A.

B

The estate's largest potential recovery is on fidelity

9

bonds issued by Underwriters of Lloyd's covering loss to Hamilton

10

Taft from theft by employees.

11

primary coverage and $30 million umbrella coverage, for a total of

12

$50 million, SUbject to certain deductibles.

13

were a requirement of most of Hamilton Taft's contracts with its

14

customers.

15

•

The policies contain $20 million

The fidelity bonds

The trustee gave written notice of a claim to the

16

underwriters on April 25, 1991.

17

commenced, through their San Francisco attorneys, in November,

18

1991.

19

They have requested access to voluminous records of Hamilton Taft

20

and the Texas Debtors to investigate the claim, and the trustee is

21

in the process of responding to these requests.

22

denied or not acknowledged after the underwriters have had a

23

reasonable opportunity to investigate, the trustee intends to file

24

suit on the bonds.

25 26

Discussions with the underwriters

The underwriters have neither admitted nor denied coverage.

If coverage is

The trustee cannot predict at this time the likely outcome of the claim on the fidelity bond. SECOND INTERIM REPORT

•

•

-45-

Substantial legal

•

• • •

•

•

• • •

•

•

1

issues are likely to be raised relating to coverage or the amount

2

of recovery under the bonds.

3

Reflecting the importance of the fidelity bond claim to

4

the estate, both the trustee and the Creditors Committee have

5

retained special insurance counsel.

6

law firm of Mound, Cotton and Wolan of New York city to assist in

7

pursuing the claim.

8

Bronson and McKinnon of San Francisco.

9 10

B.

The Creditors Committee has retained Bronson,

Preference Claims

The trustee has commenced an analysis of potential

11

preference actions against customers of Hamilton Taft for whom

12

payroll tax deposits were made under circumstances that the

13

payments would constitute preferential transfers under Section 547

14

of the Bankruptcy Code.

15

the "ordinary course of business", the trustee is analyzing only

16

delinquent payments made by Hamilton Taft during the 90 days pr.ior

17

to the filing of the involuntary petition on March 20, 1991.

18

delinquent payments were generally made in two time periods, on or

19

about January 31, 1991, when Hamilton Taft paid over $50 million

20

in tax liabilities which were due in the first part of October,

21

1990, and on or about March 8, 1991, when customers learned that

22

Hamilton Taft had diverted tax deposits to the Armstrong entities

23

and made demands on Hamilton Taft for confirmation that their

24

taxes had been paid.

25

complete, the trustee estimates that transfers meeting the

Because of the exclusion for transfers in

While the trustee's analysis is not

26

SECOND INTERIM REPORT

•

The trustee has retained the

-46-

Such

•

•

• •

•

1

preference criteria may exceed $40 million, after deduction of

2

"new value" payments. The trustee has thus far made demands for return of

3

4

payments from, and has filed adversary proceedings against, two

5

parties, Volume Shoe corporation (aka Payless ShoeSource) for $3.4

6

million and S&S credit co., Inc.

7

million.

a

in both January and March, 1991.

9

customers to confront Hamilton Taft on March 8, 1991, as a result

Delinquent taxes were paid on behalf of these customers

•

11

taxes, and they have relatively small claims against Hamilton Taft

12

for unpaid taxes. Additional preference actions are expected to be filed

14

by the trustee on a case by case basis.

15

will be filed against any customer

16

communicating a written demand.

No adversary proceedings

~ithout

the trustee first

Because of the circumstances under which Hamilton Taft's ~as

18

bankruptcy

19

preference claims to be asserted on account of payment of vendor

20

debts during the 90 day preference period.

21

generally paying its trade debts as they became due, and the

22

"ordinary course of business" exception will likely apply to most

23

payments to vendors.

filed, the trustee does not expect any significant

Sa~a.i=

24.

•

They were among the first

of which Hamilton Taft covered the shortfall on their delinquent

17

•

(aka Shop and Save) for $12.5

10

~3

•

•

Hamilton Taft was

Refund

The trustee has settled a dispute with a former Hamilton

25

26

Taft client, Sandia Corporation, also known as Sandia National

SECOND INTERIM REPORT

II

-47-

._----- - - - - - - - -

•

•

-

•

'.. .'

• • •

•

1

Laboratories, over a $938,007 IRS refund for payroll taxes paid by

2

Hamilton Taft on Sandia's behalf.

3

trustee received $744 J 198 from Sandia on February 6, 1992, and is

4

expected to receive an additional sum of approximately $187,000 on

5

or about March S, 1992, for a total of approximately $931,200,

6

including interest.

7

reflected in the cash receipts and disbursements schedules shown

B

in Appendix A, which covers only transactions as of December 31,

9

1991.)

•

•

(The $744,198 payment already received is not

The dispute arose out of a $917,876 payment which

10

11

Hamilton Taft paid to the IRS on Sandia's behalf on March 8, 1991.

12

On that day, pursuant to its contract with Sandia, Hamilton Taft

13

initiated an electronics funds transfer from Sandia's bank account

14

to cover the payment.

15

the same day, and made its own deposit with the IRS, which

16

resulted in duplicate payments for Sandia's account.

Sandia, however, reversed the payment on

Sandia applied for and obtained a refund from the IRS of

17

•

Under the settlement, the

18

$938,.007, which included $20,131 in interest.

19

not dispute that the refund belonged to Hamilton Taft, Sandia

20

claimed the right to offset against the refund any amounts

21

Hamilton Taft owed to Sandia for unpaid taxes, interest and

22

penalties.

23

completed an internal audit and received confirmation, direct from

24

the taxing

25

Hamilton Taft during the life of Sandia's contract with Hamilton

26

Taft.

Sandia

~anted

agencies~

to retain the IRS refund until it had

of all payroll taxes which it had remitted to

The trustee was unwilling to wait indefinitely until Sandia

SECOND INTERIM REPORT II

While Sandia did

-46-

•

•

•

1

received confirmation from each taxing agency, which may never

2

occur.

3

taxes for which Hamilton Taft was responsible were $22,051 in

4

state taxes which Were not due at the time Sandia terminated its

5

contract, but for which Sandia had advanced funds to Hamilton

6

Taft.

Hamilton Taft's own records show that the only unpaid

I

• •

• •

•

7

The trustee and Sandia reached a settlement, under which

8

Sandia agreed to pay to the trustee all of the IRS refund,

9

including any interest accrued thereon since Sandia's receipt,

10

except for $22,051 for the unpaid taxes, which Sandia will retain,

11

and $180,106, representing the yet unconfirmed state tax payments,

12

which will be kept in an interest bearing account until March 8,

13

1992.

14

and/or interest and penalties, it will be allowed to pay such

15

liabilities from the IRS refund.

16

funds from the IRS refund, and accrued interest, which is expected

17

to total approximately $187,000, will be released to the trustee,

18

regardless of whether sandia has received confirmation of Hamilton

19

Taft's payment of its taxes.

If Sandia is able to find any additional unpaid taxes

On March 8, 1992, all remaining

20

D.

21

During the period of December, 1989 to the filing of the

Tax Penalties

22

bankruptcy petition in March, 1991, Hamilton Taft paid over $7

23

million in penalties to the IRS on account of late payment of

24

customers' payroll taxes, which resulted from Armstrong's program

25

of diverting tax deposits to his Texas entities. R~he trustee is

26

analyzing whether such penalties may be recoverable by the trustee

I

•

/

SECOND INTERIM REPORT

•

-49-

• •

• • •

• •

1

or the customers under the Internal Revenue Code, which provides

2

that penalties may be excused if the failure to make timely

3

payment was due to reasonable cause and not willful neglect.

4

trustee believes that the unusual circumstances surrounding the

5

late payment of taxes gives rise to a reasonable argument that

6

penalties already paid should be recoverable, as well as unpaid

7

penalties abated.

8

The trustee also believes that any penalties paid within

9

90 days of the filing of the involuntary petition against Hamilton

10

Taft may be recoverable by the estate as preferences.

11

Approximately $1.5 million of the tax penalties were paid during

12

the 90 day preference period. E.

14

The trustee and his attorneys are continuing to analyze

15

potential claims against persons and entities which may be liable

16

to the estate for participating in, contributing to, or failing to

17

disclose information relating to the improper transfers

18

from Hamilton Taft.

19

about such clains.

VIII.

money

The trustee has not reached any conclusions

CREDITORS CLAIMS ANALYSIS

22

September 30, 1991 for filing proofs of claim against the five

23

Debtors.

24

of the Debtors and was pUblished in the Wall street Journal

25

(National Edition), the San Francisco Chronicle and the Dallas

26

Morning News.

Notice of the bar date was sent to all known creditors

SECOND INTERIM REPORT

•

o~

On July 22, 1991, the Bankruptcy Court set a deadline of

21

•

Other Potential Claims

13

20

•

The

-50-

•

•

•

• •

•

1

A.

2

Proofs of claim totalling $205.3 million, unduplicated,

3

were filed against the Debtors constituting the consolidated

4

estate, i.e., Hamilton Taft, Knightsbridge, Remington and

5

Enterprises.

6

the Debtors acknowledge are liquidated, non-contingent and not

7

sUbject to dispute) are added, the maximum potential claims

8

against the consolidated estate total $210.2 million.

9

all claims against the consolidated estate is contained in

10 11

• •

• •

Claims Against Consolidated Estate

When non-duplicative scheduled claims (i.e., claims

Appendix C. However, the claims total is distorted, because one

12

claim, filed by steven Solodoff, Hamilton Taft's former

13

controller, accounts for $110 million of the total.

The trustee

14

believes that Solodoff's claim is not meritorious.

(See section

15

VIII.C below.)

16

potential claims against the consolidated estate total $100.2

17

million. This compares to scheduled claims for the four Debtors of

18

$94.4 million, or a difference of only 6 percent.

If Solodoff's claim is disregarded, the maximum

19

Claims of Hamilton Taft customers for unpaid taxes

20

account for $95.1 million of the $100.2 million total claims

21

(compared to $91.9 million acknowledged in Hamilton Taftts

22

schedules).

23

and employees total $1.7 million.

Total potential claims of Hamilton Taft trade vendors

24

For the Texas Debtors, claims against Remington total

25

$970,665, including both proofs of claims and scheduled claims,

26

unduplicated, as compared to $505,932 in scheduled debts. SECOND INTERIM REPORT

•

A list of

-51-

Claims

•

• • •

• •

•

•

• •

1

against Enterprises total $47,332.

2

Knightsbridge, other than duplicates of claims filed against other

3

Debtors.

4

claims of affiliated entities which are not included in the

5

consolidated estate.

All claims totals exclude intercompany claims, including

6

B.

Claims Against Dresdner Petroleum

7

Proofs of claim filed against Petroleum total $651,060.

B

Scheduled claims total $371,376.

9

against Petroleum, with duplications deleted, total $731,286.

The maximum potential claims The

10

claims against Petroleum consist almost entirely of vendor claims

11

for goods and services provided to Petroleum's oil and gas

12

operations.

13

in Appendix

A list of all claims against Petroleum is contained

c.

14

C.

steven Solodo!f Claim

15

steven Solodoff, the Hamilton Taft controller whose

16

public disclosure to customers and the news media of the diversion

17

of Hamilton Taft funds led to the filing of the bankruptcy, has

18

filed a $110 million proof of claim against Hamilton Taft and the

19

other Debtors based on the federal False Claims Act.

20

Claims Act allows a private citizen to bring actions on behalf of

21

the united States for fraud committed against the government, with

22

the private citizen retaining up to 30% of any recovery.

23

claims that Hamilton Taft violated the False Claims Act by

24

knowingly using false records or statements to conceal or avoid an

25

obligation to transmit money to the United States and fraUdUlently

26

converting government trust funds.

SECOND INTERIM REPORT

•

No claims were filed against

-52-

The False

Solodoff

Solodoff also alleges that he

• • •

• •

1

was wrongfully terminated by Hamilton Taft because he notified the

2

FBI about Hamilton Taft's diversion of tax deposits.

4

bankruptcy case, Solodoff filed a False Claims Act complaint in

5

the U.S. District Court.

6

declined to take over the lawsuit, as it is entitled to do, but

7

the

8

complaint be dismissed because any claims stated would be income

9

tax claims, which are expressly excluded from the False Claims

10 11

• • •

• •

Prior to the commencement of the Hamilton Taft

3

The United States government not only

u.s. Attorney filed a brief recommending

that Solodoff's

Act. In November, 1991, Solodoff filed a motion for relief

12

from stay in the Bankruptcy Court seeking a determination that his

13

District Court lawsuit was exempt tram the automatic stay as an

14

exercise of the IIpolice power".

15

Solodoff's motion, ruling that Solodoff was not a "governmental

16

unit ll entitled to assert the "police power" exception under

17

Section 362 of the Bankruptcy Code.

The Bankruptcy Court denied

18

The denial of relief from stay to pursue a District

19

Court action does not affect Solodoff's proof of claim in the

20

Bankruptcy Court.

21

Solodoff's claim, purporting to assert relief on behalf of the

22

United States, Which has suffered no loss, has any significant

23

likelihood of success.

24

personal claim for wrongful termination is barred by a release he

25

executed at the time of his termination, for Which he received

26

four months of severance pay.

However, the trustee does not believe that

SECOND INTERIM REPORT

The trustee believes that Solodoff's

-53-

- - - - - - _ . - - _._.- - -

- --._-----------

•

•

• 1

IX.

Identification of the main problems, Claims, potential

2

• •

3

assets and litigation requirements of the estate is now

4

substantially complete.

5

heavy litigation activity, as the claims brought by the estate are

6

pursued, and presumably also resisted.

7

also be brought by the estate.

• •

• •

9

Additional claims will

will Ultimately be filed and confirmed for the consolidated

10

estate, there being no possibility of a rehabilitation of the

11

business.

12

depend upon the prospects of the disposition of its assets.)

13

the point of view of creditors, the questions are, obviously, how

14

much of their claims they will receive, and when they will receive

15

any funds.

16

(Whether a plan will also be filed for Petroleum will From

From this report, creditors and other parties in

17

interest will understand that the trustee cannot now provide very

18

specific answers to these questions.

19

however, on the determinants of the amount of potential recovery.

20

Some comments may be made,

Based on the proofs of claim filed against the estate,

21

it does not appear that resolution of claims against the estate

22

will be a major concern.

23

proofs of claim filed and the estate records do not appear to

24

differ SUfficiently so as to make any major difference in the

25

potential percentage of payment to creditors on their claims.

26

trustee will in due time review the claims in greater detail, and

SECOND INTERIM REPORT

•

The next six months to a year will see

The trustee expects that a liquidating Chapter 11 plan

8

•

CONCLUSION AND FUTURE ACTIVITIES

Except for the Solodo!f claim, the

-54-

The

•

•

•

. •

•

•

1

file objections as appropriate, but on the basis of a first review

2

and current information, there does not appear to be any

3

likelihood of a major impact on percentage of recovery from any

4

potential correction and disallowance of claims (except for the

5

Saladoff claim).

The physical assets of the Hamilton Taft estate together

6

7

with the cash on hand, while substantial, would in themselves be

8

unlikely under the best of assumptions to yield any more than 10

9

cents on the dollar for prepetition unsecured creditors, perhaps

10

sUbstantially less.

The key to what creditors will receive will

11

be the recovery on the estate1s claims, primarily the claims on

12

the fidelity bonds and for return of preferences, and to a

13

substantially lesser extent, on the success and collectibility of

14

various claims against transferees of Hamilton Taft funds and

15

possibly other third parties.

16

outcome or degree of success on the claims at this time.

17

certain is that litigation and pursuit of claims will be expensive

18

and time consuming,

19

trustee.

•

Dated:

This is the major task for the estate in the future.

February 20, 1992

22

Freder~e~-e-e----

23 :.14

•

25

.,.: ......

SECOND INTERIM REPORT

•

What is

The claims will be vigorously pursued by the

20

21

It is not possible to predict the

-55-

.1

MICHAEL J. YAMAGUCHI

United states Attorney 2

3

4 5

JOEL R. LEVIN Chief, Criminal Division RONALD D. SMETANA special Assistant GEORGE D. HARDY

Assistant 7

u.s.

u.s.

Attorney

Attorney

450 Golden Gate Avenue San Francisco, CA 94102 Telephone: (415) 436-6851

8

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA 10

OHITBD STATES OF AKBRICA.

)

Plail1tirt,

) )

.11

12

)

v.

) )

13 1,(

comrIE C. AlUlS'l'RORG, JR. RXCHUD A. POWLES,

I

and

Mo. CR 94-0276 CAL AJ'I"XDAVIT 01" ULLJUUJ L.

BATCBD., J11.. IN SUPPORT OF GOVBRRKBHT1S BX-PARTE Smuo::SSIOIf

) ) )

Defalltlanta.

15 16

)

-~---~---~---------)

17

I, Willard

18

1.

L~

Hatcher, Jr., state that:

I have been a Special Agent with the Federal Bureau of

19

Investigation ("FBI") for 6 years, and am currently the case

20

agent for the prosecution in United states v. Connie

21

Armstrong, Jr., et ale

22

investigation of Hamilton Taft and Company since March of 1991.

23

Prior to his retirement on January 1, 1997, FBI Special Agent

24

'Patrick K. Murphy was the case agent.

25

26

2.

c.

I have been involved with the

I first learned of the government's possession of

recorded conversations of Connie C. Armstrong, Jr. , on the night AFPlDAVITOP WlI...LARD L HATCHER, JR ,IN SUPPORT OF OOVBRNMP.NT"S EX-PARTE SUBMISSION

1

of January 12, 1997, after witness Terri Robins informed

2

Assistant United states Attorney George Hardy of their existence.

3

3.

I telephoned Patrick K. Murphy on January

~3,

1997, and

Mr. Murphy stated that

4

asked his knowledge of such recordings.

5

he understood that Ms. Robins had made some recordings for the

6

government on an unrelated investigation.

7

did not know that Ms. Robins had ever recorded conversations with

8

Armstrong. 4.

Mr. Murphy stated he

Mr. Murphy and I knew of the existence of the Dallas

FBlis investigation of Armstrong's activity at Comp-U-Check.

We

understood that this investigation related to conduct that

occurred well after the bankruptcy of Hamilton Taft.

To our

13

knowledge this investigation was unrelated to Hamilton Taft

14

except for the common involvement of Armstrong.

1S

5.

Since January 12, 1997, I have contacted Special Agent

16

Peter A. Galbraith, the Dallas FBI case agent for the Comp-U-

17

Check investigation, and requested all taped conversations with

18

Armstrong.

19

special Agent Galbraith has assured me that these constitute all

20

of the tape recordings of Armstrong in the possession of the

21

Dallas FBI.

22

6.

I have received thirty-six (36) audio tapes and

In addition, Special Agent Galbraith provided to me

23

copies of 302 reports prepared relating to the tapes and

24

documents provided to the Dallas FBI by Terri Robins.

25

me that all of the reports and documents have also been forwarded

26

to San Francisco. AFFIDAvrr OF WlLl.JJW L HATCHER. JR IN SUPPORT OF GOVERNMENT'S EX~PAJrrE SUBMISSION

2

He assured

1

7.

Agent Galbraith expressed concern about the disclosure

2

the tapes, reports and documents to Armstrong because the Comp-U-

3

Check investigation and other related investigations are on-going

4

and he is concerned that disclosure of the materials may

5

jeopardize these investigations.

6

the tapes, written materials and reports may have to be turned

7

over to Armstrong, but requested that the materials be

8

scrutinized carefully and that those ultimately turned over be

9

limited to those necessary to protect Armstrong's rights without

10 1.1

He understood that certain of

harming the investigations. 8.

Agent Galbraith said that all of the conversations were

12

recorded and documents were received in late 1993 and early 1994,

13

subsequent to the Hamilton Taft bankruptcy and before the

14

indictment of Armstrong.

15

9.

After review of the tapes and documents by myself,

16

Special Agent Laura Nielson, Assistant United States Attorney

17

George Hardy and Special Assistant united states Attorney Ronald

18

Smetana, we determined that Hamilton Taft is mentioned in five

19

(5) tapes; copies of the relevant portions of those tapes have

20

been reproduced for review by the court for a determination of

21

whether they should be turned Over to Armstrong.

22

there is one document, a "novella" about Hamilton Taft, that has

23

statements attributed to Armstrong; since I do not know its

24

,authorship, that document has been copied for the Court's review.

25

26

10.

In addition,

All of the reports, tapes and documents received from

the Dallas FBI are being made available for the Court's in camera AFFlDAvrr OF WllLAR.D L HATCHER, JIl.

IN SUPPOR.T OF OOVF.llNMEHI"S EX-PARTE SUBMISSION

3

1

review.

2

I declare under penalty of perjury that the foregoing is

3

•

true and correct.

Executed on January 24, 1997, in San

5

Francisco, California.

~ ,>~-/~~2/ /

(///I;?p'~'.,-;$@:/

6

LLARD L.

HATCHER,/Jr.

7

/"

9

COUNTY OF SAN FRANCISCO

) )

STATE OF CALIFORNIA

)

9

55.

10

Sworn to and sUbscribed in my presence on January 24, 1997,

11

12 13

14 15 16

.c.ec .. e... el

in San Francisco, California.

~ fj-'- CC:=~W2873

:! -a z,

i

.-,

i .

Notcrv Pl&:IfIc - CoIbmIo

.

Son lftlnCiIco~ Mv Comm. &pfrw 5ep ~. I9'R

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4

\(1"\\" \ \. "- \ . Notary PUblic

-------.

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My Commission Expires On '.... -(;...ol~....:.,..._iJ.-~'~·----.:.:·....\·_·:_\...)1.... ::.:...._._-<-J:_-\~lr(ll

17 18

19 20

21 22

23

2S

26 AFFlDAvrr OF WIl.UJU) L HATCHER.. JR. IN SUPPORT OF GOVERNMENT'S EX"-PARTE SUBMISSION

4

t/(~,.T ,(~

FD-J6 (Rev II-11-K8)

FBI TRANST\fiT VIA: Teletype Facsimlle

!KJ

CLASSIFI( TOP S SECR'

PRECEDENCE: Immedinte Priority Routine

o

o o

o o o o o

o

o

AIRTEL

CONI UNCI

UNCLA~

Date

TO

DALLAS,

FROM

SAC, SAN FRANCISCO (196A-SF-9J255)

SUBJECT

CONNIE CHIP ARMSTRONG ET AL; WIRE FRAUD (A}j

8/4/93

SAC

J

(P)

JR;

MAIL FRAUD; 00: SAN FRANCISCO

Reference airtel dated February 22,

SA HATCHER has obtained verbal/abth?ri:atio 4 from

United states AttorneYJ MICHAEL YAMAGUCHr~ f o r L _ J I Iconfidential source to record conver-s-a~-l-o-n-s~with sub;~cts of this case. I 1 rJ:~

2 '1) -

DALLAS SAN FRANCISCO

·-"7

WLH/wlh

1 "11" -.

App£ovod:

~~

"~

Per

Transmitted {Nmnher}

(TIme)

fIr .-

;"759 ;Rey 5-31-91) o.

DIrector, FBI ( Attn CID,\)I",c:

SAC,

Lt96B-D.L- 66524) ( p)

k (~. I.~HllS'.L1R01\lG

Notification of SAC Authority Granted

for

P~I"J;

L11"

UO:

01 ~L1JJ·l..s

J/J3/93

Section

('rime

OJ .iJL.t ~.:J

C01-.ll.,j.L.~ E:.;.' i~L

"{tie

Date

rolla'

g2116)

E

Use

.

of Consensual MonitOring Equipment (NontelephonJc) Form must be submItted wlthm 5 workmg days 01 the date authorrzat/on was granted

I.

Reason for Proposed Use (Check) 0 Protect Testimony Consentmg Party Other (Speedy)

5

'

3

ciays

6

Interceptee(s) (Include Title If PublIC OHiclal)

4

cuvnL.tr:

I

b"'7~

DuratIon of proposed use 90 (tdll : d 90 dSj c) Date Authonzed 9/r3/93 ExpIration Date

-

(Name)

Ci Cooperative Witness

~

c.

:lRI.I;£' TROIJG,

rano

InstallatIon of EqUipment (Check) t:& Concealed on Person In Vehicle In Motel Room Other (SpeCIfy)

o

7

9

,

I

J8

11

DOJ notIficatIon required

Sec(s)

0

Yes

~ No

thiS techmque being appropnale Date '"7/1/93 ~ Yes 0 No Identity of Gov't Arty 1,U[, Pc I ).1., !

USC

1343 [f

Government attorney In JudiCial district where mterceptlon

Wlil take place foresees no entrapment and concurs

bOlE

--

IJ'e}:ab

Di1112.s,

The follOWing reqUirements have been fulfilled 8a Consenting party has agreed to testIfy. ~b Consentlng party has executed consent form ~c Recording/transmitting deVice WIll only be actIvated

Vlolatlon(s) TI1Ie(s)

t'/C

LocatIon where equipment Will be utIlized (City and State)

o

o

I

ochers

]1/J1/93

10

Recorder

o Other (Specrfy)

l-b2

o Confldenttal Source

~Concealed

AmplifIer

ReceIver

ConsentIng Party (Check one)

o Nonconllden11al Pa~

o

~

Government Property

o 3

Type of EqUipment (Check) T ransmltterl Mlcrophone/

2

o Protect

£2S Corroborate

JudiCial District

IJor" he.

I

))

e

1he use of

Dr iiJa-REa

of ']'eoos

,c~

D'&"

In

"Yes" check reason below

o Interception relates to an Invest/gallon of a member ot Congress, a Federal Judge, member of the Executtve Branch at

ExecutIve Level IV or above, or a person who has served In such capacity Within the prevIous 2 years Interception reiates to an InvestigatIon of any publiC offICIal and the offense investIgated IS one involVing bnbery, conflict of Interest, or extortion relating to the periormance of hIs/her offICial duties I J ~/1~ Interceptron relates to an InvestIgatIon of a Federal law enforcement offiCial ~ - ~j)t..:.-~7""&f£7t [J Consentmg/nonc:onsentlng person 15 a member 01 the diplomatiC corps of a foreign oun ry Consenllng/nonconsentlng person IS or has been a member 01 the WItness SeCUrity Program and that fact IS known to the agency Involved or rts oHleers ConsentJng/nonconsentlng person IS In the custody of the Bureau of Prisons or the U S Marshals ServIce Attorney General, Deputy Attorney General, ASSOCiate Attorney General, ASSIstant Attorney General for the Criminal DIVISIon, or the U S ANorney m the dlstnct where an rnvestlgatlon IS bemg conducted has requested the Irwestlgatrng agency to obtaIn prror wnt1en consent for makIng a consensual interceptIon m a speCIfic Investlgatton

o

j6 (i

o

Li

-j----

o

o o

12 SynopsIS of Case (Attach additional page It necessary) A

[

i.:-<.tiJ'J.'HuHG

CoopeJ.a.L_ 1ng NLu1e5s has advJsed LhaL.

.

~

I

] lu:li1S rl'RONG ':'5 Lhe suJ 'JCC I: oi a.ll ~nveSL.lgaLJ.on / _ ......llE:. ~a n F .canC.L5l~O 01 Vls~on w11-=J.-e he nUSLea out h.t-.J'!...l.L'l'ON- l.dP'L'. 4~ t

-....,

td.-

(

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~

'3 JUsllflcatlOn statement necessitating emergency authOrization

b ~~~~---+=-",--------..'--

:::e j!/i;ft; are

---~~""""""'~~~,e) SIgnature

'GjBureau _C-

... ; Z--

(SubstanlJve Deskl

o 17

".

ate

To be executed at FBIHQ (LCD)

(Complete only If DOJ noill,callon IS necessary) SIgnature

Date

f/zt/f3 /.

J/A

1f?:1l2~

:J-759 (Rev 5-31·91)

c

DIrector, FBI (

)

CONI~.l.E

111e

/: Err'

(196B-DL-66524) {

P}

Notification of SAC Authority Granted

C. AID1S'l'RONG;

p.. L;

for -PfzlP'ijf~se

'..'_ .. COMPO-CHECJ(-Vl.CT .LM;

FEW 00:

--

Section

DAr.r.(j

SAC,

12/1/93

Date

At1Il. CIO. White Collar Crime

.

of Consensual Monltonng Equipment (Nonteiephonlc

DALLAS

Form must be submlned wIthin 5 working days of the da1e authorlzatron was granted

Reason for Proposed Use (Check) 0 Protect Testimony Consentmg

Consenting Party (Check one)

o Nonconfldenhal Party J o Confidential Source

Lb) (Name)

iit CooperatIVe Witness 1.

DuratJon~. (rut~ Date Authonzad"

ExpiratIOn Date'

(90

days DB

4

-

(Include Title If PubliC OffiCial)

o o

9

7

LocatIon where equipment wIll be utilized (City and State)

Sects) DYes

5C. No

-

usc

I 3J1 3

~eexas

Government attorney In Judicial d/stnct where interceptIon wIll take place foresees no entrapment and concurs In the use of , thiS techmque being appropriate 12/2/93 No Dale Yes Identity of Gov't Atty T.INDA GROVES JudICIal Dlstnct Northern DJSLrlct of rt1 exa 5

t&.

b7E

-

CCTV w/Audio

InstallatIon of Equipment (Check) Concealed on Person In Vehicle In Motel Room Other (Specify)

tz

I

DOJ notlflca.bon required

Recorder

Dallas,

I

18

~ Concealed

CONNiE CHJ.P ARHSTRONG and others

b7:~

The following reqUIrements have been fulfilled a Consenbng party has agreed to testify ~ b Consenting party has executed consent form. file Recordlngltransmlttln9 device will only be actlvatp.n

oJlolatlon{s). Trtle(s}

Interceptee(s)

o

12/2/93 3/2/94

o

o Other (Speerfy)

K

Ls

Type of EqUIpment (Check) Mlcrophone/ Receiver Amplifier

~ Transmltterl

Government Property

Party

o Other (SpecIfy)

2

o Protect

~ Corroborate

o

If "Yes" check reason below

o InterceptIon relates to an investIgatIOn 01 a member of Congress, a Federal Judge, member of the Executive Branch at o

o o o o

o 2

ExecutIve Level IV or above, or a person who has served In such capacIty WIthin the prevIous 2 years Interception relates to an investigation of any public offICIal and the oHense investIgated IS one involVing bribery. conflict of Interest, or eXlortlon relallng to the performance of hIS/her offiCial duties Inlerception relates to an investlgat/on of a Federal law enforcement offiCial Consenllnglnonconsentlng person IS a member of the diplomatIC corps of a foreIgn country Consenbnglnonconsentlng person IS or has been a member of the Witness Secunty Program and that fact IS known to the agency Invo~ved or Its officers Consentmglnonconsentmg person IS In the custody of the Bureau of Pnsons or the U S Marshals Service Attorney General, Deputy Attorney General. ASSOCIate Attorney General. ASSISlant At10rney General for the Criminal DIVISion. or the U S Attorney In the district where an Investigation IS being conducted has requested the Investtgatlng agency tD obtaIn prior wnt1en consent for making a consensual interception In a specrflc InvesttgatlOn

SynopsIs of Case (Attach addItional page If necessary)

ARMSTRONG has prevlously busted-out a company

~hrough

an lntr2cate scheme

to slphon off fiduc~ary funds and uti12ze them for h~s own benefit. lJU1STRONG is continuing to ut~llze ~h~s scheme wlth anO~ler ent' y, COllPU-CHECK, Dallas, Texas.

,

Cfllt-6L-t,t;,. 3 ~~,useap al .

~ 14 (SAC)

Signatur To be executed at FBIHQ (Umt ChIef)

o 15

SJgnature

Dale~

_

o 16. To .be executed at FBIHQ (Section Chief) S'gnature

Vureau

r~anIlve Deskl

!lI\lY

Dale

o 17_ To be executed at FBIHO (LCD) (Complete only sf DOJ notificatIOn SIgnature _

IS

necessary)

Dare

~__

0·759 (Rev 5-31-91)

To

Dlrector,FBI (19.:iB-DL-66524) Attn CID, Wb j1' c; Co) Jar en me SAC,

(196B-DL-66524) (p

D1iLL6J

Notrtlcatlon of SAC Authority Granted

CONNIE C. ARMSTRONG

Title

ET AL FBw; MF 00:

12/3/93

Date Section

fq, Ems

'Ise

of Consensual Monitoring EquIpment (Nonlelephomc)

DALLAS

Fonn must be submrtted wltt"n 5 workmg days of the date au1honzatJon was granted Reason lar Proposed Use (Ched<) ~ Corroborate 0 Protecl Testimony Consenttng

1

Type of EqUipment (Check) Transmltterl Mlcrophonel ReceIVer Amphfler

o

~

Government Property

Party

o Other (Specify)

2

o Protect

o Concealed Recorder

o Other (Specrly)

..;. ....

Consenlmg Party (Che~ OOAl Nonconhdenllal Party Confldenttal Source ~ Cooperabve Witness

3

4

o o

5.

DuratIOn of proposed use

P' ,

;a-,

'S?

t

Date Authonzed EXpiratIon Date

Lb2 -

(Name)

b":iD

90 days

6.

12/11/93 3/10/93

o

9

b7E

vlolahon{s) Tltle(s)

11

DOJ notlflcallon reqUired

o o

o o o o o

Sec(s) 1 3 4 ~

) 8

11.1

~ No

0 Yes

7

bie

-

Location where eqUIpment Will be utIlized (Cily and Slale)

Dallas, Texas

Government attorney In JudiCial dlstnct where mterceptlon take place loresees no entrapment and concurs 10 the use ot thiS techmque beIng appropnate No Date 12/.2./93 ~Yes Identity of Gov'! Atty AOSA LINDA GROVES JudiCial Dlstrrct Non.:hern Dlstrlct of '.rexas

o

RecorrhOQ/lragsmttllQp deylCe WI!! POll be activated

I

I

WIll

tzg b Consenting party has executed consent form c

I

USC

If "Yes' check reason below

Interceplion relates to an investIgation of a member of Congress, a Federal Judge, member of the Executive Branch at Executive Level IV or above, or a person who has served 10 such capaclly within the prevIous 2 years Interception relates to an Investigation of any pUblic offiCial and the oHense Investigated IS one InvolVing bflbery, conflict of Interest. or extortion relatrng to the pertormance of hlsJher oH1clal dulles Interception relates to an investigatIon of a Federal law enforcement oHlclal- -- - - - - - -- - ,- - - Coosentrng/nonconsenhng person IS a member of the diplomatIC corps of a foreign country Consentlng/nonconsentmg person IS or has baen a member of the Witness Secunty Program and that fact IS known to the agency Involved or Its oHlcers ConsentlOg/nonconsent,ng person IS In the custody of the Bureau at Prisons or the U S Marshals Service Attorney General, Deputy Attorney General, ASSOCiate Attorney General. AssIstant Attorney General for the Crlmmal DIVISion, or the U S Attorney en the district where an Investigation IS being conducted has requested the IOveshgatmg agency to obtain pnor written consent for making a consensuallnterceplton In a specilic tnveshgatlon

12 SynopsIs of Case (Attachaddlltonal page Ifnecessaryj

Coopera-r.ing Witness has adV1sed "Chat

il..RNS'l'RONG lnvestigat~on

1n the San FranC1SCO

Hl~·1l,LTON-TAFT •

"

ARMSTRONG lS ~ e suoJec1:. lVlsion where he busted out

196£-

'

I

'1

, . "01 Gnn .'Ll s

16

II

"bUOes

II 'iF'!

QT

~~E:::::::Z:~===i:~ Date~

05jQiPqr 2,d'waTilf:ar

l ).'':,'-

et) Date af)

~~~:1""!!!'1''''!''''t''r ......._~,."..",._

Signature

t"reau (SubSlanllve De!'>kl _"n,-~

...

('\ _

o 17

Date

To be executed at FBIHQ (LCD) (Complele only If DOJ nO/llicallOn 15 necessary) SlgnalUre

Dale

I~

.--'

land others

l&t o

':8l a Consenting party has agreed to testify

g

(Include Title If Public OfficIal)

CONNiE C. ARNS'l'RONG,

Installation of EqUipment (Check) Concealed on Person 0 In VehIcle In Motel Room Other (SpeCIfy)

The follOWing reqUirements have been fulfilled

8

Interceptee(s)

Iv/i~3 /;7

103/0/3

\

F"O·759 (Rev 5-3'-91)

To

Olrector. FBI (

Attn CIO, SAC,

)

WHITE

COT J AR

\

Section

DAT 7 AS

196B-DL-66524 ) (p

o

)

I

CONNIE C. ARMSTRONG; ET AL;· FBW; HF 00:

3-7-94

Date

CR TMf

DALLAS

Notlflcahon of SAC Authority Granted

/

tor Emergency Use

of Consensual Monitoring EqUipment (Nontelephonlc) Form must be submitted withIn 5 workIng days of the date authorizatIon was granted

,

Reason lor Proposed Use (Check) Corroborate 0 Protect Testimony Consenting Party Other (Speedy)

iXI

Government Property

o

Consenhng Party (Check one)

3

o Nonconhdenhal Party o

Conflden1lal Source [] CooperatIve Witness

-

5

l

2

o Protect

~

~

Date Authorized

ex

o

9

11

DOJ notIfIcatIon reqUired

o o

o o

o

o

o

Trtle(s)

18

Sec(s)

0

Yes

ex No

7

bie

-

LocatIon where equIpment WIll be utilized {City and Stater

Dallas,

Texas

Government anorney 10 JudICial district where mterceptlon

Will take place foresees no entrapment and concurs In the use of thiS techmque being appropriate

g: Yes

o

No

USC

JudlCtal District

12-2-93

Date

Identtty of Gov't Atty

1343

J

others

o

Jb7E

VJOlatlon{s)

I and

Installalton of EqUIpment (Check) Concealed on Person In Vehicle In Motel Room Other (SpecIfy)

~ b ConsentIng party has executed consent form c ReGordlQg/trapsm!UlDQ deVIce wI!! polv be activated

1u

Recorder

CONNIE C. ARMSTRONG,C

r

The followmg requirements have been fulfilled [](a Consenting party has agreed to testify

l

o Concealed

Interceptee(s} (Include TItle If PublIc OffICIal)

o

3-7-94 tP • 7· Gtj-

~

B

4

b 7 ~~ 6

o

o Other (SpeCIfy)

lb:? -

(i,allie)

Type of EqUIpment (Check) (]: Transmltter/ Mlcrophone/ Amplifier ReceIver

AUSA LINDA GROVES

Northern District of Texas

If ·Yes· check reason below

Interception relates to an investigation of a member of Congress, a Federal JUdge, member of the ExecutIve Branch a1 Executive Level IV or above, or a person who has served In such capacIty Within the prevIous 2 years InterceptIon relates to an investIgatIon of any public offICIal and the oHense investigated IS one InvolVing bnbery, con filet of Interest, or extortIon relatmg to the performance of hIs/her offiCIal duties Interception relates to an investigation of a Federal taw enforcement offiCIal - -- - - - - - - - - -. - - - - ---ConseotlOg/nonconsentlng person IS a member of the diplomatiC corps of a foreign country Consentlng/nonconsentlng person IS or has been a member of the Witness SecuTlty Program and that jact IS known to the agency Involved or ItS oHlcers ConsentlngJnonconsentlng person IS In the custody of the Bureau of Pnsons or the U S Marshals ServIce Attorney General. Deputy Attorney General. ASSOCIate At10rney General, ASSIstant Attorney General tor the Cnmtnal DIVISIon, or the U S Attorney In the dlstnct where an InvestigatIon 15 bemg conducted has requested the Investigating agency to obtaIn prtor wnrten consent for making a consensual mterceptloo In a speCifIc investigation

I...,'"""""......._~;.;;;_ ....-.....-~ ............__....~

12 SynopSIS of Case (Attach additional page If necessary)

.....

Cooperating Witness has advised that ARMSTRONG an investigation in the San Francisco Division where he busted out

SlQnatu

2 Bureau (SubstantIve DesKl

~

D

•

L

0 17 To be executed at FBIHO (LC (Complete only Signature

II

DOJ nord/cat/on

IS

necessary) Date

rl.. L-.~~=======::;=;========-'=::':=========-

\

)-/5q (Rev 5·31·91)

Director. FBI ( 196B-DL-66524

j.

Ille

Section

n~l I;:l~

SAC.

CONNIE C ET AL:

(196B-DL-66524

)( P)

.~TRONG

FBW;

~1F

00:

DALLAS

3/2/94

Date

~itQ Colln Crime

C/O,

Attn

NotIfication of SAC Authorrty Granted fo~rf1PfJF?EK'Use

of Consensual Monitoring Equipment (Non1elephonlc) Form must be submitted within 5 working days 01 the date authonzatron was granted

Reason for Proposed Use (Check) 0 Protect Tesllmony Consenting Party Other (Specdy)

a Corroborate

2

o Prolect Government Property

o

o

Conhdentlal Source [][ Cooperative Witness Duration of proposed use Date Authorrzed Q II IIIIUIl":'"

-.

rllW

t')

(Name)

X~~~~

~

4

-

1. DOJ notrflcatlon reqUIred

Sec(s)

0

Yes

134j

rn No

I ;:mc

9

.\.

7

o

q

"lolatlOn( s) Tllle(s) 18

I

C.

:qulpment (Check) In Vehicle In Motel Room Other (Specify)

The followmg requirements have been fulfilled [la Consenllng party has agreed 10 testify b Consenting party has executed consent form c Recording/transmitting deVice Wilt only be a~tl~ated

\..

ARMSTRONCJ

CONNIE

Installat

J L b t1~,

Concealed Recorder

b7c

rn Concealed on Person o

o

3~lZ94 v/t7f

~

tnterceptee(s) (Include T,tle If Public Official)

I

bOD 6

o

o Other (SpeCIfy)

I

ConsentIng Party (Check on

o Nonconhdentlal Party :IMlIUD

Type of EqUipment (Check) Microphonel Amplilier ReceIver

~ Transmltterl

Location where eqUIpment will be utilized (City and State)" Dallas, Texas

Government attorney In Judicial district where mtercepllon will take place foresees no entrapment and concurs In the use of this technique bemg appropnate Yes 0 No Date 12/2/93

rn USC

Identity of GOII't Atty AlISA T,INDA GROVES JudIcial District Northern District of Texas

If ~Yes' check reason below

o Interceplion relates to an investigation of a member of Congress. a Federal Judge. member 01 the Executive Branch at o

o o

o

o o

ExecutIve Level IV or above. or a person who has served to such capaCity Within the prevIous 2 years Intercephon relates to an Invesllgatlon of any public offiCial and the offense Investigated IS one involVing bnbery, conflict of Interes\, or extorllon relating to the performance of his/her offiCIal duties trrterceptlon relates to an Investlgallon of a Federal faw enforcement oHlclal- Consentlng/nonconsentlng person IS a member of the dIplomatiC corps of a foreign country Consentmg/nonconsentlng person IS or has been a member of the Witness Securl1y Program and thaI fact IS known to the agency Involved or Its officers Consentmglncnconsenhng person IS In the custody of the Bureau ot Pnsons or the U S Marshals Service Attorney General, Deputy Anorney General, AsSOCIate Anorney General, Asslslant Attorney General for the Cnmmal DIVISion, or the U S Anorney In the dls1nct where an investIgatIOn IS being conducted has requested the investigating agency 10 obtain pnor wrrn n / , _ , /; _ /" j7 consent lor making a consensual Intercephon In a speclftc rnvesltgatlon

,rJ

SynopsIS of Case (Attach addItional page If necessary)

2

ARMSTRONG

I""'"-'-

I

Cooperatin g

~~-~~~

investigation in the San Francisco

b7:~:

J

2

Bureau 'SubstantIve Desk\

COpy-

a

vised that

a'- /";

FD-36 (Rev 8-29-B5)

FBI

TRANSMIT VIA:

!Xl

o

PRECEDENCE:

o IZJ o

Teletype

Facsimile

D AIRTEL

CLASSIFICATION: TOP SECRET SECRET CONFIDENTIAL UNCLAS EFT 0 [Xl UNCLAS

o

Immediate

o o o

Priority R()Utine

Date

FM FBI SAN FRANCISCO (196A-SF-93255) (P)

6/~6/93

(SQUAD 5)

TO FBI DALLAS/PRIORITY/ BT UNCLAS

CITE:

1/3790//

PASS:

SSA

SUBJECT:

1~---------I(WCC-5). CONNIE

c~

1::/7(:

ARMSTRONG, JR.; AKA CHIP ARMSTRONG, JR.,

DBA HAMILTON TAFT AND COMPANY, 1 MARKET PLAZA, 32ND FLOOR, SPEAR STREET TOWER, SAN FRANCISCO, CALIFORNIA 94105, FRAUD BY WIRE (A); MAIL FRAUD; 00:

SAN FRANCISCO.

REFERENCE SAN FRANCISCO TELETYPE TO DALLAS, DATED MARCH 23, 1991.

ALSO REFERENCED SAN FRANCISCO TELEPHONE CALLS TO

THE DALLAS DIVISION, JUNE 15,

1993~

FOR THE INFORMATION OF THE DALLAS DIVISION, THIS MATTER IS CURRENTLY BEING INVESTIGATED AT SAN FRANCISCO WITH A VIEW

TOWARD INDICTING CAPTIONED SUBJECT ARMSTRONG AND THREE OTHER

==iiJ~-=INDEX.ED~ ,ILED Original filename:

FOX DATE & TIME OF ACCEPTANCE

fffi ~~

rI

\

)Y\ l\- e CD\ W I b 7

~PAGE

2 196A-SF-93255 UNCLAS

INDIVIDUALS.

______~IARE

TWO OF THE INDIVIDUALS

I

IANDI

___

CURRENTLY EMPLOYEES OF ARMSTRONG1S LATEST BUSINESS

ENDEAVOR, COMP-U-CHECK, WHICH IS DOMICILED IN DALLAS, TEXAS.

b7C

ARMSTRONG RECENTLY MOVED THIS PUBLICLY TRADED COMPANY AFTER HAVING PURCHASED IT; THE DETROIT, MICHIGAN AREA TO DALLAS.

AT

THE DIRECTION OF ASSISTANT UNITED STATES ATTORNEY, MICHAEL

YAMAGUCHI, A SERIES OF SUBPOENAS HAVE RECENTLY BEEN SERVED IN THE DALLAS AREA BY DALLAS DIVISION PERSONNEL.

THESE PERSONS

SUBPOENAED HAVE ADVISED THAT THEY WILL SUBMIT TO INTERVIEW BY

THE FBI IN LIEU OF APPEARANCE AT SAN FRANCISCO. SAN FRANCISCO HAS OBTAINED LOCAL APPROVAL FOR TRAVEL BY

CO-CASE AGENT, JUNE 21, 1993.

S~

~O

THE DALLAS DIVISION ON

THE PURPOSE OF THIS VISIT IS TO CONDUCT SEVEN

TO NINE INTERVIEWS OF FORMER ARMSTRONG EMPLOYEES.

IT IS

ANTICIPATED THAT SAN FRANCISCO WILL NOT REQUIRE ASSISTANCE

FROM THE DALLAS DIVISION OTHER THAN AN INTERVIEW ROOM AT THE DALLAS OFFICE.

NONE OF THESE INTERVIEWS ARE SUBJECT

INTERVIEWS.

THE SAN FRANCISCO DIVISION FEELS THAT SOMETIME DURING THE WEEK OF JUNE 21ST THROUGH THE 25TH OF A BRIEF MEETING SHOULD

APAGE 3 196A-SF-93255 UNCLAS TAKE PLACE BETWEEN SAN FRANCISCO CASE AGENT AND

SSAI

IOF

DALLAS IN ORDER TO BRIEF DALLAS AS TO POTENTIAL FRAUD BY WIRE

VIOLATIONS ON GOING IN THE DALLAS. TERRITORY. UNLESS ADVISED TO THE CONTRARY BY DALLAS

SAI

~IWILL

ARRIVE IN DALLAS ON THE AFTERNOON. OF JULY 21, 1993.

RESERVATIONS ARE CURRENTLY BEING MADE BY DALLAS SECRETARY,)

~ 553-7608. BT

~_I(PH).

SAl

ICAN BE CONTACTED AT (415)

;

t7C

FD-36 (Rev 11-17-88)

FBI

TRANSMIT VIA: Teletype

PRECEDENCE:

o

o

[X]

D

o

Facsimile AIRTEL

o

CLASSIFICATION: TOP SECRET

o

Immediat~

o

Priority

o

Routine

o

o

-

SECRET

"!

:>

CONFIDENTIAL UNCLAS EFT 0

..I

UNCLAS Date

D·

~iJ'-FROM SUBJECT

SAC, SAN FRANCISCO (196A-SF-93255)

SAC, DALLAS (196A-SF-93255)

......

.J

"

~

8

'.\

~

TO

,

(

0':.

,-'1

(SQ 5)

(WCC-S)

(RUC)

CONNIE C. ARMSTRONG, ET ALi

dba

HAMILTON TAFT AND COMPANY, ET AL, San Francisco, California FBW (B); MFi SF (A) OO:SF Re Dallas airtel to San Francisco, dated 7/30/93. Enclosed for the San Francisco Division are the

b~

following: Two copies of an FD-302 reflecting the results of pn 7/27/93.

an interview with Dallas sourcel .qD~;~tJ;J

Dallas sourcel ladvised that he plans to meet with CONNIE C. ARMSTRONG sometime during the week of August 2, 1993 and has agreed to the meeting being recorded. He anticipates the conversations will include comments concerning the failure of COMP-U-CHECK, INC. (CUC) to meet its payroll and their issuance of non-sufficient fund checks on COMERICA BANK, Southfield, Michigan as well as the source of funds being received by EQUITABLE BANK, Dallas, Texas which are being utilized to make good on the non-sufficient fund

--, r,. ("\

-- - ------. f.

2 - San Francisco (2 encs.) 1 - Dallas (196A-SF-93255) (1 enc.)

------1--'

''rl

t" iQO'·! .... -

LeG/

~

(3 )

Approved:

_

Per

Transmitted (Number)

(Time)

....'"'

---------

'~

\~

checks issued on the COMERICA BANK. In view af ARMSTRONG's activities involving cue and CC ENTERTAINMENT AND PROMOTIONS, INC., Dallas, Texas which have the appearance of a "bust out" operation and the masking of income to ARMSTRONG to avoid restrictions allegedly imposed by the US Bankruptcy Court, ND CA~Oakland Division, DALLAS is oj;)ening a new 196A-DL- "file. SAN FRAN'cjsc'o--wl.ll-be'advlSed-·of

:'.

.- __

aP.NQEi!_a..~_~_~.ey~m_ent.s

.m_

._-

-

.--------

DALLAS AT DALLAS, TEXAS

Will coordinate and monitor Dallas source's meeting with CONNIE C. ARMSTRONG during the week of August 2, 1993.

2

PD-36 (Rev .\-29-85)

FBI

TRANSMIT VIA: Facsimile

PRECEDENCE: Immediate IX] Priority

o

AIRTEL

Routine

o

!Xl

Teletype

o

o

CLASSIFICATION: TOP SECRET SECRET

o

o

o o

CONFIDENTIAL UNCLAS EFT 0

!Xl UNCLAS Date

FM FBI SAN FRANCISCO (196A-SF-93255)

(P)

4/14/92

(SQ 5)

TO FBI DALLAS/PRIORITY/ FBI SAN ANTONIO/PRIORITY/ BT

UNCLAS CITE:

1/3790/1

PASS:

ssAl

SA 1 ...

, AND

ss~

,

SUBJECr: ,Ie

_

SQ 10 - DALLAS;

SQ. 7 - SAN ANTONIO.

CONNIE C. ARMSTRONG, JR., AKA CHIP ARMSTRONG, DBA

HAMILTON TAFT, 1 MARKET PLAZA, SUITE 3200, SAN FRANCISCO, CALIFORNIA 94105, FRAUD BY WIRE (A) MAIL FRAUD, TAX

BANKRUPTCY FRAU~\ (A); 00:

SAN FRANCISCO.

RE: SAN FRANCISCO TELEPHONE CALLS TO AND'

F~UD,

'(SAN ANTONIO)

SSA~

I(DALLAS)

ON 4/13/92.

CAPTIONED CASE INVOLVES A CONVERSION OF HAMILTON TAFT

r

FUNDS BY SUBJECT ARMSTRONG TO HIS PERSONAL USE IN AN AMOUNT

~~ :~P:~- -:-

ti H((·-1: -/ (

,--,'

AP.k,U:

I

~ ,1#

.(12 '.. - - -

)?. ~lffi-~---

f'--'

Time Received:

6/0t !)~) \1"

Original filename:

---------- Telprep filename'

~fRI/JULIAN DATE:

-,... .., n" '1"'~

rl> --

R~ rrTU~

!

):'

l/'~ "

r''''-

::J~,J ~ ,() - I SO. \05

~~~~-~~---~::...-:.....--=---

ISN: OF ACCEPTANCE.

.. \

ov?

------'---:=;.----~-~~

""PAGE 2

196A-SF~9-3-255-

- UNCLAS

APPROACHING($~5 MILLIO~)DUE TO THE

EFFORTS OF THE TRUSTEE

~~

'-....

APPOINTED BY THE U.S. BANKRUPTCY COURT IN SAN FRANCISCO, MILLIONS OF DOLLARS IN ASSETS HAVE BEEN RECOVERED. ADDITIONALLY, THE ACCOUNTANT FOR THE TRUSTEE HAS TRACED OVER $16 MILLION IN HAMILTON TAFT FUNDS GOING DIRECTLY TO CONNIE C. ARMSTRONG, JR AND/OR TO ONE OF HIS NUMEROUS DALLAS BASED

CORPORATE ALTER EGOS.

INVESTIGATION HAS ESTABLISHED THAT FROM

1/1/89 THROUGH 6/15/91, $4,787,950.84 HAS BEEN TRACED TO

ARMSTRONG'S PERSONAL ACCOUNTS. IN MARCH OF 1992, JUDGE LLOYD KING, U.S. BANKRUPTCY COURT SAN FRANCISCO GRANTED A MOTION OF THE TRUSTEE FOR HAMILTON TAFT FOR A FORMAL ORDER TO ASK THE UNITED STATES ATTORNEY'S OFFICE IN SAN FRANCISCO TO INITIATE THE CONTEMPT OF COURT INVESTIGATION AGAINST SUBJECT ARMSTRONG GIVEN HIS SEVERAL

VIOLATIONS OF THE BANKRUPTCY COURT'S ORDERS TO NOT DISSIPATE THE ASSETS OF THE HAMILTON TAFT ESTATE. SAN FRANCISCQ-· CASE AGENTS

l--

--.JI AND

WILLARD

j I

I

.~~

L. HATCHER, WITH THE CONCURRENCE OF DALLAS AND SAN ANTONIO

~~ISIONS~LL

CONDUCT INTERVIEWS OF SEVERAL FORMER EMPLOYEESAI :

~OR ASSOCIATE~)OF ARMSTRONG. ------.--

"

SAN FRANCISCO CONTEMPLATES THE

; ~I

FD-36 (Rev 11-17-48)

FBI

TRANSMIT VIA: Teletype Facsimile

o o

IX]

PRECEDENCE: Immediate Priority Routine

CLASSIFICATION: TOP SECRET SECRET CONFIDENTIAL UNCLAS EFT 0 UNCLAS

o

o o o o

o o

AIRTEL

o

,Date

TO

SAC, SAN FRANCISCO

FROM

SAC,

5 1/92

-93255) (SQD 15) (P)

NG, ET AL;

SUBJECT

DBA HAMILTON T

T AND COMPANY, ET AL;

SAN FRANCISC , CALIFORNIA; FBW (B); MA

FRAUD; BANKRUPTCY FRAUD (A);

CISCO

00: SAN

ARMED AND DANGEROUS

RE: Teletype from San Francisco to Dallas dated

April 3, 1992.

b7C b7D

Enclosed for San Francisco are two copies of insert regarding witness I I original and one copy of FD-302 regarding meeting between[ with original interview notes. -------------------------------the

For informa~·an~~~~~~~~~~~agents observed meet{ing between and debriefed Jimmediately a

San Francisco (encl 5)~ Dallas

Approved:

_

Transmitted

LEADS:

D.ALLAS AT DA.LLAS:

Will obtain co ies of

and forward them to San

b7D

2

FD-36 (Rev 11-17--88)

FBI PRECEDENCE: Immediate Priority Routine

TRANSMIT VIA: Teletype Facsimile [[] AIRTEL:

CLASSIFICATION: TOP SECRET SECRET D CONFIDENTIAL UNCLAS EFT 0 UNCLAS

o o o

o o

o o o

o

Date

5/5/92

TO

:

SAC, SAN FRANCISCO (l96A-SF-93255)

FROM

:

SAC,

SUBJECT

:

CONNIE C. ARMSTRONG, ET AL; DBA HAMILTON TAFT AND COMPANY, ET AL; SAN FRANCISCO, CALIFORNIA; FBW (B) i MAIL FRAUD; BANKRUPTCY FRAUD (A) i 00: SAN FRANCISCO ARMED AND DANGEROUS

DALLAS (196A-SF-93255) (SDQ 15) (RUC)

RE: Teletype from San Francisco to Dallas dated April 3, 1992 and Airtel from Dallas to San Francisco dated 5/1/92.

Enclosed for enclosed in a envelope.

I

San

Francisco

are

nine

documents

I

For information! San Francisco! I sent copies of documentsl~ : These documents are as follows·

~

b7C 1,-, b .,'\

IL....

IS

...

per-cal.n

1:.°1L....

-

. . 1.

Inasmuch as all investigation has been conducted by the Dallas Division in this matter, this case is being considered RUC. San Francisco (encl l)~ Dallas JM/jm

(2)-

Y -

A I I /1/- ",./ Approved:

J ['1:T

Transmitted (Number)

(Time)

--

_

&

,_

lJIHI. L.

APAGE 2 196A-SF-93255

UNCLAS

WILLARD L. HATCHER, JR. AND SA 1"'---

1WERE

IN

DALLAS LAST WEEK (4/22/92-4/24/92) INTERVIEWING WITNESSES IN THE DALLAS AREA. INTERVIEWED.

I

IWAS

ONE OF THE WITNESSES

I

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b7D

OR~FLUENCED

BY THE?SAN FRANCISCO

I

t

DIVISION. LEAD:

DALLAS DIVISION

ISAl

OFFIC~

BE AWARE THAT

I DALLAS

APAGE 3 196A-SF-93255 BY THE MEETING PLACE

I

UNCLAS 'TO

WITNESS THE MEETING AND/OR OVER HEAR THE CONVERSATION. BT

b7D

SAC,

DALLAS (196-0)

I?

PrDm

SSAI.....

SullJect

CONNIE "CHIP" ARMSTRONG;

raw;

00:

[

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DALLAS

~---:-----::""='-----:--..,...,...,.....----11 telephonically advised as follows:

1 -------r====::::::!.....--=----..:......-------. I I b7C

I

I---------"""T.,......~~~~~=~~~~~.JI __ AA6 ,I I ~ is a check quaranty cOlllpany headquarterea 1.n ~oe~t-r-o~it-A-~C~O~M~PU~-CHE~ CK does business in Texas and other states. I~~';;;P=~

["

I

October 1992, CONNIE "CHIP" ARMSTRONG bought o,?

~For' information, ARMSTRONG's father, CONNIE C. ARMSTRONG, has previously been convicted in the Northern District of Texas of money laundering in an IRS sting and s~rved time. Approximately 1 1/2 years ago, articles appeared in The Dallas MQrning News and Ihe Wall street JOUrnal concerning a San Francisco company called HAMILTON-TAFT HT. CHIP ARMSTRONG purchased this company from ?n r ;r>.A.,,.~ ~J,I<J OM"'-' ~ Iwho was convicted in a THRIFT N case and is serving time. ARMSTRONG went from being a fireman in Plano to having millions of dollars and living a high profile, extravagant lifestyle. The newspaper articles concerned HT which handled millions of dollars ,of-·payroll._tal'es for a number of large companies including NIEMAN MARCUS 'and affiliated stores. Basically, HT was incurring extravagant expenses and making loans from the large amounts of monies passing through ET. Writer recalls the scheme whereby HT delayed making payroll tax payments to the IRS by several months, eventually falling further and further behind on the payments. The loss was in the millions. The San Francisco Division investigated this case and there were leads to the Tyler RA. ARMSTRONG had a ranch near Tyler.

2-196-0

WGE/dr (2 )

bID

.(~ 196-0

1~--.poI

the same scheme

that CHIP ARMSTRONG is perpetrating CHECK.

So

fter takin

over COMPO

esident 1.5

honest

and should be contacted by e accor 1ng o~ ~__~ ARMSTRONG alao ~jrftd All the directors with the excep ~on ofl

I

]

whomL

Ibelieves bought into this scheme.

~

~11eged that COMPO CHECK is running up extravagant expenses. Like BT, ARMSTRONG is using this month's checks to pay last month's expenditures, and therefore he believes COMPU CHECK is falling further and further behind. He believes that merchants in a number of states will eventually Buffer significant losses as a result of these activities. The company has accounts with a number of auto chain stores. ARMSTRONG was able to obtain about 60% of the stock pf c o : with a loan from an investment company in Denver. L b e l i e v e s this loan transaction was also suspicious. ARMS N has offices in Dallas where he runs COMPU CHECK from.

b7c.:

biD

IHECK

I

frond

DS

1~~~T't='~~~~~~~~~~asno conclusive evidence O~f ~1 described above, but if is his professional opinion I

I that

ARMSTRONG is operating COMPU CHEC~K~--

as he did HT.

2

b7C b7D

Memorandum

To

SAC, DALLAS (196-0)

From

SA

SublCCI

1'---

Dale

---'

3/16/93

b/::::

CONNIE "CHIP" ARMSTRONG i

FBW; 00: DALLAS

__.. .I

On February 23, 1993 I I~~-:-"""":,,, contacted wr iter regarding captioned matter and attached m 0 um dated January 26, 1993. writer attempted to contact on two (2) prior occasions and was informed that as out of the C1ty.

I

writer andl Idiscussed the activities of ARMSTRONG as detailed in the January 26, 1993 memorandum. Ihad nothing more to add but clarified a statement in the

~ referenced memorandum I

I

b7C

~

Ireiterated the of the informatio-n---p-r-o-v~i-d~ed to SSA his professional. opinion He suggested that any investigati ct finding b7C process commence- with ·a telephone call to __ lalso stated that he prefers to remaln detached from this b1u matter unless and/or until his assistance is needed.

2-196-0 PRW/pw r------~--.---.

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--

..........

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FD-I(l
FB1

TRANSMIT VIA

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o o

CLASSIFl

PRECEDENCE:

Teletyp~ Fnc~m1tle

o

Immt:dmte

o

D

Pnurlty RllUtine

o

o

AIRTEL

o o o

TOP~

SEeR CONI UNCI UNCI

Date

TO

DETROIT

FROM

SAC

SUBJECT

connie C. Armstrong; aka

j

4 / 19/93

SAN FRANCISCO (196A-SF-93255)

(P)

(Squad 5)

Chip Arstrong Jr.; former cha1rman of Hamilton Taft Company San FrancIsco, now dba as Cornp-U- Check Inc. 24901 Northwestern Hlghway, Seventh Floor southfleld, Michlqan 48075 lOf Hamllton Taft. currently employee at Camp-U-Check; ~__~~__~~ ~, former presldent of Hamilton Taft;

I I

FBW (A); Mail Fraud; Securitles Fraud

b7C

OO:SF Enclosed for the Detrolt divislon is one copy of the drafts of numerous financIal documents and a draft of the 13-D flling for the Securities Exchange Commlssion which were provided to San Francisco eocase agent by captioned subject Ion 4/15/93.

I

For the InformatIon of the Detrolt dlv1sion captioned subJect Armstrong is one of several-subJects 10 an ongolng 1nvestlgatlon WhlCh commenced in San Francisco in January of 1991. San FrancIsco'S case ~s centered around the fact that Armstrong with the asslstance of other Harnllton Taft officers

transferred approximately $55,000,000 in Hamilton Taft client funds to

hlS

personal use and or to hIS corporate alter egos

durIng the perIod of March 1989 thru March 1991. PKM/dbc

2- Detrolt (enc-l) ~ ~ ~ SAN Franc~sco (196A-SF-93255)

TrdlNllltt~d

(Numht:r)

(TInH~)

HamIlton Taft was a service company located in San Francisco whose business was the payment of tax obligations due various taxlng authorIties. It provided its tax payment services for many of the Fortune 500 companies in the Unlted states. It had been in bus~ness performing this serVlce Slnce roughly 1980. Historically, the company had derived its lncome from a nominal service fee it charged its clients and from the use of the cllent funds for a short perlod of time usually no more than one to three days. Durlng this short period of time, HamIl ton -Taft wou ld invest the clIent funds in very short term, very secure and very liquId instruments. Succinctly stated, Hamllton Taft made lts money on the Itfloat" or the perlod of time it actually was in receipt of client funds and the time those funds had to be paid to the varlOUS taxlng authorltles. When Armstrong

took

oyer

the]

company in March of 1989 .he lmmedlately began uSlng cllent funds to flnance an elaborate lifestyle and for the acquISItion of personal assets lncludlng the purchase of a $10,000,000 ranch near Tyler Texas WhlCh he used as a personal headquarters. In essence Armstrong operated a Il"'Ponzi lt scheme. ThIS scheme reqUIred that Armstrong replace those client funds that he converted to his own use by using other client funds were continually arrlving at Hamilton Taft to pay the tax oblIgatIons of other HamIlton Taft clIents which were going to become due and oWlng in the very near future. Armstrong wlthheld clIent checks Intended to pay for tax bills. He used other clientls funds to pay the preVIOUS cllent funds and penaltles WhlCh were accrued for beIng late.

froml

b7C

I

I

It should be noted that captIoned SUbject has been interviewed at San Francisco on 4/2/92 at which tlme he made some admISSIons regardIng haVIng asslsted In the lllegal wire transfer of large sums of client funds to Armstrong directly and or to hlS corporate alter egos·r adv~sed San FranCISCO case agents that he ~s currently employed at b7C Comp-U-Check and 15 worklng on lnstalllng a new computer system for thls company. Armstrong andl I are in the process of belng lndicted In San franCISCO for FBW Vlolation~

I

1

A cursory review of the documents provided to San FranCISCO case agents lndlcates that Armstrong IS continuing

to commIt fraudulent acts possibly Includlng varlOUS securIties laws violatIons and fraud by Wlre transactions. More speclflcally, Armstrong appears to be "creating" assets and then leveraglng these non ex~stent assets to fund at least one of his companIes, CC Entertainment and Promotions, Inc (CCEP) (see notes to flnancial statement, F-13). 2

Further reVlew lndicates that Armstrong 15 In the process of convertlng posslble acquired assets to hlS own use, through the issuance of fraudulent debentures . . San FranC1SCO belleves that the SecurIties Exchange Commlssion may be investigatlng the recent acquisition of Camp-V-Check by Armstrong. The Hamilton Taft case has been the sUbject of wldespread medIa coverage includIng a front page story In the western edltlon of the Wall street Journal. Comp-U-Check has also been the sUbJect of media coverage locally ~n DetrOIt includIng an article In a lndustry news magazine called tiThe Collection Agency Report rt • The publlsher of this report, has contacted the San Francisco dIvision re~arding Armstrong and his recent acquisltlon of Comp-U-Check. I I himself IS a former Camp-U-Check employee who published a March 1993 artIcle concernlng Armstrong and Comp-U-Check . San FranC1SCO suggests that Detroit have any case aqent assigned thIs matter contact San Francisco case agent, prior to contacting 'again regarding thlS matter. Addltlonal lnformatlon is avallable thru Lex~s

] t

"7 .-, .)

I f...."

I

a1,.---

I

I

I

NeXlS and "Craln's DetrOIt Business" LEAD: Conslder open~ng a fraud by wire and or a securItIes fraud InvestIgatIon.

J*

28:5

D'\ RE 1{A..'rlILTON TAFT & CO.

United Stales Wlder~. . Justice .Act (wEA.IA.- ~ .dHIH.All. LV.-\. is not azl . .~ ,nlflin~ St.:llUle In fa,.-or of !iti~ \d.i.l :l,(f.llnst the b'1JVe~'~ 2-lU(dH [HAl say" that ~# Jan.y is not entitled to an a~'~ ~nd.:5 thal the position of ~ ""as :iubsuntially just.i.fied ~.J§. -:.n:urns~ces make an ~ ~ :t '·subst.:l!ltially justified" ~~' ~ned out in Pierce u. Un.deo.'1fi iii"-- 51}5 • lOS ..... C; CL .,,, 'I -......., 'X;7,~ "P, t
~,

9{j

119&11. followed in Ccrm~"~' - 158 n. 6, 110"''''',~ ..'ILC "" l "S 1-...1. . ) . 1" 6 110 L n., ..t.c..:.c 3-l (l~ ~

~3

FJu

u,:lt U,E depor-.:ltion order created dilt!mrna becau:ie 5urrendenng ••",j,! h:a\'t! tn~~rerl tllei.r immedi::ll.e deptH-· .~~ll\. Jl\IJ..Hin~ u,t!ir meritonous att.Jck Iln ~ "ni,-,r·.- \·:ilidity. But ieder:U couns regu...~. I-"\.lnt emergency relief :.tg-ainst ubi.~. r.Jlin~~ in immigration procedures ~.:cn. juul,'1ng by the r€ported c:J.Ses anci by ~-..:J l'-xpenence. do seem tD proriucE i:lI' =:>~. :.I::lf1 lht'1r :ih:u-e uf JrDILr:tri.n~:i';), and .~,n.- dill :hll immerli:lleJy :.tlcempt to ;J.\'::Ul ·;rm."<.,j\,e,; ui tll:lt uppol"tU.!1.iry r:Itller than l'~.;: iUI-"luye . ; &

1·./.ICh-~

:

,:e

exi:
depor-...1tion: li nder a then: ~ ~ .: amendmenL to the lm~'~ ltJ,- .Iity ACl (8 U.s.c:·~ filing oi a motion' tQ ~ .. :.ft, ,.roceedings where the -, 'eer: gi.... en notice of .such ~i - -' cally stays deportation. r£ ~l mmigTation Judge had ClJ%)o~ , :.acion healing in :t.bseDttl~' : ~ :..ha~ Zapons had Dot ~, It hearing (something tMt:!!:: "
-:~~ . of,;"a.

: ""culty in recoverin b ~~

th~ir having ~one fugi~

_ stilJ-oum,anmng (tl1o~ 1b~r~.

I~i.h

Clr.

1'l'l~1

sue

:lII appeal of the Lleporw.tion o:cier or :l deniaJ of his :lpplication for a \\'ar:e:- oi

depor-~tiQn.

In light of that presti¢ous l:Qur:.',; pronOl:~cE' men~ and the simibr circumst.:lnces oi this case. it C:lIl sC:lrcely be :iiJid Lha~ the l" rUted SUtes was not "suDsunUa.lJy ju.srIDee·" in opposing Zapons' elTort.5 t..o Qbtair, ::l s~y oi depor..:ltJon.

We thereiore ..\FFlR)v1.

!: I I1nly in the rarest of situ:ltlons do

:'f~:,

he underl:;.ing subs~~ \ .e magistrate judge ua'~ " were corre::t in cOl\clucfui('~ u-d of Immignuon Appesla Yo '~-et.ion in refusing to ~.~

l!~

../..;un 1'-<-'.-

',,),-r;l.1 t'Our_, counten:lIlce a pan:,",; disre·

I1S

:i) deoo • ...:loon order. I

Cl' ....

,;:Ionl "i

;l.l\

n .. m~-I~lkenJy

··~~d "r h:lCi

rmly a frinllous pretense to ·uh:\'." i,; the unly e.umple th;Jt comes to 7=<1. Il"tdkrr r. City of Bir71l;71ghnm. ~ .. ~. ::0'7. :1l5. ~j S.. CL 152-1. 1829. ]8 L.Ed~d ::lflll!!li~. In:ill other situations obediem:e ~ r'\,.n :lI1 a..~!'ertedly yoid I not merely void a~ I "rtler is required unless and until it has ~ ';:lC;Jtcrl or reversed, Walker, id.. at :::n-.:l, :"i S.CL at 1832: Ullited Stlltl!.~ l'.

In re H.-L'lILTON TAFT & CO.. Debtor. Frederick S. WYLE, Trustee in Bankruptcy of Hamilton Taft & Co~ Plaintiff-Appellant, v,

S & S CREDIT CO., Defencbnt-Appellee. No. 93-15455.

.Hille Iv"orkC'T'S. 330 u.S. 258. :290-9-1. <:7 :,.. r.l. li77. fi94-96, 91 L.Ed. 88-1 (1947); H:.r~h r:u:t, The t·oid Order and the UlLty To ,".:lr,(

'Y.,,-.,. Iii C.Chi.L.Rev. 86 (19.:j81,

united StateS Coun of Appeili,

Ninth Circu.iL Argued and Submitted

II ..rv 7..:lpons ens;aged in seli'help rather .~ ,"'ml111:-inJ,! v,;th an ouc.st.anding order to ~'nrh:r for clepor..:ltion. and the immigra-

:I:Jt..hllnties responded by denying a suy As Bar-LI!l"Y 1:. United :·~t::.:n D"p', Ilf ./u.sticr. 990 F.Zd :n ~ (2-d t-..... ~~rli Iciutions omitted) h::l.S put it: .\..:ll: lI l1ch :111 ilien who fail3 to surrender to ~:-.,. I \"S despite a lawful order of nepona~n i..~ nUL soiruy speakinR, ::!. fu~ti\'e in a r!"".rn.iru.! matter, we think thal he i.s nonelhrll":V\ :I fugitive from justice. Like the f~uve in ;J criminal matter, the alien who .. ~ rUl{luve from a deportation order ~ltl Ilnlinarily ~ barred by hi5 fugitive ...:1Itu.~ from c:alling upon tl1e resources of lk cuun to det.ennine his clai.on,s. AI: ~n .....ho i.s a fugitiVE from a deportation ~kr ,'ihllUJd thus not be permitted to pur..

....."!1

.;{ ,i"pllrLiUOn,

1.

I.nck.:,j.

II

wtU

.heir l:uer.. filtd habe:u pcrilion

,~ug.

12, 19~.

DecJded :'I'l:!y :;. 1995.

Bankruptcy trustee for debtor ~..ho con-

t:';Jcted \l.;th clienc.s to pay client.5' ierie..-al, s~te :lJJd loc.aJ payroll l.a..."(es and prepare all relevant reports filed action to reCQ\'er as preference ta..x payments made by debtor to Internal Revenue Service (IRS) on behalf of

client.

The Bankruptcy Court dismissed

complaint and denied trus~'s motion for partial summary judgment that U!..xes were est.:.lte property. Trustee appealed. The United States Distnct Court far the Northern Distrit:t of California. Charles l'_ Legge • J . , afftrrned. Trustee appeale
sp:>r~d

z..:,pans from deporulion.

000130

286

5J FEDERAL REPORTER :kI SERIES

ciid not re!]Wre debtor to ;;egngate ~"(es, and thus. t:L'I; funcis L"':lIls.ferreci to decLOr were pro~n:y of dt'btor's esute. and ux paymem.s made by ciebtoi to IRS on behalf of cliem were subje-:t to ;l\'oidance as preference,

1. Bankruptt:' (;::l~ ~61O

Aj&.oug-n iund~ \\;tilneld from emplo~'­ ees of client oi debtor. WilO cont;-:lcted \\,tn client to P3Y iede::l!. H:lt,e and loc:tl p:lyrolJ t.:Lxes and prepa..re :ill :-ele,'ant reportS, were impressed' in "t:1turory crust when collected. after O"'.lst fund ~,e5 ~'ere tr:m.sierred (Q debtor. n",btor held t:L'\es frl'e of tr1l5t and t.:J,..'\e~ were proper.:,· of neDtor's ESt3te. where client L":ln.Sf2~ :.:J..xe,,; to debtor \\ithout requiri..'1g rlebtor ~o ;;e!!1"eg:lle tho~e funds and hold iliem in 0'U5~ thlJ..:l, ta"C p:ll'ment.5 made 00 benalf UJ client by debtOr "ithin 90 days of bankruptcy filing were avoidable preierence,;. Ban.\;:!'.C ode. 11 Ii.S.C_-\. § j-li(bl: ~6 C.S.C--\.. ~9 ';'501, 75QHal. ~.

Trust..s C=>:lS6< 11 Cnder nannal

principles af tr'USt... if

truste-e cran.sfer:s O'U.5t property to third party, third pan:; noid~ :.1uIt propen:; free of tru.st :mJe.:;.s c-.1.St...~ ~mmitted breach Qi t.nJ£t in con\'e~'tDg property. Resur.cmem (Secondl or- TrusL5 ~ 253. 3. TT1.1s t5 C=' :!56<:! I

oi UL!.:it, when rru.,;t~ enters imo contr:lc t ',I-;U1 third p;LrT.j', :J..rIj" trus t fun ds t::i":J.I1S i e rre
.-\llsem

-I. Trus t.!

--------

bre.ar~

(!';::> :t56<:~)

Depositing tn.!5t funds in bank :lC~un[ is not t:-ans i e!' 0 { O'USt property to t.b.ird party wi~ meaning of provi... ion Rest.1tcment (Second) of Trusts th;Jl when trustee cr.msfers t:ru5t property W third pany, third party holda thal property tree o{ trust unJes.s trustee committ.ed bre.:Lch of trust in com'eyRestatement (Second) or ing property. Tt:llSl!d 283.

5.. Bankruptcy <:::=>:}76&.1

haC jtL-i5ri.iccion to ~ t:ru5~':; motion ior partial 5umm,ary jud!;TT1enc in preieren~ 3 ... oidan~ proc~g on issue th2.l L"'U5t fund taxes ~d by debtor to IRS on behalf DC nebtor';; client. with whom nector be! canL-:LCtei:l to par payroll t;l.:teS mo prep~ :ill reie',-:l1lt reports, were propert:; IJf deblO:- ior prefer-!?nce :l\'oidance purplJses ai'te:- :.'i.2l on meri!.5. where Coun of A,ppeals T'e\'e:=eo cismet court';; dismissaJ of trUstee';; complaint, ruling that :lS matter of law trustee couJd teCo\'erfTom debtor's client funds p::J.id CD IRS on client's behalf during preference ~ri­ u-d ii client tT':I.nSferred taxes to debt.or v.ithour requiring debtor t.ll hold funds in LTUSt; -re\-;ewi.ng- denial of :iummary jlld!fIT1ent v,d.S fi,QtJ!Clinc.less aodemic e."Cer~e.: -Court of

.-\ppeaJ~

\iev" deni.:U of bankruptcy

6. F e+)S0.25

In general. denial of motion for summary judgment is not final artier since cor..sequence of denial is th~t case will go t.O rriaJ; thus. ordin.iriJy, re\;ew oi such denL11 is sought through interlocutor:,.' appeal. :;

7. Federal Courts (!:::I769

w-nel! int.erlocutDr:: appeal from denial of motion for Su.rn.ITiary judgment is not tak· . ~ en. deru.a.l of summa::; jud~ent is re\;ev.
D:I~id L. Kane! and P:mic:J S, ~l:ll', feldman. Waldman & Kline. San Francisco, CA. for plaintiff-appellant...

~

.'

Susan C. Cag:mn, Lath:J.m & Watkins. SaD: _]; Francisco, Cr_ :lIlci Raben D. Crocke[".., La--,g ,-tham £: Watkins, Los Angeles, c.:'_ tor defen- ,J dant-appeUee.

~,~

Appe.aJ from the Tj ni~ St3tes Distrit:t Co~ for the Northern DisrriCl of CaliforciL Before: NORRIS, THOMPSON, TROTT, Circuit Judges. WILLIAM A. NORRIS. Circuit Judge::' The banknlot...'), trustee of debtor Hi-~ ton Taft & Co~pany (Taft) :lppen.l:1 the'"~_: ruptey court's disrnissaJ of his suit to from S & S Company (S &. ~) ..F~eDts

2Si

IN RE HAJ'\1ILTO::'i TAfT &: CO. CII . . . 53 F..J.d 2M 1'i1b Clr. .~766.1

; han jurifidiccon to f1!-. "r:..ruptcy trustee's motion

--:,' judgment in preference on i.,;sue th:!.t trust fund r to IRS on behalf of '.n whom debt.or had con. 11 t:!..."'(es :LIld prepare al.l e propeny of debtor (or :ce purposes :Uter t'I"Ul on

----

3:

.-: of Appeals re\'ersed disj of trustee'; complaint ,_ .~r of 1::1..... tnIstee could :or', -~nt funds paid to ..ng preference peri~d t:!...xes to debtor v,ith.or to hold fumls in C"llSt;

.:.!Jt!nL.:i to pay the clients' fedenl. St::lLe and ioc:U payToll taxes and prep:l.Te all the rele~purts, As consideration, S & 5 paid ;:u', the amount oi the taxes !D ad...ance....ci

\?Ilt

:.'l~'

due daLe of the U:xes which enabled Taft ;he benent of lhe use 'Jf the fJm':3 ::U-::':J.; the inten'a1 bet".. een the date il re.%./\.t'd the funds from its clients :lIld L~e date :! paid the ta:'{es. Thus, Taft was paid for its lle.....;Ce5 from the "float" on S & S's money.

'"

Lic e.:'{ercise, ,,:;:>tl60.25 motion for sum· . order since c:onsethat ~e will go to trial; ~~ ...;ew of such denial is

~769

·1,)....:

fin

appeaJ from deni..aJ judgment is not tak-

"'ogmenl is revieYooll:dgmem,

~aIl.'P.rl throu'gh Taft's accounts :LIlnuall;'. b~:lUse of bad investments ~d

lila

HOI.I,·l'vp.r.

Pauicia S. ~ar. Feldt'l\ne. San Francisco. CA.

.. Latham & Wat.ki.ns, San itaber: D. Crockett. LaAngeles. CA., for defen-' .

.. U niLed States Distri~ ." Dis tri et 0 f Calif0miL. . S. THOMPSON. and ~es.

.:~·t

Tne funds Taft reeeived from S & S and its "'L':f'r clients were not placed in separate ~unts with the E..xception of funds from 7";1.Tl clients which had specific:::illy contracted ~or ~ecr-eg-ale{j treatment of their funds. AU <.her funds we~ commingled and used by 7'.:ul :"01' its 0'(l,'l1 purposes until paid to the ~'Cinl! ::Iuthorities as the !.a.."(es bec:une due. .\ppro:om:!.tel.... S6 billion of client mone\'

'locutor)' appeal .

f)'

~r-,~.<''''",."", <: /~_,Ii), . ."'":'*'

Cz

TIle rele... ant r"acts are not in dispute,~ T;ll-: .:onL"':lcted \\ith S & S and :'!S6 other

.:;wnmary judg:ment w~

,.. Jr:'

:n;Idt! to the Internal Revenue Ser-1ce (IRS) un behalf or' S & S. The crusr.ee also appeals :ht! rourt's denial of his motion for paruaJ ,;ummary judgrnenL The question presentee :.:l both :lSpects of the :!.ppeal i5 9.. hether the :nuney Taft paid the IRS on behalf of S & S -0..' e\'er the property of the debtor withl1l :.~t.' ::It':min~ of BankruDt..'"\' Code ~ ,':H7fbl. '1 l''': ,~ -.1"'11. ='-{bl /;;",,; ,}", '/TI'''·~. /r..u.rr .. ' _C .' ~ • /1

-t

Jther improper handling of these funds, Tm ::l."r.e to have dramatic cash flow problems ~1ri :'ell behind in making LJ..'C payments on ~l-.:U..f n[ its clients. It then began selective-

:r ·...ithhoJding federal payroll taxes during :.he fll"St month of each q~ in order !.D ~ those funci.s to pay delinquent taxes from ~ prior qUarter. Taft anempted to conce31 ~ facts from its clienLS_ But in March. ~l. :!. fanner Taft compcrnller disclosed the I.

Thes.: facu ;lrt: derivc:d From the .J.ffid.:1viu pro~ In Ihe conu=xt of the:' U"\Utre·. mOlion "for ~l;;-~';mma,..\' judgmenL While the: Summ:lrV JUdIP'Y'c:TlI

pap";' provided det.;oiu

10

.uppl"m"~1

Ihr "Icadings. the: :lppdlcc does not dispute Ih~e: addll.lonal facts and agr~ that th")' do not maLe-

f\al~ ;affect the: outcome of the marion to d15miSJO.

I~~~I

improper diversion of funds. and Tail' 5 c.i..ienLS fi.1ed the i.nvolun~ry baruc-.J!Jt!:y peri:.ion that g-ave rise to thls J.Ct.:or_

In :\'taren, just prior UJ the filing 01 L1e bankruptcy petition. S & S was notifieci that :c was going to be audited anc requested tha, Taft provid e proof th:1'1. S & S's payroU .a.'CE3 Tere up to daLe through 'the end or" JanU
moved for dismissal under Rule 12rOlfS).

~g

that the funds paid to the IRS

we~

::e!d in st.1tutory u"ust under I.R.C. § -;-J-Ol and. thereiore. were not properr:-' of the cebtor. The trustee, in turn, moved for ;:w-. tiaI summar:y judgment seeking a determiD2:;on that the funds used to pay the IRS were ;Jroperty of the debtor under 11 C,5.C, ~ 547(b). Tne bankrupu:y court dismi..~~ :':e complaint and denied the plaintiif5 :DC>~on ior partial swnmary judgmenL The ci.."-'::"".c: coun affirmed the decision, T'1e c-.:.:,~ appealed the dismissal and the denial oi ~ summary judgmenL~

We review both d~i.ons ~e n~o. In

rt!

.5tt:r.·~ 107 B.R. 702, 705 (9th Cir. E.-\.P

1959) !1dec:ision to dismiss complaint under Rule 12(b)(6) reviewed de novo); In n Xro: Engl..lJ:n~. Fi.3h Co., 749 F.2d 1277, 1280 (9t..D ~

Th~ tru.stee aka a.rgu~ th.. t io ruli..cg on the tt1otion to dism.i..s.:;. the bankruptCY judge: imP"'f'>crly cansider"1'd ~dcnce auuide: the comp[.11n1 without convening Ih" motion 10 Ji>.miss into :I :cation for summary judsme:nL Bcc:lusc we :-c' vc:~ the ilis m is.s.aI on 0 lh.c r groun d.s .a..cd anla the dinnet court (0 enter pani.1.l swnmJJ)' judg· tt1cnl in the trustee's f:.vor. we n=d not adt1r=s this issue.

Oonl~'J

288

;)J

FEDERAL REPORTER.. 3d SERIES

Cir.I!JS-lJ (summ:u-:: ju
[II Section ,i-..j",rb) permits the uustee t.o recover L-:lnsfers oi the dei:Jt.Dr·s property when the tr.l!'.sier OCC!..l!T-eti \\ithln the !XJ.-.day "preierence penoer' pnor to th~ riling ui the bankruptcy petition. if tne transier was marie for the benent. ui one oi i~ credito~.; If the reCjuirement.5 of ~ ,'>-I7ibJ :1fe met. the L-u.stee may recover the ';;l1ue of the property ttansferred from eitiler the creditor on whose behalf the mnsier was made or from the p::u-ty Ul whom the tr.lnsier was made. 11 U.s.C. § 5501:1)(1). In this C:l5e. lhere is no riispute that the t.a.'\ parmenL~ the trustee seeks to ;.l\-oid were made for the beneiit of S ~ S \\ithin th prcierc:lce period. However. S ,~ S :m,'1Je, that ~ ,')--!',lbi does not :.lpply bet:ause the t.:I..': payments Tm tr.Lnsferred to the IRS were not property Qf the debtor, but rather funds held in J :it.ltutory truSt for the benefit of the IRS. S & S argues tha. the runds paid to the IRS by Taft were funds held in trust pursu. ant to Intem:ll Re\'enue Code ~ 7501, which pru\ides; "[wlhenever any person c; required UJ collett or \\;lhhold an}' intema.l re\"enue t.1...'( from any other person and t.D pay o\'~r such t:L-.: UJ the United States. the amount ui the L1.."\ so collec:t.ed Dr withhelt! ~h:lJl be held to be :l sped:J.1 fund in O1l$t for th!: U rut.ed S1.3Le:i," :26 eSc. § 7~OUal. (~, 3 J Il is cle3I that the funds S J: S \\ithhelcl from it.5 employee,; were impressed in :l st.J.t1lLOr:-' trust when collected. BCg1i:T t'. J/Liema!. Ret'wlLe Sen"ice, ·196 l:.S. 53, 01--62,

3.

[n full.

lh~ 5r:lnJl~

110 :iCL ~, :!2t>-l. 110 L.=:d.:2ci ·Hi (1990l. Hu..... e\·er. iller collet:uon. the tnlSt-funci ~'\_ es were L-:JJlS t'e rrecl to Taft \lo1 Lhou:. req u.i.'"in g T;ut to ;;e~l'.ll.e those funds :l!ld hold th~rn in tnls:.. Under normal pru1Qple::; oi trusts. if :l L'"1JSte-e L-:L.n.:;iers O'\Jst property tc a third p allY, th e third part:: hoi cis t.h a t prop~rty tree ui tru:i~ unless the t..-..LSLee commit .. teci :.t bre:.tcn 01' trust Ir, COnVE'j1ng ,he propert::. Rest.J.tement (Second) of Trusts ~ :2S3 (19591: IY Austin W. Scon £: \Villiam F. Fr.ltch~,. The L;lw of Trust.5 ~ ~'3 ~-1ti-, ed. 1989). Thuli, ;lasent a bre3cn uj O'\Jst. when :l O"U$tee enter; inUJ :l cont.'dCL Int}. a third party. :lny tJ"'.lSt funds l:r:LTJ.:;ferred to that third party in consideration of the conc-act 3IE tr:msierred free of !:rUS[ unless the cantr.:lct pro\ldes th:lt [he tr.ln5ferred fund.s ",hall be held in truSL [41 In [hi:; l':tSt:, ~ oS: S ri~5 not come:ld that it committed a breach ,)i tru.st by can\'e);n~ the trUst-fund t.1...-.:es t.D Taft as consiaeration for Taft's promise tD P3Y S & S', t.a..'> obligations and prepare the appropnate repons. Nor d06 S & S :lttempt to :inow that it ~ngeci \\ith Taft for thE' c-ansjerred funds tQ be held in trust. \\1ti1e m-o of Taft'.:; clients arra.nged to h3\'e their Ull5:.-fund t.a..'t: pa)ments kept in segreg:lteo a.::COllllts, S &: S and the other clients did no,- Instead. Taft e.:n.ensiveJy commingled all of the hlnd5 it recei....ed mci tre2t1:'C the fu!ld5 :!.S It,; oo,;,l\ :J.SSets, usmg them to P;I:-· Its open.ting e.xpenses ana irwe:iting the funci..:; ror its O\,l;tJ benefit. Thereiore, unde, orri.in:.u-y principles of trust, Taft did not hold t.L.:~ funds in tn..lSt. Tnu:i, the funds wer~ pro~n:,' of the debtor :.lnd the January L1.,"( pa)ments were subject t.o ;lvoidance. 1 (5) rh:l~ cn:Jblt:s such crcdilor to ~eiv<= man: tn= such cn:diror would rec.<:i'·c if(AI the C~ w"rc a c;UC' untie~ chapler 7 of

pravi..ks:

the

tn1.St~c

nl

ur Ute t.I"btor in prop~n~-

m:lY :lvait.l any [r:lOder uf :In inler·

Ihi, liue:

ar far the benefit of :> c",ditar. C!) for ur un ~c;t:ount of :In 3nl"c"dent d~bt oweu b~' th" tkblor before such Ir.>nsfer \\Iou (I) 10

..Jcbr 10 the ".~[<:nl prol'idcd b,' the provi.sio~ of thi, lille. 11 U.S.c. S 5-l7rbl.

rruor:: 0) m,.ac while !.he debtor ""as insolvent: (4)

rn"de---

CAl on or within 90 d"Y' before the "bte of Ihe filing uf thc pclltion: or (8) b"lwecn OIn"lY I.bys "m! un .. ycar b"fon: the dDte of th: minE: of the pelition, if such crruilUr :11 Ihc 11m" af such lr.ln"fcr WElS an insider. and

•

. CB) the (r::msfer h"d not b=n m~de: and Ie) such t:rrdilor rrccI"cd palmen! of such

4.

S & S :.sSC'~ th:ll unuer omirurv principia 01 thC' trust funJ. n:m"in funw ~ whilc in po"'-Cssion of an Lnlcnn...Ji:lry, cilinJ" .BlCxiu and E. John Vila. Inc. I'. Fir:sl ~ S",d: Murv/anti. B""kr.LRplf'. 7.1.012. J99! WL 56335 rSankr.D.MLl.19911. In beth ~

m:..

lrUsl.3,

or

000133;

:· .I

.., .'..

:

-"

';".

110 L.EIl.:;d 4ti (990), tion. the L'LJsl-fund Wu. to Till \\;thout re-quiring ~-se funds md hold them nal pnnciple,; of tnl.sts, .~:-s trust property to a ......d pany holds th::lt prop~ss the U'1J..Ste!! commiz.in conveying the prop:Seconrt l of Trusts ~ 2S3 ..., ScOtt £: \Yilliam F. . Trusts ~ :!33 (4th ed. .• :l bre:lch of trust., when '.0 :J l:ontT:lct \\ith ;j third is tr:l.nsferred La that . - 2r-:ltion of the conrr:act -: c: 1st unless the contr.:J.nsferred funds _L

.

,

\_~ "', !,~. : ~',.

... ..:..

g

'':<%/

.~ ,~

S & S rioes not contend -e:Jch uf tl1,lst hy can. axes to Tait :.IS considi co to pay S & 8'5 tax Olppropriate re.rnpt La show that art for the tnnsferred -ust, Vv'hile two uf Taft's 'e their trust-fund ta;t . gated :lccount£, S & S ,; did noL Instead. Taft i J11 of the funds it he funds as its own :0 its operating ex. .unds for its own Icier ordinary princ:i~ ,lOt hold the funds in cis were property of the • t3.X. payments were

h cn:dilor 10 rc:cci,·: mo~ lould receive i{:;U" UJ'lde:' chapler j of 'laJ nOl been mad~: and - -cived paymenl o( 3ueh vidcd by rhe provisions

. ordinary principl= of m:lin tJUst funds I:Yen J \ ; .... lcnnecJi:lry. citing 10 Firsl AmrncQfI •. 7-I.U I 2. I 99 I In both th~

-

IN RE HAJtOL TON TAFT & CO. OlT .. SJ F.:lcl Z8S 19thClr.

::i .\: S arg'Ues. howe\·er. that. such common I'l!strictions were abropte
:-.!.'l·. :In ;.ili-Unl' decb.red bankrupt::y mer :~l\1nl.C t:eruin ....ithholciing raxes to the IRS. r~t! airline had not kent :ill uf the trust-fund :.J,.-';'-,'; in ::l se~g-ateci account. but had p:J.id a .uo.~t:tIltiaj portion of the ta.'te:i out of irs _"t'nt:'r:1J funds. Tne tru3tef :J.uempted to :-t....·l'\·t:'r from the [RS :.ill oi the ta.,es paid .::.Jr::1l! the preference period. The IRS "~;UlllL'U tbt the ta.:"es paid by the bankrupt "r11piu:,er were never pro~ny of thE nebtor. out in...:teOld were funds held in trust for the : (\~ pur;;uant [Q LR.C, ~ 7501. Cnder com:nun b\\' principles. the IRS \\"oo1d h:Jve been ,-umpcIled to crace the funds it W..5. Instead. the Court 6uted. Congress intended that U[t]he mur..~ :-;hould permit the use af reasonable :L"'''umptions under which the Internal Reve'u~ :-:~nice. md other ta.."Cing authorities, can ,L-~On."L-;He that the amounts of WIthheld '.:I.'1:L"; ;lr[~ still in the possession af the debtor ,~ :~I.: Cllrnmencement oi the case." ld.::It 65. ........'. IruSl fund.! wcre held in a bank :Ie count. 'i .;. S ::IpP::Ircnth' contends th:ll placing trUSl lun~ In a b=k: :lecoum is l:!Iuiv;Uen~ LO paying UUI lh" funtLi 10 a third parry as consideration for .a ClJntr:1cl. Ho",cyc •. dep<Jsiting trust fun~ in :l b.uJ1-. :lCeounl IS nor :l tr-:lnsfer of !IUSI propcny 10 .. third P:l~' within the rnc:lt1ing of § 2BJ of thc ~1"tem"nL

S 61 S :lbo relies upon Sdby \'. Ford .'vl%r Co .• ~90 F.ld b~1 Ibth Cir.t979J. But ~lby did nOt un"'!-'e monev =nsfern:d bv the SUWtOl"V trUSl· ctOr.i. In Seltry. the ~ontnlcu>r

=

289

199~1

110 S.CL at 2206 (quoting 12-1 Cong.Rec. 32393. 32-11, (19,S) trem:1!'ks of Rep. :::d· wards)]. Tne Cour: held that a ieO!SOnable assumption in the case before it was that. "[tlhe ciebtor's act of volum.:uily paymg ;-.=; trust-fund tax ooiiplion ... is alCJne ::;LillScient to est::lolish the required nems be:-;;-~n the 'amount' held in trust :md ti:e f:mci;, paid." lei at SQ-O":. 110 S.CL at ''''''57. S & S argue~ th:It Segler comp=s Lhe conclusion that the funds paid to the IPS i.'l this case were fund.: held in ;;wtu.or:; c-..l.S:. Hawever, the holding of Be[J1~r is not e.:.:-~:,. ly appiica'ole to this case becau:;;e .nis C2.."<:! does not involve :i debtor ·....;olunta,;,]y P01. However, these factors do not requLr-e ~e e:tcepaon to the common law tha~ S ~ ::: i5 seeking in this case. The St2.CUtory lan~~--e clearly indicates that the s:.o:"" paid lO the sUbcOntr.:lClors was propcl'tV UUI ~ COnlr.JClor held in :I slale-I""" Sl::lNIOr:v . The coun did TlOt cDnsider whether the be: ::=':'1 Ihe: mon"y W:l!i ne,'cr paid directly 10 the SON:'>ry lI'USl<:e deprived Ihe funds of their St:1N~' trust narus unda the Mic:hig:m saNle:.

=

nn011A

:!90

5.i FEDER:\L REPORTER. 3
intention t(l :1.ller tb~ rommon bw I)f t.'"U::it.s

"'ht;>n

doin~ :oil

would nol ma tC'r.aJI,1" further the interest.; IIf the ben~llc:l:lr:> of thl:' ~[;J.lUte, ~hullJu

e..'\lenJ the holuing in BI'11I' ,'r mure bro;ldly In:Lr\ i.; n~e::~:lry [0 aecompli:'h f[.:i rLL'"PIl,;e~ \\'ot:'n dOIn!; "0 neces5arii:: underml!1e:: rile Bankmp[(:y Code's core rnnC:lple of equJ.lit~' of dislrihution :unung creditor;;. In Bl'rna, the ClI\tri, (uuno :10 exct:'ptibn to the common l:.tw u( tnt:iL, W;15 nece~sar:.· to effectuate the cun~:::;illnill intent that the IF.S not be depri\'ed of funn:: th:Jt h:Jri heen 5pecific:illy \\ithheld from emplo,vees' pay (or the e.'1lre5S purpose of p::tyment to the IRS, Han the trust-fund t:1..'(es heen c:on~iderecl property of the oebtor in Bp,qirr, the TRS woulcl h;1ve been compelled to !"ec:ei\'E flani:J..! n:.t~ml'nc of t~e t~lses flue like all the othl:'r t'reti i tor.; , HOWe\'Er. when the bankrupt rlehtor is J thin; part~' and the employer rem:tins ;;oh·ent. the concerns of Hegier dissolve. Tne ability of the IRS to collect the ta.'(es owed- by Till's clients is :iimply nOt impiic:lted in this C:lSe. S & S :lnd Tili's other clients remain liable to the IRS and. as far :IS we know. :rre financi.:illy able to make the payments, The IRS \l,ilJ be ::tole CD coUect the !2..'(es owed to it regardless of whether the ~tee is :lble t.o avoid Tail's bst-minute payments on behalf o( some of its creditors. :Y10re imporu.ntly, the money returned to the e.st.:lte waugh the :lvnici:lnce is mon!:!}' th:.lt c:m be p:l.id to the other creditoremploye!"S anu us!:!o to pJy thetr out.::itanciing t.:L~ obligation,;_" :-';UI'

rii.~tric~

cour: erred in j:;."aIltinl; the motion to

dLSrniss,

III

\\'f

In sum, Begier does not :.tddress the cirt'ase, In the absence of any clear ~licy reason for extending Beqier, we apply the common bl.w of t.rlu!t5 am.! hold that the funus paid to the IRS on beh;t![ of S & S were not held in st::ttutary trust :lnd. thus. th!:! payments ~e avoidable unuer 11 U.S.C. § 54ilbl. Therefore. we hold that cumSUlIlCE:; Dl tJu,;

::rust.ee :ilio :lopeals L~e d~O'iC"_ of tile tl""Jstee'; motio;; ior pa;-. tl:..U ~umm:u-:, juOgmenL P~lr.e=- th:l!1 arldre~s the mt:'rits of th~ portion of the appeal, S & S mt'~iy :tr!!'Ues th:Jt thi.> court lacks

[51 court's

Tl\~

rier~

jurisdiction judgment.

iO

re\le\\'

;1

cieOla.i oi

~urnmi:L-"

(6.71 1n general. the denial or" a motion for surnm.:lry judgment is not a iinal artier ~ince the c\lnsequence of the denial i5 thaL the cJ.Se \\ill go to m:.ll. Ordin:ui.ly. re\ie".. of ::uch a denial is sought through an interll)cutory :.;:,?€,aJ. H owe\-er, ',\'he!1 i:ltl'rlocutory i1pp~:i ~ nOt [;lken. :.l rienia! of ,:urnm;u-:.· juclgrnent :...~ re~;ew:l.ble upon erll:r~: of :! final judgment. .I,{omn ['. Aetna L~fr: In.!, Co.. ::\72 F 2d .~. :lOO--O1 19th C:r.l989L While WE will often decline to engage in the '"?Ointless ;lC;loe;.-':c e:'Cert'!se" of !"';?\ien1~g ;l cienUl of SturUTl:J.::' judgment :lfter a c:ial on the merits. LraTL 1'. City and COILllty oj Hon..oi1J· in %.'3 F..:2d 1167. 1169-70 (9th Ci.r.19~). such ~ C':L"-e is not presenred her£. ,;

There J.re no disputed i:;,iues ot rnar.e.riaJ fact." Vie have held as a matter of law tiu.t if S & S :r:J.I'.5ferre d i t5 ~ [.I1lnd ta.,'( e.s 1.0 Taft \\'iL~om ~quiring Taft to hold. L!lose funds in tc.:.5l.. the tnl:ite~ may reeol'e:- from S &: S the funds p:tid to the IRS an 1[3 behill during- the preierence period. S & S disa\'o\\"~ :my a.tternpl to shoH' t!:.:.tt L-:utSier af funds cre-ar.ed :my common bw truSL Then:fore, pa..r-al summa.ry judgment should be entered in favor of the LrusL."':. holding t.b.a!, the funds paid to the IRS Wet': the prop"~ of the ue1Jt.or under § 5-\irb). ._~

The fumet c.:OLL.""t's dis~ of the c:om: plaint is REVERSED, Upon R£~;

. !-:

invelv" :In ;:11l~mpl by !.he some oLbcr clie:nt·~. were pJ.iJ jWI heron: lbi 1rU~lee 10 ~ov"r payme:nl from the: IRS, w" banJu-up""Y p!:lilioo "i=U fib.!. ,. n=L1 '10\ dc.:id". therdore. whclhe:r the poli<:y <:on,;"m~ anim:llln~ nC~lcr would forbiLl Ih" 6. 5 6.: 5 ;osscn.:; in p:u"inS UuL Ih",." m:ly ~ tr'W:Lc:e !rom collecting Ih" avoided pl&yTnenL:< U l:>etlU.! d..i.spule aboul ~ Ii.< S'~ ability Ie ~ from the IRS "'Iher than frem S I.L 5, IMlelld. th" Fund;s through T:lfl'! accounu, SiJ:u:,e,'.tI we only nc"d 10 decide whether S & S j, 10 holt.ling d<x:! '101 ucponJ on .. he:thcr nu:l:!'''! n:""i"o pn::fercnli"l Irearm"m .imply be:.:"UJ<- of lr.1dng is po!.ibl" or no I. ilJ\Y such la"tual ~ ---'I.hh£clfo~l"l[!!!.u'.l.ilD'!'us~""'c:."ei!id!'c'..!:n~l_.!.th~a~l~i'='-"'--la~1=_ .."S~.~r~D~lh~...:.'"r_'lll'ha~n'_ _ _.I=p~u~I,,~u not material. ' .-_;r.r.;, .5.

Nor doe..:! rJ,i..

~,....,

~

'-----------

"

'',I

"

~ the motion

u.s,

, 7"

b)

"' ••

''J.i~

._.-.~ };:-', .. .t;". ".! •

CII.

::r ,\i...;[..nc t ,u.iJ[m~nl

Ll

rourt sh:ill enter pnrciaJ summ:l.~· in 1:J\"or uf the truS~,

I lou, Or.

l"~l

1. CriminnJ Lnw C'>113!l. 1l·I-U3(:l.. ~ 6),

1159.2( 7} In determining sufficiency of evidence.

,;

c.irt:umstantial. together v.;th reasonable inferences to be drav,n therefrom. in li'iht most fa'·ol.lble to governmenL re:J.SoTl'lble jur:-' rould find defendant guilty beyond re:l.Son~ble doubt.

5; .j ..

~I

coun re\iew3 record de no.... o and :lSks only whether. uking evidence. both di.rect and

;pe:ll.s the ~--:~ . ,.... mouo n (or ~- '.;Z Ither than ad-~t -,or. Ilf the appeaL ~:: this COUrt ~

aJ of

291

v. VER.'fERS

5J FJ
~.

r;';ITED STATES uf Amenc'l...

,p'

Plain tiff-A ppell ee.. \'.

L"lJ"tlan F, VER:'ffiRS. Defendnnt-

Appell::Jnt.

l:;ITED ST_-\TES of .-\.merica. P1:lintiIf-AppeJl ee, \'.

CUe-lUIinia VER:-rERS also known as Guessinia Holland, Defend..antAppellant. ~os.

9-h'i029. 9-h'i030.

To support con\;ction lor posses.5ion

\\;th intent. governmen::-mu,,;c prove

~

.:1

o.~ll~ncbnt :lI1d his mother were com;ct:.i;e l' niteci St:JLeS District Coun: Cor the

''·In.!".crn Di...;trict of Okl:iliuma, H. Dale . -... ,t. J... ,1' \'molCi drug olTenses. and they

~~(-d.

Tne Coun of Appe:J..l.s. McKay,

t:J'nlJl .Judge. neld that:

(l) e\;dence sup-

I.anttJ defend:L1lt's conviction for possession r.!.h I1ltent to disaibuLe; (2) evidence that

1bo<.<.h'' T' \l,";J,,:; aware of presenc!! of drugs in b.-r horne .....ould support aiding and abetting ~i.ct.inn but did not show intent to distrib~; f:J) e-\;dence did not show that mother ~~n~ home for pw-pose of drug manu~1Jrinl:': :l1ld (-ll mother W:IS not entitled to ~l:"C.

3. Drugs and

-

Hi

~Ied.

U

11l'

-(

~arcotics

-.J

C:O'j3_1

In order for indi\iduaJ constructively to po~sess prn!1erty. he must kno\\;ndy hold power .:md ability to exercise dominion :md concrol over it.

-I. Drugs and

~arcotics

c=>73.1

For purposes of comiccon of possession of narcotics. -constructive possession" is dEfined as appreciable ability to guide destiny of the drug. See publication Words and Phr= for other judici.J1 constructions :IJ'Id def-

initions.

5. Drugs and

'. ~arcolics

C:OI07

Jury could re:lSor.nbly infer that defc!ldam had constructive po55ession or' cocaine fOllIld in his former bedroom and kitchen. despite testimony that he no lon~er slept at residence. in light of e\,;oence that he continued to keep his posse~sions at residence. had dominion and control o\"er bedroom. and had unfettered access to kitchen.

6. Drugs and N arcotic:s

Q;;:> 123.2

Testimony that amount of coc:Line reco\'ered "'-as in e."tcess of amount which might be possessed for per-sonal use supported finding intent to distribute, when coupled \\;th presence of scales. blades. guns and ammunition. large amounts of c::lSh, and notebook in defendant's bedroom.

razor

7.

Am-e"

kno~\ing

possession of controlled ;;uDst:Jnce \\;th intent to distribuLe. although possession may be constructive rather than actual.

l'niLed St:Jtes ColU"t of Appeais. Tenth Circuit. April 11, 1995.

Drugs and ~arcotics C:07::l.1

. par... an d part, reVEr-sE d Ul

Dru~

and Narcotics c=>73.1

Defendant's mother could not be eonvict-

,d

,r

po...",i" with

in",",

"

distri~~ f\ 1

Q

~

!

p I;L E D 1 UNITED STATES DISTRICT COURT

2

FEB 1 91993 ,

,.... ....

1~:~;:'AR[lII.'

I'

3

4

5 6

7 8 9 10

11 12 _0

13

14 --'

-:"'::J '.I)

IN RE

.:..1

16

I--

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17 18

19

20 21 22 23

24 25

t'·· ... ':'.

I: J

:~.

...

".~. ·F.. . •. '-' t..:RN!

) No. C-92-2996-CAL )

HAMILTON TAFT & COMPANY,

et al.,

)

-----------------) ) AND CONSOLIDATED CASES ) -----------------) ) FREDERICK S. WYLE, Trustee in ) Bankruptcy of HAMILTON TAFT & ) COMPANY, ) ) Plaintiff, ) ) v. ) )

S & S CREDIT COMPANY, INC.,

Chapter 11 No. 91-3-1077 LK Adv. Proc. No. 92-3-0057 LK

)

) )

Defendant.

-----------------)

15

-0:::

I •

"./ .:;

02 r/;1.3.

...:..

::::: l.L-

t·

NORTHERN DISTRICT OF CALIFORNIA fI,'Or,"l/-c;w, D:STfq" .~> ""U'~' . ' .. , !:.;IN [)/STiJI;.·,j.-~:- .>~{ '.. \

• \ t;

°3 .!.-_

ORDER OF AFFIRMANCE Plaintiff and appellant Frederick S. Wyle, as trustee in bankruptcy of Hamilton Taft & Company, appeals from a jUdgment of the Bankruptcy Court. on June 22, 1992.

That jUdgment was entered

The judgment dismissed the complaint and

directed that judgment be entered for defendant.

The court's

reasons were set forth in its findings of facts and conclusions of law, filed on June 17, 1992. This appeal was briefed, argued, and submitted to the court for decision.

The court has reviewed the record in the

bankruptcy court, the briefs and arguments .of counsel, and the

26

27

28

000150

~J~l- E: D 1 UNITED STATES DISTRICT COURT

2

5

II)

:u

~

-cr:: ~« l-

COMPp~Y,

)

FREDERICK S. WYLE, Trustee in Bankruptcy of HAMILTON TAFT &

COMPANY,

v. S & S CREDIT COMPANY, INC., Defendant.

18

19 21

22 23

24 25

) ) ) ) ) ) )

Chapter 11 No. 91-3-1077 LK Adv. PrDe. No. 92-3-0057 LK

)

--~--------------)

15

17

) )

)

11

16

)

-----------------)

Plaintiff,

20

et al.,

)

10

14 u .....

HAMILTON TAFT &

7

13

~

) No. C-92-2996-CAL ) )

AND CONSOLIDATED CASES

12

-=?

IN RE

-----------------)

9

...4RD 'l~!

\','; _.... ,.. NORTHERN DISTRICT OF CALIFORNIA (I,'Or;"'l/J;.;::;' U:Srfi'l'" C.E""'~' . ' .. , "c\N [J/t'7' .. , i~;:.:. I ' .. \ -. tJ J:!~'.' ..:... ~- . - l /

6

8

:~:t·

.,. I:

3

4

FEB 1 91993

ORDER OF AFFIRMANCE

Plaintiff and appellant Frederick S. Wyle, as trustee in bankruptcy of Hamilton Taft & Company, appeals from a jUdgment of the Bankruptcy Court. on June 22, 1992.

That jUdgment was entered

The jUdgment dismissed the complaint and

directed that jUdgment be entered for defendant.

The court's

reasons were set fDrth in its findings of facts and conclusions of law, filed on June 17, 1992. This appeal was briefed, argued, and submitted to the court for decision.

The court has reviewed the record in the

bankruptcy court, the briefs and argurnentsof counsel, and the

26

27 28

J

000150

·., 1

2

applicable authorities, and concludes that the decision of the

3

Bankruptcy Court should be affirmed.

4 5

.6

The complaint seeks to recover for payments made by Hamilton Taft & Company to the Internal Revenue Service on behalf of defendant S & S Credit Company.

The complaint

7

alleges that the payments were preferential payments within

8

the meaning of section 547(b) of Title 11 of the United

9

Code.

10

State~

That section requires that the trustee establish that

11

the transfers were the property of the debtor.

12

court believes that the plaintiff's complaint and the

13

Bankruptcy Court t s dismissal of it, are governed by- Begier v.

14

Internal Revenue Service, 496 U.S. 53 (1990).

15

Begier controls the facts and the result here.

16

taxes withheld by defendant, and paid by Hamilton Taft to the

17

Internal Revenue Service, were trust funds pursuant to section

18

7501(a) of Title 26 of the United states Code and were not the

19

property of the debtor.

20

argues between this case and Begier do not change the

21

application of Begler to this case.

22

However, this

The decision in The payroll

The distinctions for which plaintiff

The complaint was properly dismissed without leave to

23

amend, because the alleged payments were as a matter of law

24

not the property of the debtor, and no change in the

25

allegations which might be made by

26 27

I

28

I I

;

Order of Affirmance No. C-92-2996-CAL

plain~iff

could alter the

-2-

000151

;

! 1

2

3

4

result.

trust for the Internal Revenue service and were not the property of the debtor Hamilton Taft & Company. The judgment of the Bankruptcy Court is therefo

5

6

7

The payments were as a matter of law funds held

affirmed. Dated:

February ~, 1993.

C-~ (c

8

CHARLES A. LEGGE

9

UNITED STATES

J--:r-.

u (.)

DISTRIC~

10 11 12 13 14

15 16

17 18

19 20 21

22 23

24 ·25 ·26

,27 128

Order of Affirmance No. C-92-2996-CAL

-3-

000152

IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT No. 93-15455 IN RE:

HAMILTON TAFT & COMPANY, Debtor

FREDERICK S. WYLE, TRUSTEE, Appellant

v. S & S CREDIT COMPANY, Appellee

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA BRIEF OF THE UNITED STATES AS AMICUS CURIAE ON PETITION FOR REHEARING

On May 23, 1995, this Court invited the Government to file an amicus brief "addressing whether the opinion filed in this case, In re Hamilton Taft & Co., No. 93-15355 (sic], slip op. filed May 2, 1995, adversely affects in any way the interests of the IRS in collecting federal taxes."

The following brief is

submitted in response to that invitation. STATEMENT The case is an appeal from a District Court jUdgment ~ffirrning

a Bankruptcy Court's refusal to treat a payment of

federal taxes as a voidable preference under Bankruptcy Code (11

000154

- 15 CONCLUSION For the above stated reasons, this Court should grant the petition for rehearing and affirm the jUdgment of the District Court affirming the Bankruptcy Court's judgment insofar as it re~uses

to treat payments made by debtor for

S

&

SIS

trust fund

tax liabilities as voidable preferences. Respectfully submitted, LORETTA C. ARGRETT Assistant Attorne

c:::J-- . _.

l.L

I~)

/ ' I ,/.' _

General _

L--rt /\.. - {-fl. L-L-I L/i'

I;:' d

GARY R. ALLEN (202) 514-3361 GARY D. GRAY (202) 514~3005 PAULA K. SPECK (202) 514-4329 Attorneys Tax Division Department of Justice Post Office Box 502 Washington, D.C. 20044

Of Counsel: MICHAEL JOSEPH YAMAGUCHI United states Attorney AUGUST 1995

000155

Page 3

68 F.3d 337 printed in FULL format. IN RE: HA1vfILTON TAFT & CO.• Debtor. FREDERICK S. WYLE, Trustee in Bankruptcy of Hamilton Taft & Co .• Plaintiff-Appellant, v. S & S CREDIT CO., Defendant-Appellee.

No. 93-15455 UNITED STATES COURT OF APPEALS FOR TIrE NINTH CIRCUIT 68 F.3d 337; 1995 U.S. App. LEXIS 28742; Bank!. L. Rep. (CCH) P76,492; 95 Cal. Daily Op. Service 8031; 95 Daily Journal DAR 13763

October 12, 1995, Filed

PRIOR mSTORY: [>icl] D.C. No. CV-92-Q2996-CAl... Original Opinion of May 2, 1995, Previously Reported at: 1995 U.S. App. LEXlS 9848.

nJDGES: Before: William A. Norris, David R. Thompson, and-Stephen S. Trott; Circuit Judges.

OPINION: ORDER The Court is advised that the case has been settled. Accordingly, the appeal is dismissed 2.S moot and the decision fued May 2, 1995, appearing at 53 F:3d 285, is vacated.

000137

37

1

guess we can deal with it in that regard when it comes up.

2

THE COURT:

I think one other comment, I am concerned

3

that you attach too much significance to this Ninth Circuit

4

decision which reversed my -- 1 / 11 call it my "tax decision.

5

I think you should bear in mind and {houf} that that Ninth

6

Circuit decisionsa

7

53Fed3rd285a

8 9

II

I am talking about in re Hamilton Taft,

Now, the Ninth Circuit said I was wrong in precluding that the money made by the client in the Hamilton Taft therefore

10

then became a trust under united states Internal Revenue Code,

11

the 501.

12

question of there being a trust relationship between Hamilton

13

Taft and its clients because that was the 7501, the Internal

14

Revenue Code section dealing with the relationship between

15

Hamilton Taft and its holding funds vis-a-vis the IRS even

16

though they could mingle; and, therefore, those funds were not

17

a 7501 trusta

18

So I was wrong.

But I don't think that answers the

I don't think that means that there could not have been a

19

trust relationship between the customers and Hamilton because I

20

can give you money -- say, "Mr. Hanson, I am trusting you, you

21

are my trustee.

22

don't comply with some other statute of the IRS, the IRS comes

23

in and grabs the money.

24

upsets the fact, that you and I had a trust relationship.

25

more particularly, in case a relationship where you owed me an

Okay, you take my money.

II

For some reason you

I don't that affects the fact, or Or,

38 1

2

obligation not to defraud me. MR. HANSON:

And in that maybe is something excluding

3

important we discuss now what Your Honor's idea of what the

4

scheme defraud would entail.

5

Fowles that the trust relationship, however that might be

6

defined, cannot form the basis of a charge under the relevant

7

statute here unless there were statements made by the

8

defendants to those individuals from whom they receive money

9

indicating that the money was going to be used, spent,

10

{teut} {poegs} {tf} defendant

whatever, in a certain way.

11

THE COURT:

12

MR. HANSON:

You may well be right. Well, I think, Your Honor, whether it

13

comes down to this, if somehow that is not the case, then I

14

think we do have a problem in terms of how the case will be

15

presented to the grand jury.

16

there were no specific promises made by the defendant to the

17

individuals here as to what would be done with the money when

18

it was delivered.

19

presume that there was some kind of trust relationship

20

prevented the defendant Armstrong from spending any of the

21

money that were put in the corporation coffers for parties.

22 23

If the government stands and says

But, none the less, {hrpblgz} you may

THE COURT:

which~·

I would not think that would constitute

the elements of the crime.

24

MR. HANSON:

25

THE COURT:

I agree. But if come in and say that Armstrong or

39

1

Fowles went to who was it {tped} and stated U{upb} {euf} and if

2

you put your payroll money with me and I will take your

3

payroll, I will pay your taxes promptly and on time.

4

that, of course, could be a breach of contract.

5

a {tkpweupgb} that could be criminal fraud.

7

what the government is trying to prove.

9

Now

On the other hand, if there was never intent to perform in

6

8

II

MR. HANSON:

I think that is

So the question becomes, if the

government----says -- and it would be argument -- let's say in

10

opening, that use the terms {tke} {sregs} let's use the

11

{tkpafrpl} which was used by government counsel a few minutes

12

ago about the {shreupbg} {aeug} as he put it, I am not so sure

13

I understand now the relevance of what such evidence would

14

show, {aur} absent some greater explanation by the government

15

that our clients were under some affirmative obligation not to

16

spend money which they received in a fashion such as some

17

corporate party, and if there was a genuine "trust obligation"

18

that might be broad enough to say:

19

on a corporate party; then we are going to run into problems

20

because I keep corning back to the proposition that if the Ninth

21

Circuit, as I read the case, essentially says that there was no

22

such genuine trust, then this case has to {khrats} into what

23

you just explained.

24

THE COURT:

25

MR. HANSON:

Well, you couldn't spend it

Misrepresentation. Misrepresentations, and unless the

40

1

government can point out there was a specific misrepresentation

2

undertaken by our clients, evidence of other activities, would

3

that-THE COURT:

4

We have the diversion counts, and the

5

payment -- late payment of taxes counts, and the cover-up

6

count.

7

MR. HANSON:

8

THE COURT:

9

can~t

And-But what I am -- all I am saying is:

corne in and say because of the Ninth Circuit decision

10

there is no trust relationship between the customer and the

11

corporation.

12

that.

13

misrepresentation to the front-end and get the money indoor

14

under misrepresentations, I agree.

I don't think the Ninth Circuit decision says

If you are saying the government has got to prove

15

MR. HANSON:

16

THE COURT:

17 18

You

Okay. For those counts the ones involved in

getting the money indoor. MR. HANSON:

Let's assume the Ninth Circuit decision

19

{pwpls} {eur} which is, if its been {srrs} essentially,

20

certainly stand for the proposition that we had some

21

affirmative obligation to do something with the funds, that is

22

to keep them a certain place or --

23

THE COURT:

24

did not, you, the corporation

25

MR. HANSON:

I think just assumes the fact that you

That is all I would --

41

1 2 3

THE COURT:

-- assumes the fact the corporation did

not all based on fact the corporation corne in MR. HANSON:

So that is the only {prop} {roeugs} so

4

there is {tpo} implicit promise made by our clients to the

5

investors, or whatever, about what to do with the money.

6

is all I want, and if there are no implicit {eupl} promise the

7

government can rely upon in terms of good faith management of

8

the money, then the government is obligated to show actual

9

misrep~esentation.

10

THE COURT:

That

I don't know when you get -- certainly to

11

me {tru} {o} the front end {kts} counts call it the crimes

12

charged getting the customers put motion in once you get to

13

diversion counts, or how the money is used.

14

MR. HANSON:

I am not sure.

I get --

It's needless to say I

15

am in the position we all are of as the government begins to

16

present its opening statements, to be howling about something

17

is going to come in and objectionable because of the relevance

18

is something will have determined prior to at least the opening

19

statements.

20

THE COURT:

21

in this motion.

22

trial date?

Well, it could be.

I can't say you won't, but -- what is our

23

MR. HANSON:

November 18th.

24

THE COURT:

You've got time.

25

I mean, you want more

All I am trying to tell

you is that, just don't use this IRS {srrs} this decision by

42

1

the Ninth Circuit as a holding {tphros} trust relationship

2

between the customer and the company; I don't think it says

3

that.

4

MR. BROWN:

We joined Mr. Hanson in defendant Fowles'

5

in omnibus motion just to have brief comment.

6

carefully to what the court said and I appreciate the court's

7

comments.

8

probably going to need some further clarification.

9

mean to belabor this, I am concerned that there is going to be

10 11

I listened very

I would agree that at some point pre-trial we are I don't

a witness on the stand and the question is going to come up. THE COURT:

Let's take a few minutes right now and

12

kick a little around.

This is not with the idea of rUling, but

13

maybe assisting us all now on what I call a front, counts 1

14

through 3 dealing with tax process allegations, and 4 through 6

15

the tax service agreements.

16

contention is going to be that there were representations --

17

misrepresentations made to the customer to bring the money in

18

and sign these agreements, and it was done with criminal intent

19

never to perform -- so it's going to be a fraud, a

20

misrepresentation case, right; is that right?

I suppose that your government's

21

MR. HARDY:

At least; yes, Your Honor is correct.

22

THE COURT:

So, I think we understand.

What about

23

the diversion counts?

Now I assume you are going to show they

24

didn't keep the money that Armstrong took out the door and used

25

it in other ventures?

43

1

MR. HARDY:

Your Honor, basically, through the

2

diversion, the government would be showing the existence

3

{poeps} {eu} schemes that monies were being removed and spent

4

at a rate they could not be replaced, and expenses were taken

5

out with the intent to repay them.

6

THE COURT:

So, the customers' money was taken by the

7

corporation, or by the officer of the corporation, out of the

8

corporation funds -- out of the corporation under circumstances

9

which we infer what {tpho} {oeublt} to use them for purposes

10

{tpheu} {tkphapl} the front door.

11

MR. HARDY,:

In essence, shows theft.

12

THE COURT:

That theft -- okay, theft is a simple way

13

to phrase it --

14

MR. HANSON:

15

THE COURT:

The problem you are -There get trust {kwe} corporate money

16

corporation their own money they were stealing.

17

people who has

th~

18

stockholders.

I guess Mr. Armstrong was a sole stockholder, or

19

is it stilk somebody else's money?

20

trust question.

21

do you think?

22

The only

right to complain about it are the

So we may get into the

We are going to get into the trust issue; what

MR. HARDY:

I think I -- Don't you need to {kabg} it

23

as trust?

I think everyone if you call it an obligation, they

24

enter into obligations to pay certain taxes and to do certain

25

things, and they in fact went about a business which did not

44

1

involve doing that.

2

for purposes other than the payment of taxes; and we were in no

3

position to replace those monies whatsoever.

4

the literal sense, it is still a

5

THE COURT:

6

money.

7

IRS money.

8 9

theft~

It's a trust in

It's a taking --

That becomes a question when it's their

Now this case, the Ninth Circuit said this was not the Okay~

MR. HARDY: money.

They, in fact, stole the money by using it

Even by the contract it's not their

They are entitled to the use of the money pending

10

payment of taxes, but if the sole purpose of their getting the

11

monies in fact the payment of taxes, and in fact the money is

12

spent for purposes other than payment of taxes, it is no longer

13

available for the payment of taxes.

14 15

THE COURT:

That {togs} front end {koepbts}, doesn't

MR. HARDY:

It {ogs} the {hraeuts} count as well,

it?

16 17

Your Honor.

Is directed to divide into discrete crimes.

It's

18

ongoing pattern which I think defies the court's efforts to

19

divide it up, but the fact is:

20

larger amounts of money was taken for other purposes which

21

amounts to a theft.

22

perform

23

other than to pay taxes -- reach the point where payment of

24

taxes became unlikely as each new day came in was applied for

25

purposes other than what I {tkpweupl} to Hamilton {thras}

As time went on, increasing

The money was taken without intent to

intent to take {paeubgs} is} was used for purposes

45

1

{thru} theft.

2

MR. HANSON:

I think, Your Honor, {sreu} break it

3

down because assume for the sake of argument, there was no

4

up-front misrepresentation and they had the right to spend the

5

money as corporations have the right to {sreg} {ef} it.

6

Suppose those investments go belly-up?

7

between the corporation heading toward bankruptcy as it tries

8

to invest its money in ways that will allow it to continue to

9

function and a criminal case in which they say:

What is the difference

"Well, it was

10

spending the money out in certain investments and it could not

11

keep its prior promise,-" and that is where criminal cases and

12

civil cases become a {tkeu} to {tkeuf} {epbt}.

13

tlWell, they were taking in money and because they couldn't pay

14

their bills and were headed toward bankruptcy that that becomes

15

criminal ll is simply not law.

16

THE COURT:

I think to say:

I think that is

Why don't we take this -- Say, you give

17

me your money to pay your taxes with but I put your money

18

elsewhere, use it elsewhere in order to pay taxes {wher}

19

{tkopb} I get some more money.

20

{hreus} {er} if you gave me money to pay your taxes I will pay

21

your taxes.

22

taxes.

I go to {ph} {pheus} {eu}

She gave me that money, I don't use it to pay the

I use it to pay catch-up and pay {urs} crime.

23

MR. HANSON:

24

THE COURT:

25

MR. HANSON:

Again, two issues, what did I promise? That is {popbs} {eu} {khras}. -- classic corporate investment which

46

1

is:

You give me your money, Judge Legge, and I will put it in

2

the bank and I will pay you interest; and then I take your

3

money and I then go split it on some real estate investment

4

which I am pretty sure will give me enough money to pay your

5

interest; and then, somehow, those real estate investments go

6

bad and I can't pay your interest; and, so, then I continue to

7

try and keep my bank functioning by going to get other people

8

to invest money in my bank so that eventually I can pay the

9

interest lowe you. THE COURT:

10

What if I use your money to buy myself a

11

personal jet plane and take my wife on a trip to {kar}, things

12

like that?

13

MR. HANSON:

Exactly right.

So it {pwapls} {phats}

14

of {tkpwre} doesn/t it; which is to what extent can I

15

characterize something which the government tries to say:

16

Look, we/II say it's okay to put it in such and such a company,

17

but we now consider money being spent on a ranch in Texas as

18

being something which is clearly so frivolous or whatever that

19

that never be construed by a reasonable person to be an

20

investment.

21

THE COURT:

22

MR. HANSON:

That is a {skwreur} {kal}. It may well be.

On the other hand, it

23

may be a {hrel} {kal} on your part as to when that is relevant

24

at all considering what promises were set up front to these

25

individuals, {a-r} what point of fact we have

47

1

misrepresentations as what to be done, and whether or not

2

anybody can acquire

3

fact, they were otherwise trying to fulfill their promises.

4 5

THE COURT:

MR. HARDY:

10

Well, in other {popbs} {eu} scheme type

Really {tpoepbs} case more often than not

mail fraud or wire fraud.

8 9

what they did with the money if, in

of investment what statute you follow {bgs} use what statutes.

6 7

{~aos}

THE COURT:

Just the mail fraud, wire fraud statutes?

Isn't there a specific statute bring in amounts of money for purposes of saying the defendant's obligation to {pwfplt}.

11

MR. HARDY:

It's simply another scheme to defraud.

12

MR. BROWN:

Your Honor, there is a problem here that

13

I think is so essential to how the jury is going to perceive

14

this case.

15

determination for the rUling this case, and that is, to a

16

jury -- and I say this because I know in the grand jury

17

transcript that we have been provided grand jurors asked

18

questions on one of the transcripts -- and I have it here with

19

me if you want me to read it.

20

one of the witnesses:

21 22 23 24 25

That is why I think we are going to need a

One of the grand jurors asked

"How do you justify what Mr. Armstrong did when he spending other people's money?" At least that is how I see it., and then that -THE COURT:

{per} only assumes {seupbt} because you

are {tkhreupbt} was performing a financial service, it was

48

1 2

almost like a bank. MR. BROWN:

The Ninth Circuit says that he had the

3

use of that money; and, in fact, Your Honor, it was Hamilton's

4

money to use and to invest; and, as we all know, when he took

5

over that company there was {pweu} {sr} {kts} for 14,

6

million dollars of deficit in that company, and he had a

7

plan -- and it's not the only company that worked with plan to

8

try to make some investments that would in time mature and it

9

would cover that deficit.

10

18 or 20

Now, he did that with the money, now the government is

11

calling those IIdiversions.

12

of those monies are kind of things where I am {pro} the jury

13

gets the impression they were other peoples' monies, the case

14

becomes a much more horrendous thing in the eyes of the jury.

15

In fact, they are a company with contractual obligations.

16

ruling on this Ninth Circuit decision

17 18 19

THE COURT:

t1

They are making out as if the use

The

Except that you did take the -- did take

some people's money now. MR. BROWN:

All the money was -- was tax money of

20

clients', but when it became -- when it got into Hamilton

21

Taft's hands, according to the Ninth Circuit, it was Hamilton

22

Taft's money to use as it saw fit.

23 24 25

THE COURT:

Well, vis-a-vis the IRS.

No trust was

credited that the IRS can claim. MR. BROWN:

They still had contractual duties.

They

49

1

had to run the {tpwhus} reasonable fashion and they still could

2

be charged with misrepresentation if indeed there was

3

misrepresentation that I present.

4

that money to pay expenses, I think the word "expenses," and

5

"costs,1I and "investment" are all within that Ninth Circuit

6

opinion.

7

THE COURT:

But as far as the use of

{kwrao} if he -- taken in the money, and

8

invested it in CD's, during the period of a note, or government

9

notes during the period of -note, cashed it and made money on

10

the interest {spred}, no problem.

11

to do.

12

That is what he was entitled

All right, so suppose he got out to the {tkeuf} type of

13

investment and taken the money and invested it in first deeds

14

of trust with 30 day maturity, if you can first deed of trust

15

with 30 day maturity fully secured, okay form of investment;

16

but you can get {tpurts} out that {kwrupl} on potential on

17

types of use of the money where you got to reach a point

18

eventually something has so bad it's absolutely fraud.

19

MR. HANSON:

Didn't we do that criminal contract if

20

every time Wells Fargo, my bank, {thurs} on corporate parties

21

using my money, and our {sub} {all of assigned to claim that

22

when they promise to pay me interest and they are spending my

23

money for some kind of ski box down there at Giant's three com

24

park that I can charge them a criminal offense for representing

25

to me what they are doing with my money.

I think we got

3

1

FRIDAY, NOVEMBER 8, 1996

1:30 P.M.

2

THE CLERK:

3 4

CONNIE ARMSTRONG AND RICHARD FOWLES. MR. SMETANA:

5 6

CALLING CR-94-0276 UNITED STATES V.

GOOD AFTERNOON, YOUR HONOR, RONALD

SMETANA AND GEORGE HARDY FOR THE UNITED STATES. MR. BROWN:

7

GOOD AFTERNOON, YOUR HONOR, CHESTER L.

8

BROWN AND SOL WOLLACK ON BEHALF OF THE DEFENDANT ARMSTRONG,

9

WHO IS PRESENT IN COURT.

10

MR. SABELLI:

11

SABELLI ON BEHALF OF MR. FOWLES.

12

SHORTLY.

13

THE COURT:

GOOD AFTERNOON, YOUR HONOR, MARTIN

ALL RIGHT.

MS. LEARY WILL BE JOINING US

NOW WEIRE HERE FOR THE

14

MOTION BY THE DEFENDANTS FOR PARTIAL DISMISSAL OR FOR SPECIFIC

15

JURY INSTRUCTIONS, AND THEN WE ARE ALSO HERE FOR PRETRIAL

16

CONFERENCE.

17

MOTIONS FOR PARTIAL DISMISSAL OR FOR JURY INSTRUCTIONS.

18

SO I THINK WE SHOULD, FIRST OF ALL, DISCUSS THE

NOW I HAVE READ YOUR MOVING AND OPPOSING PAPERS AND

19

OF COURSE THEY ARE SIMILAR BUT NOT IDENTICAL TO THE MOTION

20

THAT WAS MADE A NUMBER OF MONTHS AGO, BUT DO YOU WISH TO

21

ADDRESS THE MOTION IN ADDITION MR. BROWN?

22

MR. BROWN:

YES, I DO, YOUR HONOR.

23

IN PREPARING, YOUR HONOR, TODAY FOR THE PRESENTATION

24

OF THIS MOTION, IT OCCURRED TO ME THAT I WAS THE THIRD

25

ATTORNEY THAT HAS REPRESENTED MR. ARMSTRONG, AND INDEED

DIANE E. SKILLMAN, OFFICIAL COURT REPORTER, USDC

4

I

1

THE COURT:

AT LEAST.

2

MR. BROWN:

AND I JOIN MY TWO PREDECESSOR COUNSEL IN

3

FILING A MOTION OF VERY SIMILAR CHARACTER AND NATURE, ALTHOUGH

4

THERE ARE SOME DIFFERENCES IN THE MOTIONS.

5

MERE COINCIDENCE, YOUR HONOR, THAT THESE MOTIONS HAVE BEEN

6

FILED BY ALL COUNSEL BECAUSE IT GOES TO THE VERY ISSUE OF THE

7

DEFENDANTS' RIGHT TO DUE PROCESS AND A FAIR TRIAL.

8

9

IT IS NOT JUST A

ALL THESE MOTIONS HAVE AT THEIR CORE THE QUESTION OF THE CHARACTER OF THE FUNDS AS CAME FROM THE NINTH CIRCUIT

10

DECISION WHICH INDEED WAS VACATED, BUT IT'S MORE THAN THAT,

11

YOUR HONOR.

12

THE ENTIRE CASE.

13

THE ISSUE OF THE CHARACTER OF THE FUNDS PERMEATES

AND I TRIED TO THINK OF THE BEST WAY TO EXPLAIN THE

14

DEFENDANTS' POSITION SO THE COURT WOULD UNDERSTAND WHY THIS

15

MOTION IS SO CRITICAL, EVEN BEARING ON THE ISSUE OF THE RIGHT

16

TO A FAIR TRIAL, TO PROPERLY ADVISE THE COURT OF OUR CONCERNS.

17

18

19 20

21

AND AS I THOUGHT ABOUT HOW TO BEST PRESENT THIS, I THOUGHT WE WOULD START WITH THE PROPOSITION -THE COURT:

LET ME PERHAPS SAVE YOU THE TROUBLE.

YOU SAY IT'S THE CORPORATION'S MONEY.

MR. BROWN:

YES, YOUR HONOR.

WE SAY, YOUR HONOR,

22

THAT THE CORPORATION HAD THE RIGHT TO THE USE OF THE MONEY

23

UNTIL THE TAXES WERE PAID.

24

THE COURT:

OKAY.

25

MR. BROWN:

AND WE BELIEVE THAT'S VERY CLEAR.

DIANE E. SKILLMAN, OFFICIAL COURT REPORTER, UBDe

SEE

12

1

ASSUME WHAT YOUR SAYING IS TRUE.

2

FURTHER, I'LL SAY THAT THE MONIES THAT CAME IN, WERE HAMILTON

3

TAFT'S OWN MONIES, BUT AS LONG AS THE CHARGE IS THAT

4

MR. ARMSTRONG TOOK THOSE MONIES AND USED THEM FOR HIS OWN

5

PURPOSES, ISN'T THAT STILL A FRAUD?

6

MR. BROWN:

HE HAD THE RIGHT TO TAKE THEM AND USE

7

THEM FOR HIS OWN PURPOSES.

8

PAY THE TAXES. THE COURT:

9 10

BUT LET ME ASSUME EVEN

HIS DUTY WASN'T TO -- WAS ONLY TO

THAT WAS THE CORPORATION'S DUTY.

THAT

WAS THE CORPORATION'S DUTY.

11

MR. BROWN:

12

OF THE CORPORATION.

13

CONTENTIONS.

YOUR HONOR, HE IS THE SOLE SHAREHOLDER HE HAD THE RIGHT -- AND THOSE ARE FACTUAL

THE LEGAL

14

THE COURT:

THAT'S WHAT 1 1 M GETTING AT.

15

MR. BROWN:

THE LEGAL CONTENTION THOUGH, YOUR HONOR,

16

THAT'S GOING ON HERE, THEY'RE TRYING TO ARGUE AND PLACE BEFORE

17

THE JURY AN INCORRECT LEGAL POSITION THAT THESE ARE EARMARKED

18

FUNDS.

19

AND WE ARE DEALING HERE, YOUR HONOR -THE COURT:

WHAT YOU REALLY WANT ME TO DO THEN IF

20

YOU CAN'T GET A DISMISSAL, YOU WANT ME TO TELL THE GOVERNMENT

21

THAT WHEN THEY MAKE THEIR OPENING STATEMENT AND WHEN THEY PUT

22

ON THEIR WITNESSES, THEY SHOULDN'T REFER TO THE FACT THAT THE

23

MONEY IS PUT IN BY THE CUSTOMERS WERE TRUST FUNDS?

24 25

MR.

BRO\~N:

THAT'S -- THAT WOULD BE IN THE FORM OF A

MOTION IN LIMINE, WHICH IS THIS IS CLOSE TO, BUT THAT IS NOT

DIANE E. SKILLMAN, OFFICIAL COURT REPORTER, USDe

13

1

WHAT WE ARE REALLY ASKING.

2

THEY ARE GOING TO USE THE WORD "TRUST FUNDS" ANYWAY.

3

TOO SMART TO USE TRUST FUNDS, ESPECIALLY IN LIGHT OF ALL THAT

4

HAS OCCURRED NINTH CIRCUIT OPINION AND THE LIKE.

5

BECAUSE TRUST FUNDS, I DON'T THINK

WHAT THEY ARE GOING TO DO IS THEY ARE GOING TO CALL

6

THESE CLIENTS' MONIES, CLIENTS

7

THE COURT:

YES, I KNOW.

8

MR. BROWN:

THAT'S NOT WHAT THEY ARE.

9

THEY'RE

GOING TO BE AN INFERENCE.

t

TRUST MONI.ES. THAT IS WHAT I -THERE IS

IF THE JURY BELIEVES THESE WERE

10

EARMARKED, DESIGNATED RESTRICTED FUNDS AND THEY WERE USED FOR

11

SOME OTHER PURPOSE OTHER THAN TO PAY TAXES, THEY ARE GOING TO

12

FIND THE DEFENDANT GUILTY.

13

IT IS VERY EASY.

THE GOVERNMENT CAN PROVE FRAUD IN THIS CASE IN TWO

14

WAYS.

15

THEY HAVE ALLEGED, AND THAT'S THE CORE OF THEIR FRAUD

16

ALLEGATIONS, AND THAT IS A FAIR FIGHT.

17

ONE IS THAT HE NEVER INTENDED TO PAY.

THAT IS WHAT

WHAT THEY ARE TRYING TO DO IS ADOPT A FACTUALLY AND

18

LEGALLY INCORRECT POSITION.

19

BOTH FACTUALLY AND LEGALLY CLEARLY INCORRECT.

20

TO INFER SO THIS JURY WILL BELIEVE STARTING WITH THEIR OPENING

21

STATEMENT AND WITH THE WITNESSES WHEN THEY GET ON THE STAND

22

AND THE QUESTIONS THEY ASK AND THE WAY THEY ELICIT ANSWERS,

23

THAT SOMEHOW THESE ARE SOMEHOW RESTRICTED, DESIGNATED,

24

EARMARKED FUNDS.

25

I WOULD LIKE TO EXPLAIN WHY IT IS THEY'RE TRYING

THESE ARE TAX MONIES.

TO A LAY JURY, WHO PROBABLY ALL OF THEM HAVE HAD

DIANE E. SKILLMAN 1 OFFICIAL COURT REPORTER, UBoe

14

1

WITHHOLDING TAXES TAKEN OUT OF THEIR PAY, THIS JURY -- THEY

2

ARE ALL TAXPAYERS, WE ASSUME.

3

THESE FUNDS, WITHHOLDING FUNDS ARE SOME SACRED TYPE OF FUND

4

THAT THEIR EMPLOYERS TOOK OUT.

5

THE COURT:

I UNDERSTAND.

6

MR. BROWN:

BUT WE DON'T HAVE THAT HERE.

7

YOUR HONOR, HAMILTON TAFT -- THERE IS FIVE VERY

8

THEY'RE GOING TO ASSUME THAT

BRIEF POINTS ON WHY IT IS LEGALLY AND FACTUALLY INCORRECT.

9

WE

KNOl-J THE GOVERNMENT, FIRST OF ALL, BEFORE WE GET

10

TO THIS, IS THE GOVERNMENT REALLY GOING TO SAY THAT THEY

11

WEREN'T HIS MONIES TO USE?

12

THEIR TRIAL MEMO ON PAGE 11, LINE 24 AND 25, THEY MAKE THIS

13

STATEMENT:

14

WAS NOT HIS.

WELL, KNOW THEY ARE.

EVEN IN

BUT THE MONEY TO PAY FOR ALL THESE EXTRAVAGANCES

15

WELL, IT WAS.

IT WAS HIS TO USE --

16

THE COURT:

IT WAS THE CORPORATION'S.

17

MR. BROWN:

IT IS THE CORPORATION'S.

THEY ARE

18

CALLING THE CORPORATION AND ARMSTRONG BASICALLY THE SAME.

19

THEY ARE SAYING HAMILTON TAFT OR ARMSTRONG.

20

TAFT DID THEY ARE CHARGING ARMSTRONG WITH DOING.

21

THE THING.

22

WHAT HAMILTON THAT'S NOT

THEY ARE SAYING HE DID NOT HAVE THE RIGHT TO INVEST

23

THOSE FUNDS.

24

THE WAY HE SPENT THEM BECAUSE HE NEVER INTENDED TO PAY THE

25

TAXES.

HE DID NOT HAVE THE RIGHT TO SPEND THOSE FUNDS

DIANE E. SKILLMAN, OFFICIAL COURT REPORTER, UBDC

6

1

BUT I

WANTED TO REALLY DISCUSS THE INSTRUCTION THAT

2

WAS REALLY THE OUTGROWTH OF OUR PREVIOUS DISCUSSIONS IN COURT

3

CONCERNING PROPOSED INSTRUCTION NUMBER 6. AND I WOULD SUBMIT TO THE COURT THAT WE HAVE

4

OUT THE PROBLEM,

5

CRYSTALLIZED THE ISSUE AND I

6

AS WE CA!; SEE FROl·j THE GOVERN1'1ENT I S RESPONSE.

7

BELIEVE FLESHED

FROM THEIR RESPONSE,

YOUR HONOR, I WOULD SUBMIT,

8

\\lITH J..LL Ol.-£ RESFECT TO GOVERNI'lENT COUNSEL,

9

OPERATING CLEARLY ClJDER AN ERRONEOUS UNDERSTANDING OF THE LAW.

10

IT I S NOT JeST A LITTLE BIT

11

OFF

":ROI~G I

THAT THEY

IT 1 S t1ILES HRONG.

ARE

IT'S vJAY

COL1RSE.

12

THEY SUBI·iIT TO THE COePT THAT THE CHARACTER OF THESE I'~HETHER

THEY BE THE PROPEETY OF H':'.l·jJ LTOlJ TAFT,

13

FUNDS

14

\'JHETHER THEY

15

JUR"Y' TO DECIL1E.

16

UOT A QLTESTIOl: Of fhCT.

17

In

I

BE TF;CST FU1'!DS,

eIReL-IT,

IS P. QUESTION OF FACT FOR THE

J;..l:D TH.::'.T JUST SIj·IPLY IS HOT THE LAl'L

YOCF~

OR

IT'S

IT I S A QUESTION OF LA\"J.

HonOR I S OPINIon

I

I·JHICH h!AS REVERSED BY THE

THE COCRY STATED ON THE FINAL PAGE THAT IT'S A

18

HInTH

19

QUESTIO:: OF L':.\<.

THE COUET

DID NOT REVERSE ON THAT BASIS

20

21

T ·~ •• ~.K •

bRO\·:;,: :

YOL~

22

THE

cor~I:

THE INTERPRETATION OF THAT STATUTE AND

23

24 25

lUDI c.; TID IT \·JAS.

THE EVI DINer PF:ISENTED TO l'lE BEcor'1E A QUESTION OF LAh1 •

Iv'lR. BROhin:

YOUR HONOR,

CHARACTER Of THESE FUNDS,

~'JE

~\OULD

SUBI'iIT THAT THE

h1HETHER THEY BE TRUST FUNDS,

ROBERTA L. ROGERS, OFFICIAL REPORTER, USDC SAN FRANCISCO, CA (415) 863-4211

OR WHAT

7

1

THESE FUNDS,

THE CHARACTER IS OF

IS CLEARLY A QUESTION

THIS IS A VERY COMPLEX,

2

SUBTLE DISTINCTION.

OF LAW. AND

3

WHEN THOSE FUNDS ARE TURNED OVER FROM HAMILTON TAFT -- FROM

4

THE CLIENT COMPANIES TO HAMILTON TAFT THEY LOST THEIR

5

CHARACTER AS TRUST NONIES.

IILL GET INTO THAT IN A MOMENT.

6

THE COURT:

YOU STATED

7

II.~R.

THERE I 5

BRO\'JlJ:

-- BESI DES THE NINTH CIRCUIT

8

OPIl;IO!~,

9

THi\T PP-.RTICULAR ISSUE IS P. QuESTIO!; OF

10

H01~OR

IT MANY, MANY TIMES.

YOl1R

11

NOT

IT I S

DETEREINE.

IT I S

I

l~OT

THEEE t S -- THERE I S JUST NO QUESTION THAT

A QUESTIOH OF

SOI·~ETHI1:G

DETERl-1IlJE HHAT THOSE FUNDS AEE,

13

OR

14

THAT IS A

15

AND THEY

F.!!D THE SEconD

17

OF TRUST OPINI01~

Al:D

I

T

fRO~·:

CLE~.R,

I

JURY, SHOULD

A LAY ARE

TRUST FUNDS

POInT THAT THEY STATE

AS hIE' VI

SEEN

KNOI~

FRO!'!

THE COMMON LAh'

THE NINTH CIRCUIT

THE CASES r.1JD THE RESTATEHENT AND THE

19

TREATISI~

20

CHP-.RACTEP AS TRUST FUlJDS

21

RESTRICTED FUlJDS.

22

IT I S NOT FAIR GAME.

DESPITE THE FACT THp.T \':E NO\\1

I.'!.;}~ES

COURT TO

THE PROPERTY OF HAMILTON TAFT.

Lz...i·~.

INCORRECTLY,

I

A~E

FOR THE

\'iHETHER THEY

QUESTION Of

16

18

IIJDEED, THEi

rJ...Cl.

THJ..T P. JUP"l'

12

~H[:RERt

LA\'~

0:: THE SUBJECT, I

THKT THEY ARE -- THEY .LOST THEIR

AS EAR!'1ARYED FUNDS,

THE J.:I!:TH CIRCL:IT

AS DESIGNATED

OPInIon -- THAT h'AS VACATED, ITIS

23

TRUE -- BeT IT \'JAS NOT VAC.:;TED, AS

24

AUTHORITY FOR THAT, NOT VACATED BECAUSE OF INCORRECT LEGAL

25

REASONING.

I'JE'VE CITED

IT WAS VACATED BECAUSE OF MOOTNESS.

AS OUR

THE CASE WAS

ROBERTA L. ROGERS, OFFICIAL REPORTER, USDC SAN FRANCISCO, CA (415) 863-4211

8

SETTLED.

1

2

THE COURT:

3

l'-1R.

BRO\·~n:

I

UNDERSTAND.

AND THEY STILL INSIST AT THIS POINT THAT

4

THEY

5

ENTITLED TO ARGUE TO THE JURY AlJD PRESENT EVIDENCE THAT

6

THEY'RE TRUST FUNDS.

FUNDS, AND THEY MAKE AN ARGUMENT THAT THEY ARE

ARE TRUST

NOT WHAT THIS CASE IS ALL ABOUT.

THAT'S

7 I 8

FRAL:D CASE

9

REASOn

~'JE'

THE QUESTION BEFORE

'lOCH HOl:OR.

1

THIS IS A

THIS JURY AND THE

RE HERE I S BECAUSE THEY'VE HADE AN ALLEGATION

AS WE

I

SEE FROH PARAGRAPH 18 , I\lHICH IS THE SCHEEE.

10

IN THEIR TR:!:.Z::.L r'H:l·l0 THEY TALK ABOUT THE FACT THAT

11 12

THERE IS A SINGLE SCHE!·jE,

1]

SCHE1·:I IS SET fDRTH ;'.T PJ..R;GRAPH 18, PAGE 11, OF THE

JdJ

ARTIFICE TO DEFRAUD.

THAT

SINGLE

14 . InDICTJ'lEnT, TH.:'.T 1·:R. p.EI·jSTR01:C nEVER INTEUDED TO PAY THE TAXES I

15

lAT

16

I

17

IA

THE TInE

;;.1

THE

LEVEL PL:;YII:G fIELD.

18

FIELD.

19

PREJUDICED I

CASE

.21 22

THE COIJTRACTS STATEI''lEl~T

I

20

Tn,:~

\'~I'RE

THE

THAT THEY

TO PLAY on

\'JANT

ENTERED

O!JE THAT'S GOING TO

~vANT

A LEVEL

INTO.

TO PLAY ON

PLAYING

BE PREJUDICED,

KHERE I DOI!lT THINK WE HAVE A CHANCE TO WIN THIS

1l1~LESS

THIS

\·:Hl-.T IS

I liVE

\':E

\'~ERE

INDICATED,

PF:ETPIf..L INSTRUCTIon

IS GIVEN .

PIp.LL'l' HAPPE!JING HERE

I

YOUR HONOR,

THERE IS 1'\':0 \\1A'iS TO PRO'/E THE CASE.

BEIl~G

A fR.;;UD CASE,

J'lR.

ARHSTRONG'S

IS,

AS

\\lE

23

BELIEVE THIS

INTENT AT THE

24

TIME THE CONTRACTS ARE ENTERED INTO IS THE CRUCIAL FACTUAL

25

QUESTION THAT THIS JURY HAS TO

RESOLVE, AND WE'RE PREPARED TO

ROBERTA L. ROGERS, OFFICIAL REPORTER, USDC SAN FRANCISCO,

CA

(415)

863-4211

9

1

DO THAT.

THAT'S THE ISSUE IN THIS CASE. FRAUD REQUIRES LYING,

2

\'~ERE

CHEATING,

ENTERED INTO.

DECEIT,

AT

THE TIME

3

THE CONTRACTS

OUR SPECIAL INSTRUCTION

4

NUI-1BER 6 DOES NOT PRECLL'DE THEI"! FROI'1 ENTERING EVIDENCE AND

5

PROVIIJG THEIR CASE.

IT SII·1PLY SETS T'HE RECORD STRAIGHT.

WHAT THE GOVERNMENT IS TRYING TO DO,

6

INJECT INTO THIS

7

IT'S TRYING

TO

CASE S01'1E NE\'] TYPE OF SYLLOGISM THAT THERE

h'hS A COIJTRACT BETh1EElJ HAI'-1ILTOlJ TAFT AND ITS CLIENT COMPANIES.

8 I

9 10

I THE

COnTRACT \';.".5

I PAID.

L.~\.;.

THAT I S nOT THE

THAT'S NOT FAIR.

h'H.J\T THIS CASE IS ALL ABOUT.

I ARGUr1El:T B'l' SAY I IJG THAT THESE FUNDS

14

! GOInG

TO r·:;'.LE THE ~.RGUI·jE!:T'.

IT HAS BEE),:

rLE~;';~::'0

SOI"1EHO\'~

- -

AND THEY I RE

\'~E "JERE CONCERNED ABOUT IT.

h!E HAD THEIR TRIAL

17

HII·iOR.AlJDur·! ":HERI AT ONE PARTI CULAR PAGE OF THEIR TRIAL

18

HEI'~ORAJJDL;J.j

19

OF

20 21

r~10lJEY

THE'; STATE THAT HR.

-- h'IRE E"; THE L:SE OF \':ELL,

I J.lP.. AR1'~STROnG

NOW

\':I SEE IT IJ! THEIR RESPONSE.

Ol~1.

THE L;'.ST TIH£ ,,;t CAl-iE TO COURT,

16

THAT I S NOT

THEY TRY TO BOOTSTRAP THAT

13

1S

THE TAXES WEREN'T

CRII·1E.

EPGO,

11

12

FOR THE PA'mENT OF TAXES.

\'OL;R HONOR

AR1·lSTRONG I S EXPENDITURES WERE I~jONEY

THAT \\IAS NOT HI S Oh'N.

THAT 'S SINPLY NOT THE LA\\I.

I

AI~ 0

H.!:.D THE PI GHT,

HAI·1I LTOIJ TAFT HAD THE RIGHT I

THAT I S TRUE FRaIl} -- \\lE KNO\,l THAT

22

TO THE USE OF THAT nONE 'j

'23

FRor·l THE COI·1!.'jOn LP.h' TRUSTS

24

FROM THE NATURE OF THE BUSINESS THAT HAMILTON TAFT WAS

25

FROM THE C01JTR.ll,CTS THEHSELVES

.

I

FROI'1 THE NINTH CIRCUIT

I

DECISION, IN, AND

h7HICH EACH ONE OF THEM -- EVERY

ROBERTA L. ROGERS, OFFICIAL REPORTER/ USDC SAN FRANCISCO, CA (415) 863-4211

10

1

SINGLE ONE OF THEr"1 STATE THAT HANILTON TAFT HAD THE RIGHT TO

2

THE USE OF THE FUNDS. OUR SPECIAL PROPOSED INSTRUCTIOn NUMBER 6,

3

YOUR

4

HONOR,

NOT ONLY IS A DEFENSE THEORY OF THE CASE INSTRUCTION,

5

BUT IT' S A CORRECT STp.TEI'1ENT OF LA\'J AND IN NO WAY PRECLUDES

6

THE GOVERI:I'1[UT FROI·i PROVING THEIR CASE --

7

SIMPLY peTS

8

THJ~

PL~YING

IT

FIELD.

RATHER

THE ISSUE THAT \.J[ \';OllLD SUBf·1IT TO THE COURT, THAN THE SYLLOGIS!·l

9

10

PROPOSED BY THE GOVERNI'1ENT,

PROPERLY THAT CONTRACTS \':ERE ENTERED INTO;

12

HO\';[VER, DID NR.

14

CUSTOl·1ERS

15

THEN THE Tp.~:[S \';ERE

I

Il:TO

IS 1\10RE

THAT CONTRACTS \-JERE

AT THE: TIl'i£ THE CONTRACTS h"'ERE ENTERED INTO

j\RHSTRO!:G LI E,

13

I6

,J:: h LE\:'EL

CASE

IN NO WAY.

CHEAT AND DECEIVE THESE \\10ULD-BE

BELI[VI!~G

~:01

HE \';AS GOING TO PAY THE TAXES,

AND

P;.ID AIJD IS THAT A CRII-1E?

TH;'.T BRIljGS IT I1no THE COllTEXT OF THE CHARGES THAT

;

17

I ARE

IS

I ABOL'T .

PRLSE!:T I!: THE Il:01CTEEllT.

I

19 20

II

nOL,

I

CLEAR -- ;-.!JD I

YOUE HO:·:OR, \'~Ol]LD

THAT IS \'JHAT THIS CASE

THE I~INTH CIRCUIT HAS N.l1DE

IS

IT VERY

Sl'B!·:I'I T·J YOUR HONOP THAT OUR INSTRUCTION

I 21

I I S SUPPOFTEL~

22

I DEFENSE

2]

24 25

PROVII~G

I

E";

THE LJ...';.: AU 0 THE EVIDENCE.

!~STRUCTIC<; .

I

TIS A THEORY OF

1 T DOESN I T PRECLUDE THE GOVERNMENT F'ROt·1

THEI R C.Z\5E.

THE FAILURE TO GIVE A THEORY OF THE DEFENSE INSTRUCTIon IS

PER SE REVERSIBLE ERROR.

THE DEFENSE IS

ROBERTA L. ROGERS, OFFICIAL REPORTER, USDC SAN

FRANCISCO,

CA

(415)

863-4211

11

1

ENTITLED TO THAT INSTRUCTION WHEN IT IS SUPPORTED BY LAW AND

2

HAS SOME FOUNDATION IJJ THE EVIDENCE.

3 4

OUR WHOLE DEFENSE IS PREDICATED UPON THE FACT THAT MY CLIENT HAD THE RIGHT TO THE USE OF THE FUNDS.

5

THE GOVERNMENT THEORY IS THAT HE INTENDED AT THE

6

TIME OF THE CONTRACT TO TAKE THE MONEY AND RUN,

7

TO PAY THE

8 9

NEVER INTENDED

TAXES. AS I'VE SAlO, HE

SINGLE SCHEI'JE

Kl~Oh~

THAT THAT IS THE SCHEME

I

AS THEY INDICATE IN THEIR TRIAL MEMORANDUM,

I

10

THAT'S IN THE I 1: Dr CTI·n::r;T.

11

SOTELO-I·jURI LLO

12

CASE, SAYS A THEORY OF DEFEUSE INSTRUCTION JV1UST BE GIVEN.

I

THE CASE.

THE JURY AT THE EIJD OF

15

PRELlr·1I nARY I lJSTRl7CTI o~;s . J.1R.

17

THE COURT:

18

BROE!;:

I

1989, NINTH CIRCUIT

BUT THAT'S TALKING ABOUT INSTRUCTIONS TO

14

16

AND

THE CASE OF UNITED STATES VERSUS

FOUllD AT 887 F. 2 D 176

THE COURT:

13

THE

IT I S NOT TALKING ABOUT

THAT 1 S TRUE,

YOUR HONOR.

AND THERE IS A BIG, BIG DIFFERENCE.

BIG

DIFfEEE1:CI.

19

}\1R.

20

p.;;D THERE IS A DIffERENCE.

BROElJ:

LET r'lE JUI'1P AHEAD,

I F I

MIGHT

I

THEN.

BUT \vE I RE DEALING

21

HERE

22

THIS IJ.JSTRUCTIOJ; \':AITS UUTIL THE END OF THE TRIAL,

23

CONSIDERED AS FAIR GAME fOR THIS JURY TO HEAR THE GOVERNMENT1S

24

THEORY THAT THIS

25

ANY WAY THAT TH:LSE ARE MONIES -- AND THESE ARE ALL LAY

.L.UD \',"!.::. GEl

Sf-.cr

1'\~H Y

h'E NEED I T NOh!.

IS TRUST MONEY,

YOUR HONOR /

IF

IF THIS IS

IF THEY GET THE IMPRESSION IN

ROBERTA L. ROGERS, OFFICIAL REPORTER, USDC SAN FRANCISCO, CA (415) 863-4211

12

1

PERSONS. THEY ARE ALL TAXPAYERS.

2

THEY'VE ALL HAD WITHHOLDING

3

TAKEN OUT OF THEIR PAYCHECKS.

WE HAVE TO ASSUME THAT,

4

SURE IT'S TRUE.

5

SOMEHOW SACRED WITHHOLDING MONEY LIKE THEIR EMPLOYER TAKES OUT

6

OF THEIR PAYCHECK.

7

PURPOSE BUT FOR THE PAYI'·1ENT OF TAXES

8

COMNITTED.

AND I'M

THEY'RE GOING TO ASSUME THAT THESE WERE

AND IF THEY HERE USED FOR ANY OTHER THEtJ FRAUD WAS

I

THAT'S \-:HAT THE GOVERNI·1El:T IS TRYING TO INJECT INTO

9

If

SEE}~ING,

THE INSTRUCTIon \'JE I RE

~

10

THIS CASE.

11

THEORY Cf THE DEFENSE INSTRUCTION, WHICH HAS TO BE GIVEN

12

AND

13

THE

14

CONCUR.

15

THE END OF THE CASE.

\\IHICH IS

BY THE WAY, THOSE CASES DO NOT SAY IT CAN'T BE GIVEN AT

1

BEGI!:!:I~:-~

OF THE C.z..SE.

VOL ARE

16

~BSOLCTELY

IT SAYS IT HAS TO BE GIVEN.

CORRECT.

THI SIS J.. unUSUAL CASE,

17

TIHE.

Tr.1 SIS

18

JUST TA:-:ES

19

FAJ-1ILIAF:

I

.?-:.

\'~ITH

IT'S NORMALLY GIVEN AT

AS HE TALKED ABOUT LAST

CASE INVOLVInG TAXES.

BCT \';ITHHOLDlnG TAXES.

IT IS INVOLVING NOT

ALL THE JURORS

\~ILL

BE

TH.::.. T.

THE GO\'ERIJ1'lEI:T SEEES TO CALL THESE -- DESPITE THE

20

CIRCUIT

DESPITE THE C0!-1I'10H

DESPITE THE

NII~TH

22

CONTRACT, THEY STI LL SEEK TO CALL THE!'1 TRUST 1"10NIES.

23

SEEK TO

24

FUNDS.

Hhr~E

I

LA\'~

OF TRUSTS

21

25

I

I

-- GIVE THE II-JPRESSION THAT THESE ARE

THEY

EARMARKED

Any SUCH I11PRESSION LIKE THAT IS GOING TO CAUSE THIS

ROBERTA L. ROGERS, OFFICIAL REPORTER, USDC SAN FRANCISCO, CA (415) 863-4211

13

1

JURY TO INFER FRAUD.

2

THE CASE IS ABOUT.

3

WHAT THE CASE IS ABOUT.

\\1E

CAN'T DEFEND THAT.

THAT IS NOT WHAT

THIS CASE IS A CASE OF INTENT.

THAT'S

THEY'RE NOT PRECLUDED FROM PROVING THEIR CASE WITH

4

5

THAT PRETRIAL INSTRUCTION.

6

BOTH SIDES.

7

WITH REGARD TO THESE FunDS; THAT HAJ'1ILTON TAFT, INDEED, HAD

8

THE RIGHT TO THE USE OF THE FUNDS UNTIL THE TIME, PURSUANT TO

9

THE CONTRACT, THAT TAXES HERE DUE TO BE PAID.

IT EXPLAINS TO THE JURY

NO\-: ,

10

IT SIMPLY MAKES THE CASE FAIR FOR

\-JHAT THE SITUATION \\7AS

THE GOVERNI'lENT CAN BRING IN ALL THE EVIDENCE \"{HAT

11

THEY

12

QUESTIotJ THEY I RE

13

THAT.

14

IT DIDIJ'T ALL GO TO THE PAYMENT OF TAXES.

\~~ &:... ~ J T

ABOL:T

HAPPEl<JED

'\lITH THIS IvlONEY.

GOING TO DO THAT.

IJJ FACT, hiE LL STIPULli.TE TO I

THERE'S NO

"JE HAVE NO PROBLEM WITH '·~HERE

THE MONEY WENT.

AND

WE ALL KNOW THAT.

IF THIS JURY InFERS THAT SOJVJEHO"J THESE MONIES COULD

15 16

ONLY BE USED fOR THE PA Y!\1EUT OF TAXES, THEN THERE I S NO PURPOSE

17

IN THE TRIAL. THE \':HOLE FRAUD CASE REQUIRES PROOF OF INTENT,

18

INTENT TO DECEIVE,

20

THE TIME THE COr:TRACTS WERE ENTERED INTO.

21

THAT'S

22

\'~HAT

INTEnT TO CHEAT,

LIES TO THESE PEOPLE AT

19

THAT'S THE SCHEME.

THEY H.L."JE TO PROVE.

NO'..: ,

YOUR BONOR, THESE LAY JURORS THAT ARE GOING TO

23

COll.1E HERE, If THEY IRE SUBJECTED TO

24

TAKES -- T\'JO

25

WEIVE HEARD ALL THESE DIFFERENT ESTIMATES -- AND, YOU KNOW, WE

r\101~THS

\~HATEVER

THIS TRIAL

, SIX h1 EEKS, THREE MONTHS POSSIBLY, THAT

ROBERTA L. ROGERS, OFFICIAL REPORTER, USDC SAN FRANCISCO, CA (415) 863-4211

14

1

ALL TRY TO MAKE THOSE ESTIMATES AS ACCURATE AS WE CAN. BUT IF THIS JURY GETS THE IMPRESSION THAT THESE ARE

2

3

EARMARKED FUNDS, THESE ARE TRUST MONIES

THROUGHOUT THIS

4

TRIAL, THEY'RE GOING TO HAVE THEIR OPINIONS HARDENED LIKE

5

CEMENT BEFORE THIS TRIAL IS OVER WITH.

6

PRACTICAL MATTER.

j

WE KNOW THAT AS A

THAT INSTRUCTIOn THAT YOUR HONOR l-JOULD GIVE AT THE

7

8

END AFTER LENGTHY TRIAL

9

\\1013

'T

DE.~LING

"JITH THESE KIND OF MONIES

J.1.1I.TTER AT THAT PARTICULAR TIME, AND THERE WILL BE

E'V'[];

10

SO MUCH ERROR InJECTED AnD PREJUDICE INTO THIS CASE AND

11

MISl NDERSTJl_NDlnGS Il-1POSED UPON THIS JURY.

12

CURED \';ITH p.i:

13

NINTH CIRCUIT OPIIJIOIJ.

14

VACATED.

1

I!;STF:UCTION THAT h1AS TAKEN RIGHT OUT OF THE

THE"

15

C·~l'RT':

AIJD THhT OPINION,

r·1E.

BRO\'JlJ,

THAT?

1 HEARD YOC THE FIRST TIME.

17

YOU'VE

NO~

18

YOUR POI1:T.

20

21

I NIIJTH I I GOInG

YOUR HONOR,

YOU SAID IT TWO WEEKS AGO.

SAID IT AT LEAST FOUR TIMES TODAY. I

AGREE.

I

THINK I

WAS NOT

HOh1 1·1ANY TIMES HAVE YOU SAID

16

19

THAT CAN ALL BE

I UNDERSTAND

SHOULD BE GUIDED BY THAT

CIRCUIT DECISIOU. THE QUE S T I 0; J I JJ 1'1":1:' 1,1 IN 0 I S \',' HAT THE Y DE CI DE 0 • Tel

I IM

TArE TH;'.T AS l·~'l' F:)LEST.z:..R \-JHEIJ THE TII·1E cor·1ES TO MAKE

22

THE DECISIon Ol~ THIS THING.

23

SAID BECAUSE IT

~hS

1 1 1'1 NOT GOING TO DUCK \"JHAT THEY

VACATED FROM ME. OKAY.

I APPRECIATE THAT.

24

I'-1R.

25

YOUR HONOR, h1E HAVEN I T' REALLY -- NONE OF US REALLY

BRo\-,'n:

ROBERTA L. ROGERS, OFFICIAL REPORTER, USDC SAtJ FRANCISCO, CA (415) 863-4211