Amended 2255 Motion 9-21

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THE WHITE HOUSE Office of the Press Secretary For Immediate Release July 29, 1993

PRESIDENT NOMINATES EIGHT U.S. ATIORNEYS The President nominated eight individuals to be U.S. Attorneys today: Eric H. Holder, Jr., for the District of Columbia Michael Joseph Yamaguchi for the Northern District of California Randall K. Rathbun for the District of Kansas Thomas Justin Monaghan for the District of Nebraska Stephen Charles Lewis for the Northern District of Oklahoma Vicki Miles-LaGrange for the Western District of Oklahoma John W. Raley, Jr. for the Eastern District of Oklahoma Frederick W. Theiman for the Western District of Pennsylvania Eric H. Holder, Jr. has been an Associate Judge on the

District of Columbia Superior Court since 1988. Prior to his appointment to that position, he served for 12 years as a trial attorney in the Criminal Division of the Justice Department. His responsibilities at the Justice Department included the investigation and trial of complex political corruption cases, the preparation of federal Courts of Appeals briefs and appellate advocacy, and supervision of other government corruption investigations. Holder holds his B.A. and J.D. degrees from Columbia University. Michael Joseph Yamaguchi has been an Assistant U.S. Attorney for Northern Califorrua since 1980, serving for four years in the Civil and Tax Division and more recently in the Criminal Division. He has also worked during that time as an Adjunct Professor of Law at the University of San Francisco, and has been active in the American Bar Association. A Captain in the U.S. Army Reserves, Yamaguchi has also worked as a Visiting Professor of Law at McGeorge Law School in Sacramento, and was formerly an accountant with the fmn of Peat, Marwick, Mitchell & Co. He earned his B.A. from UCLA, J.D. from the University of San Francisco, and LL.M. from New York University. (more) U.S. Attorneys page two Randall Rathbun is a partner in Depew, Gillen & Rabun, a Wichita firm specializing in environmental litigation. Before joining that firm in 1980, he was with the criminal and civil litigation finn of Curfman, Brainerd, Harris, Bell, Weigand & Depew. He was previously on the Board of Editors of the Kansas Trial Lawyers Association Journal, and has spoken widely on topics relating to environmental law. Rathbun is a graduate of Kansas State University and Washburn University School of Law. 1110nlas J. Monaghan, is a partner in Monaghan, Tiedman & Lynch, an Omaha fmn with which he has been associated since 1978. He was formerly with the [rrm of Young & White. Monoghan also served form 1985-91 on the adjunct faculty of the College of 81. Mary, and has spoken at numerous Nebraska

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5/7/2009 2:59

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EVENTS AND TIME FRAME OF YAMAGUCHI

~~q~1~

GRADUATED COLLEGE WITH B.A. AND DEGREE IN LAW

6 YEARS WORKED FOR PEAT HARWICK IN THEIR TAX DIVISION ,

~u

DURING THIS TIME ACQUIRED A MASTER IN LAW FROM NEt.] YORK UNIVERSITY

WENT TO WORK AS ASSISTANT U.S. ATTORNEY

WORKED FOR 13 YEARS, UNTIL 1993 AS AN ASSISTANT U.S. ATTORNEY

1993 APPOINTED BY CLINTON U.S. ATTORNEY FOR NORTHERN CALIFORNIA

1ST YEAR: 93-94: APPOINTED U.S. ATTORNEY APPOINTED TO A.G. ADVISORY COMMITTEE 2ND YEAR: 94-95: NOMINATED FOR FEDERAL JUDGE BY BARBARA BOXER INDICTED ARMSTRONG FOR FRAUD 8 FILED AMICUS BRIEF ON BEHALF OF WASHINGTON TO VACATE IN RE. HAMILTON ~~ 4TH YEAR: 96-97: TRIED ARMSTRONG/FOUND GUILTY SENTENCED ARMSTRONG 9 YEARS 5TH YEAR: 98: REMOVED FROM OFFICE AND ASK TO RESIGN HIS NAME FROM FEDERAL JUDGESHIl

Memorandum

To

SAC, SAN FRANCISCO

From

SA WILLARD L. HATCHER, JR.

SubJccl

Dale

(196A-SF-93255)

1/28/94

(P)

CONNI:.E CHIP ARMSTORNG, JR j

ET AL;'''... FBW (A) , Mf

00:

SF

,,_

Enclosed for the file is a facsimle copy of the Dresdner $18.9 million note to Hamilton Taft .

. ~- File (196A-SF-93255)

~H/wlh .1.

HEMMING MORSE Certified Public Accounlants and Consultants I 160 Bove' Road, 4th Floor I San Mateo, Cahtomia 94402 I (415) 574-1900 Fa~imile #: (4151378-4090

FACSIMILE LEAD SHEET

I

I Date/Time:

01/18/9403:02 PM

I

I

rPLEASE DELIVER THE FOLLOWING TO: Name: Will Hatcher Firm: Federal Bureau of lnvesbgation FacsimIle: (510) 834-6551

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Client: Hamilton Taft & Company

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Endosed IS the a copy of the Dresdner Note dated April 10, 1989. The second paragraph descnbgs thCl principal as due In fIve yanrs.

,

I

, The information contained in this facsimile is confidential and may also be attorney-privileged. The information is intended only for the use of the individual or entity to whom it is addressed. If you are not the intended recipient, or thQ employee or egant responsible to deliver it to the inlonded recipient, you are hereby notified that any use, dissemination. distribution or copying of this communication is strictly prohibited. If you havQ rRceived the fac!1imile in error. please immediatety notify us bV telephone. and return the original message to u! at lhe address above via the U_ S. Posbll Service. Thank you.

Please call (415) 574-1900 if an error

Ot;CUI'$.

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j

Dallas c.aunty, '1'exas

April 10, 1989

$18,962,255 .. 00

J'OI VALDB RBCBIVlJ) I th. undersiqned (the ItMakar R ) promises to pay to the order of HaMilton ~.ft & COBPabY, a california corporation (the "Holder"), at. 14 Ncaw Montqomery, San Franci6oo, California 94105, or at such other place or places AP any bolder

of this Promissory Not.e may designata in writing, the principal

SWI

ot Eighteen Million Nine Hundred Sixty Two Thousand Twa Hundred Fifty Five and NO/100 Dollars ($18,962,255.00) in legal and lawful money of the United states of America, toqether with. int.ert?:st on tho unpaid balance from time to time remaining u.npaid pri.or to maturity at the lesser o'f (a) the maxilmna laW'fu~ rate (as

hereinaftQr detined) or (h) nine percent (9%) per annum

a

Interest

shall be ca-puted on the basia af a 360 day year and for the actual number of days elapsed (including the first day but excluding-the

last day). unless suCh calculation would result in a usurious rate, in whiCh case interest ahall be calculated on a per annum basis of a year of 365 or 366 days, as the caee may be.

Maker shall pay to Halder hereof quarterly installments of interest hereon commencing october 1, 1989, and continuing for five (5) years with the final qua.rterly paYlllent consl~ting of all of the outstanding principal in addition to thQ accrued interest as set forth here.in.

Such quarterly payments shall be made by Mak*r on

or before October 1, January 1, April 1 and JUly 1 of each year until Eaturity on 3uly 1, 1994. ~l payments are to be applied f~r$t

to accrued

Unpaid principa.l

interest and the ba1.ance to

until the

princip~l

is

paid

reduction of the in full. This

Promissory Note may be prepaid in part or in full at any time without penalty at the discretion of the Maker. Ma.kar hereby pledg«as to Holder, as security for the full and tiMly payment of this Note, all of Maker's rights, title and interest in, to and under that certain ReneweQ, Modified and Increased Promissory Note. in the amount of $1,500,000 by and between Gulf~ex Financial Corporation, a ~exas corporation,

GulfRtates Management Corporation, Interests,

Inc.,

a

Texas

8

Texa& corporation 1 Whitehall

corporation I

and

Whitehall

General

Interests, Inc., a Texas corporation. as makers and Hamilton Taft &I cOlllPany, 8S payee, dated

February 16, 1989 (the IIIGulftex Note") ,

which Gulftex Note was Bold to Maker pursuant to tMt certain Sale and Assignment of Prollissory Notes and Accounts Receivable, by and between Helder and Maker, dated April 10. 19a9 r and the collateral s8C\1ring such Gulftex Note; provided that Haker reserves the right to convert the Maker-s interest in the GUlttex Note into an equity interQst in the 1lUlkers of the Gulttex Nota or their underlying businesses; provided further that upon such convBrsion, the Maker's equi ty interest aball be ple49ed to Holder 85 security far the full and timely payment of this Bota.

PROMISSORY NotE - p_ge 1

F-~Ol

t" • LlJ" ,',\.

~\lil.

-

~08:

03

_1\11;

Al.l past due principal and. interest sba1.1 bear interest until paid at 1:he maximum lawful rat.a of interest. in ac:eordanc8 with the laws of the state of Texas ana the onited states. It da:faul t is mad. in the paYJlWlnt of any installlllent ot principal or int.er••t unt1er this ProJlliasory Note, then Holder Jl4y,

at its option, declare the entire unpaid principal ~alance of and Accrued and unpaid interest on this prOlaissory Note to be hU:l!9diate.ly due and payable without notice or doand, foreclose all liens and security interests seeuring the payment of this PrClmis80ry Note,

or any part thereof,

and offset

a9~inst

this

Promissory Hete any sum or sums owed by the Holder to Maker, all at the option of the Holder.

The undersigned and all other parties now or hereafter liable tor the payment hereef, whether as endorser, guarantor, surety or otherwise, aeverally waive notice of demand, notice of acceleration, notice of presentment, demand, presentment, notice of dishonor, diliqence in collecting, grace and protest, and consent t.o all extensi.ons that from time to tiDe Day be granted by the Holder hereof and to all partial payments hereon, whether

before or after demand.

No delay or omission on the part of the Holder in exercising any right hereunder. shall operat.a as a waiver of such right or of

any other right under this Promissory Note. A waiver on anyone occasion shall not be construed as a bar t.o or waiver of any right

or remedy on any future occasion.

rr thi. Promissory Note is not paid when due, or if it is collected through a bankruptcy, probate or other court, the undersigned aqrees to pay all costs of collection, including l but not 1tmited tOI reasonable attorney's tees, fi1ing fees, costa of court and other costs and expenses incurred by the Holder hereof. This promissory Note shall be bindin9 upon and inure to the benefit of the parties hereon and their respective successors and assiqns. The Holder may aasi911 any of its right, title or interest in and. to this Promissory Note or any securi ty aqreements or collateral in connection herewith withou't the consent of the Maker

hereof. This PrallliS80ry Note shall be construed accordance with the laws of the state of Texu.

under

and

1n

Notwithstandinq anythinq to the contrary contained in this Promissory Note or in any o~er aqreement entered into in conneetiOh with or securing the indebtedness evicSenced by this Proaissory Nota, Whether no\i existinq or h~ftar arisinq and

whether written or oral, it is aqraed that the aggreqate of all interest and any other charq•• constitutinq interest, or

PROKISSQRY NOTE - Page 2

adjudicated

as

cClnst1tutinq

interest,

and

contracted

for,

cbarqeable or receivable under this Praai••ory Rote or otherwise ill oonnection. with this loan transaction, ahall under no a1rcuaatancea 8Kceea t:he total amount ot interest perJIlittecl at the maxi1llUJll lawtul rate. It froll any circuJb8tance the Holder shall ever receiv8 interest, or any other Charves conllt1tut1nq interest, or adjudicated as constituting interest, in axcess of the total amount of interest which would have been earned at the maximua lawful rate, the amount of auch eXC8815 interest ahall. be applied to the reduction of the principal amount owing on this promissory note or on account of any other principal indebtedness of Maker to the holder, and not to the payment of intere.st. If the amount of such exceas interest exceeds the unpaid principal balance or this Pro.issory Hote ~nd such other inc1.btedne•• , the amount of such excess interest that 6xceed$ the unpaid principal balance of this Pro_is8ory Nota and auah other indebtedness shall be refunded to Maker. All sums paid or aqreed to be ~aid to the Holder for the

usa, forbearance or detention of the indebtedness of Maker to the

Holder ahatl bc aDortized, prorat@d, allocated and spread throughout the tul.l tarm ot this Promissory Note until payment in full BO that the actual ratfll of interest on account of such indebtedness i . uniform throughout the ter1ll of this Promissory Note. Dr Wl:'rDU 1IJ.KKRB01", tha Maker bali caused i::.his promi~sory Note to be made and executed aa of the day ~nd year rirst above written. DUS~

a

By'

d ,; d t1..,.i'--

:rts:

fBOKliSOBY NOTE - page 3

mrl'BJlPnBB8, DlC.,

. .a. Oorporation

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Oct::=.er 19, 1981 Mr. :·1 arc Pa i Va ~amilton

T2rt & Com~any 1.255 ?ost 5 ~reet

San Francisco, CA Re:

94109

C~ar2c~erization

of

Fu~cs

Kichheld by

~mployer

?or Tax Payments Dear Marc: Per your request, this letter Q1SCUSses the characterization of funds withheld by employers from employee pay checks in satisfaction of federal and sta:e income taxes, Social Security taxes, and state ~nemployment insurance ". taxes. This letter is limited to a discussion of the Internal Revenue Code (III.R.C."), t::Je CaliEQrnia Revenue and Taxation Code ("Cal. Rev. & Tax. Cadell), ~he California Unemployment Insurance Code ("Cal. U. Com. Cadell), and the qeneral responsibilities and duties of a trustee 2S reflected in the California Civil Code (IiCal. Civ. Cadell).

An employer is required to ~ithhold Erom the wages of employees amounts in respect of federal income taxes (I.R.C. § 3402], Social Security taxes rI.~.C. § 3102], state income taxes [Cal. U. Com. Code § 13020]. and state unemployment insurance -taxes {Cal. U. Com. Code § 986J. The employer is liable for the deduction and wittho1ding of taxes. I.R.C. § 3403; Cal. U. Com. Code 5 13021. Characterization of Withheld Funds Funds that 2re withheld or c~llected as income tax or Social SecL:rity Tax are to be held by the employer as " a special E:..!nd in trust Eor the United States. I.~.C. § 7501. 1I

U. s.

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: e ~mplcyer as "3 special fund i n ~ r 'J s t far ': ~ e 3'ta teo f Cal i a C' n i a ~ Cal. '_'. Com. Ca de § 13070J; ~hile =~~ds withheld as unemclovmen~ :nsurance tax .3re to be \·;ithheld "in trust." ::al"U.-Co~. ::ode § 986. The duty to kee~ wlt~r.e1d taxes as a trust crises as the taxes are withheld from wages regardless of the 9r~scribed dace Ear oavment ~o the covernment and cioes not termir.ate until the t 3 xes are r: aid O'J e r . ~ S t 1 e for C ~J. U.S., 7 5 - : u. S • T . C. .~ 9 4 6 4 (D. :·1 inn. 1975). II

During the ?eriod the Eunds are held i~ trust, the person holding the f~nds assumes, with a few excepc:ons discussed 8elow, the cuties and responsibilities-of a :rustee as such duties and responsibilities are mandated under common law. ~arsh v. Home Federal Savinas & Loan Assn, 66 Cal. App. 3d 674, 136 Cal. Rptr. 180 (4th D.C.A. 1977). In general, a trustee is a fiduciary and is bound to act in the highest good faith toward his beneficiary, must make full disclosure of material Eacts, must not acquire any adverse interest, and must not use his position to gain any advantage over the beneficiary or to make any special profit. Cal. Civ. Code §§ 2228-2233. A trustee normally should not ~ingle trust property with his own, but iE he doss willfully mingle the trust funds with property of his own, he is absolutely liable for their safety and Ear the value of the~r use. Cal. eiv. Code §§ 2236. A trustee has a general duty to invest funds for the benefit of the beneficiaries, but he must account over to the beneficiaries any interest earned. Cal. eiv. Code § 2262. In investing, reinvesting, or otherwise managing trust property, a trustee must exercise the judgment and care which people of prudence, discretion, and intelligence exercise in the management of their own affairs. Cal. Civ. Code § 2261. California law provides a-fairly liberal description of the type of investment a prudent person would make, including every kind of property, real, personal, or mixed, and every kind of investment which a prudent person might enter into. rd. Not wit h s tandin g' the for e ~ 0 in g, the par tie s tot he t r u s t alter or waive any of the standard provisions and duties. Rest. 2d, Trusts § 216. It is possible for the parties to a trust arrangement to authorize commingling of funds, to authorize the trustee to retain any income Erom the t=~st assets, and

~ay

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.::cober 29, :961 :::age Three ~o consent ~o ~arious kir.cs at invest~encs. Th; =~se c: =·:acsh v. HO.-:le Federal Savlr.gs fa Loan Assn., 66 C=.:. ;'pp. ~a -574, 136 Cal. ~:Jt:L'-; ldO (4th D.C.:". 19-77), is pa=ciculat:ly ~nstructive. At issue in Marsh was the proprie:; and :"egality of t.he "irnpouild u or "reserve" accounts :::.lstomari1y required by savings and loan associacions and ba~Ks in connection with residential ~ortgages to insure ?ayment of :axes and insurance. The suit was a class action seeking general and punitive damages and seeking an acco~nting of interest on the impound accounts, which were cus~omarily held ~ithout interest.

The Court first determined that the impound accounts escrows. It then considered in trust and the duties of a trustee, observing that the beneficiary of "the trust may ~aive the right to any income and may authorize the commingling of funds. Thus, the Court noted that the deed of trust authorizing the impound account stated specifically that the payments by the plaintiff would be held by Home Federal "in its general fund without interest," and concluded that the parties had agreed that the trustees could commingle and use the trust funds, but did not have to account for any interest earned. ~onstituted trusts, not ~etail the nature of a

0.

The statute and cases indicate that the trust funds created by I.R.C. § 7501, Cal. U. Com. Coce § 986, and Cal. U. Com. Code 5 13070 are subject to some ~odification of the general rule. Thus, although normally a trustee must segregate the assets of a trust and not commingle the assets with his personal funds, see Cal. Civ. Code § 2236, it is not generally required that the-Iunds withheld for taxes be held separately from the general accounts of the corporation or ~hat they be deposited in a separate bank account, Slodov v. ~.S., 436 u.s. 238, 78-1 U.S.T.C. 'i 9447 at 84,206 (1978); Newsome v. U.S., 431 F.2d 742,70-2 U.S.T.C. " 9504 at 84,149 (5th Cir. 1970). The Treasury or the Franchise Tax Board, as the case may be, may specially require that withheld taxes be put into separate accounts, however, in the event the employer has failed previously to make appropriate deposits, 9ayments, or returns for such taxes, I.R.C. § 7512; Cal. Rev. & Tax. Code 5 18492. Furthermore, there is nothing in the statuce or any regulation or case with which we are acquainted ~o imply that ~he government is entitled to any additional interest on the trust funds daring the period such funds dre held in trust. Thus, it would follow that if an employer decided to forego interest on the trust funds, he, too, could ao so.

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October

:9,

1981

?age four

~ole

of Collectino

Ager.~

-

The foregoing discussio~ has considered the situation of an emolever. There does nee appeer to be cny case law, regulation, or statute dealing wit~ an :~dependent agent who actually ~ays over the taxes to the sovern~ent. The funds presumably are still trust funds, and the holder of those funds still bears the responsibilities of a tr~stee. Presumably, however, the collecting agent may use the funds in the same manner as the employer ~ight have, and is noc required, insofar as the Internal Revenue Service or the Franchise Tax Board are concerned, to segregate the :unds :rorn the general fund of the collecting agent. Penalties The normal penalty for a breach of fiduciary duty by a trustee is the amount of the loss to the beneficiary. A similar penalty is imposed by I.R.C. § 6672 or Cal. Rev. & Tax. Code § 18815: any person required to collect, account for, and pay over withholding taxes who willfully fails to collect, account for, or pay over such tax, is liable for a penalty equal to the total amount of the tax evaded, not collected, not accoun ted for, or pa id over.

..

The test is "willfullness." Basically, "willfullness n does not require anintent to deprive the government of its taxes, Newsome v. U.S., sucra, 70-2 U.S.T.C. at 84,151, but can be evidenced merely by use of the withheld funds for any other corporate ~urpo5e, regardless of any expectation that adequate funds would be available at the due date for the taxes. Wavchoff v. U.S., 79-2 U.S.T.C. ~ 9602 at 88,195 (S.D. Tex. 1979). Any person who voluntarily and consciously risks the withheld taxes in the operation of a corporation is subject to liability under I.R.C. § 6672 (Cal. Rev. & Tax. Code § le8iS) if SUbsequently the corporation is unable to remit the withheld taxes. ~ewsome v. U.S., supra. In addition to the civil penalties, however, there are also ciminal penalties. I.~.C. § 7202 provides that any person required to collect, account for, 2nd pay over any tax who willfully fails to collect, account for, or pay over such tax shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more

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:·1 arc P a '0· ~.3 29, :'981

OctObEr

?age Five

than five years, o~ both, together with the costs of prosec~­ tion. Cal. ~ev. & Tax. Code § 19408 imposes a fine of nat moce than S2,000 or imprisonment [no stated maximum}, or both for the similar offense. Although the penalties under these sections have been imposed only rarely and only in particularly egregious situations, there is considerable need to be concerned about the potential criminal penalties as well.

If you have any questions or comments.concerning the foregoing, please do not hesitate to contact us.

DLK/aw

'.

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Memorandum

To

SAN FRANCISCO (196A-SF-93255)

From

s~L.-

_

(SQ 5)

(F) b7C

Dale

3/8/91

YI..

?n IM>1 tJ

r/ Subject

CHIP ARMSTRONG, Jr., elba Hamilton Taft and Company 1 Market Plaza

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~~AJ6t./ dd,te-r

6

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~.,.l...c-,.oN" rf;f.ldf. ;.)4

PI'S t./,tr.le...J

thiH~

~/o s;"

tP.od 13tJtev

Spear street Tower San Francisco, California FEW; MFi Tax Fraud; 00:

SAN FRANCISCO

The purpose of this memo is to document events that have taken n1g]e since ~ry 13, 199} which is the date that I was last interviewed by the writer. On that date,! provided a number of documents to the w,iter which

have been disseminated by the writer to SAl

or the IRS

CID here in San Francisco, telephone number 556-6850. It should also be noted that a copy of these documents along with a summ~ry of the writer's review of San Francisco file 196A-2868 has been prepared and disseminated to AUSA MICHAEL YAMAGUCHI at 556-1328. A copy of this summary is a matter of record under a separate communication Which is a part of this file. Due to the fact that AUSA YAMAGUCHI was on annual leave and did not return to his office until March 4, and/or 5, 1991 no overt investigation was undertaken. This matter was referred to ~l Mr. YAMAGUCHI because of his previous referral which he handled regarding Hamilton Taft in which he SUbsequently declined for lack of prosecution. This matter was investigated by S~ I lit was handled under SF 196A-2868 and was closed ~ln------August, 1988.

byl

I

with regard to information supplied writer was reluctant to initiate any overt investigation for tear that there .~d be Rotential liability attached wherein the ~ government could be accused of initiating the downfall of ~ captioned cpmpapv by,the mere fact that it was making overt

inquiries.

L

has provided detailed information which,

~

of this date, has been unable to be thoroughly corrobo~ated. Progress is being made to effect such corroboratlon.

I

I. expressed apprehension in his mind regarding the ttextensive" time it was taking for the government to decide whether or not to initiate an investigation and to effect some .criminal process. He was t.o:l_dJb)~j; th'§-9ov~rnment h9d".-t~tJ}.SiY.?~_~._ victim before any process would be forthcoming. He was further

;J

196A-SF-93255 PKM/sgc

advised on more than one occasion by the writer of the potential civil 1iabi1ity which might attach to the revelation to the general public that the FBI was conducting or maybe conducting an investigation into certain alleged criminal activities op tpe ~ part of Hamil ton Taft. 7 h6k!dtflJr ~/..Ie-~~ ~Jt:.~ 4.dtI (J/(I \

flRtJ~cc..tZ.-fJt;~

tJr-ill.,1,r(}.4I

I

Nonetheless, on February ~l, 1991,1 saw fit to contact the Congressional offices here in San Francisco of

Congress persons NANCY PELOSI and BARBARA BOXER. The representative at Congresswoman PELOSI's off,ice to whom I

spoke gavel

Ithe name of an investigative reporte-r--t~h~a-t~~h~e

should consider -contacting with his information. On February 12 '; 1991, the writer as well as Agent I lof the eIn repo~d receiving telephone calls from an attorney at the Department of Justice making inquiry as to the PBI and/or IRS' connection if any with Hamilton Taft.

b7C

On February 13, 1991, during the interview of~I ~ conducted by the writer, he was again questioned as to the reason for making calls to the aforementioned conaressional offices. He stated that he was concerned about I

I following his resignation from Hamilton ..T....a...f.... ~t-o-n-F..le-~b,....r-u-a-r-y-~11-,~1""'!!9!""!!9!""!!1~. It should be noted that

I

during this interview on February 13, 1991 re-iterated that fact that]

I

---------------------T"I.. .H"":""e-w-a-s--.....

again reminded of potential civil liability problems tbat might ensue from the pUblicatiQO of the possible interest of the FBI with re~p~~t to Hamilton Taft. On Wednesday, March 6

1991, the writer received a

telephone call from SAJ - ~ JrRS ern who advised that he had been called by a M . RALPH :IN , an investigative reporter for the Wall street Journal here in San Francisco~ The purpose of KING'S call to SWAIN was to confirm that the IRS was conducting_AXLinyestiqa~reqardingHamilton Taft. On the morning of March 6, 1991, the writer reviewed message slips that had arrived on Tuesday, March 5, 1991, the writer having been on sick leave that day and one of them was from RALPH KING of the Wall street Journal. The writer did not return KING's phone call, however, in resgon~g to a page, for a telephone calIon the afternoon call Of~~j 1991, the writer became connected to Mr. KING of the Wall stree~ Journal. The usual inquiries were made and the usual response, that, is we can neither confirm and/or deny the existence of any investigation was provided to Mr. KING who ~ d perturbed Qy ~his response. 2

I

196A-SF-93255 PKM/sgc On March 6, 1991, i r head of corporate security of Sun Micro systems Inc. at 2550 Garcia Ave., Mountain View, California 94043, telephone number (415) 336-0496 was called by the writer in response to call that he had made to our office on March 5, 1991.

writer that his office had been contacted by was accompanied by an attorner one (ph) who advised that the purpose o i l ' Jcontac lcro Systems was to advise Sun Micro Systems that it had been the victim of a fraud perpetrated by Hamilton Taft on Sun Micro s:stems and numerous other corporate clients of Hamilton Taft. ladvised the writer that he would fax certain documents up to San Francisco at the writer's suggestiqn. These documents included a copy of the service agreement tha~· exists betw~en Sun Micro I s:
I

of

I

writer\

I

r-

t\"

"'\~

I

Of the mornin: of March 7, 1991,1 through c:-~ ~, his associatel an investigator for the corporate Security Department un Micro Systems, facsimiled 16 pages of ~~ documents to the writer. The most salient point of these documents was a letter to Sun Micro Systems dated February 13, _. 1991 from the .IRS in Fresno. The let:ter refers to a particular J~~'u~',~ t-~n, identification number utilized by Sun Micro Systems and· :~.~. c: "'references a tax period ending September 30, 1990. The letter ;.~~~~.~~, ~:, goes on to thank tax payer (Sun Micro Systems) for its reply ~ ;.~.; ~ dated January 25,1991 and its payment of $260,784.25 in penalty,~·~·lffees and for its late deposit of ($5,215, 684.86). The --'r.~ l(.. n e signifira : at tb~S :rmmunication is that Sun Micro Systems S~ ~ throughL ~ _ _" has represented, as of March 7, 1991, that,,~ ;:.i t did ~n act sen t e appropriate money that is $5,215,684.8 6 f~~ ";5 to Hamilton. Taft via. a wire transfer in order to pay employment ~~: \:. . tax oblJ.gatlons do and oWJ.ng the IRS for the tax perlod ended .. ';:.-; ~. September 30, 1990. Per an agreement of which the writer i~n r~ ~_~ ~ receipt, that is, the service agreement between Hamilton Taft and ~ k Sun Micro~stems, Hamilton Taft is responsible for the -. paYlT\ent oLqnyJ..at..e Eenal t~. It is an inference drawn by Sun ~:.

or

1,

.

.

k

3

~ I.. ~.

~ \.

'~

.~~\,~

.. .. ~

: ..

~-:

> ;t

196A-SF-93255 PKM/sgc Micro Systems personnel that this document tends to corroborate what I I was alleging in his representations J,to the . "r- I ,.",governmen t . y (f}I'Jt:.- ~ t:~v iJ ~tJ.lh-;£.' ~.... i'h:': n;-t::::.,- --.J,t)~i:',; V tt e-f-Ia/r:tJ On the afternoon of March 7, 1991~ AUSA YAMAGUCHI was personally visited by the writer and a brief update was provided to him of events that have taken place. On March 8, 1991, copies of the aforementioned facsimiles were provided to AUSA YAMAGUCHI fore his review. On March 8, 1991, Mr. YAMAGUCHI suggested to the writer -that efforts continue to accumulate enough probable cause to cause the issuance of a search warrant for the offices at Hamilton Taft at the earliest possible date. -.I

b7C

l

The following corporations have been contacted by ~ :Jand/or his attorney and ~d~~~ed thEt they have been the) victims of fraud perpetrated on them by Hamilton Taft. These ~I corporations are Costal Savings Bank, Sun Micro Systems, American West Airlines, and one or two chemical companies located at the east coast. In addition,) advised writer that he has been contacted by representat~ves of Lloyds of London Insurance company with respect to Hamilton Taft. It is unknown how many individual companies will have representatives at the meeting to be held at Sun Micro Systems offices on the afternoon of March 8, 1991.

I

San Francisco at San Francisco, California: Investigation is continuing.

4*

•

•

•

•

• •

•

APPENDIX A STATEMENTS OF CASH RECEIPTS AND DISBURSErvlENTS FOR THE DEBTORS AS OF DECEMBER 31, 1991

•

.' •

•

•

•

HemmingMorselnc

~

let/ilm! rubltc AUDun/i!o-l,

•

I

S8n Mal8D Offic! 160 80••1 R030 faufln fl~o'

San Maleo. Cf.. 9~~O, lelcohon~ 1'151 574·'9ilD Fa'o I<;E,I 376-~09D

•

• •

Frederick S. Wyle, Trustee for Hamilton Taft & Company ACCOUNTANT'S 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 iiiobankruptcy), 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, 199] 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 representation 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.

1k"'~t1 m~-J2J g(\c-' San Maleo, California February 19, 1992

• • •

I'

I

A-Ol

•••

• •

CONSOLIDATED 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 Docember 31, 1991 (See Accountant's Compilation Report)

•

• •

• •

Cumulative for Post-PetitiDn PeriDds Consolidated Texas Deblors Consolidated Total Since 11/01/91 To 10/31/91 To 10/31/91

Hamilton Taft

Receipts: Gross real estate sales Less sales costs Net proceeds from sale of real estate

711,250 (158,875) 552,375

Net proceeds from sale of livestock-HTC Ranch Net proceeds from sale of other assets Interest received Meadow Owens settlement Other receipts (See Detailed SchedUle} Total Receipts Disbursements: Employee costs: Ranch (Since B{01,r91) Employee costs: Other Subtotal: Employee costs

•

Beginning Cash and Cash Equivalent Balances Balance as 01 bankruptcy petition Ranch cash balance as of August 1, 1991 Transfer of Texas Debtors' cash balances Ending Cash and Cash ECjuivalenl Balances

•

•

A-02

831,250 (179,812) 651,438

139,449

331,623

17,680

342,048

192.174 156,956 169.054

167,412 284

186,380 704,564

78,793 798,865

14,403 400,000--19,490 690,085

37,136 445,270 482,406

268,805 268,805

20,179 21,415 41,594

57,315 735,490 792,805

16,829

79,009

564,936

7,570

342,399 13,664

976,803 42,045

469,098 Other operating costs (See Detailed Schedule) Professional Fees: Trustee and Trustee's Professionals 634,4Q4 Trustee's Attorney & Accountant 20,811 Trustee's Appraiser and Consultants 104,088 Trustee's fees 14,536 Professional Fees: Creditors' Committee Professional Fees: Debtor-in-Possession 16,114 Ranch operating costs 188,945 Settlement Bank One furniture lease 5,835 Trustee's administrative costs Trustee's bond 4,500 U.S, Trustee fees 1,940,737 Disbursements for operations Net transfers to Petroleum 1,940,737 Total disbursements

Excess 01 Disbursements over Receipts

120,000 (20,937) 99,063

183,741 400,000 284,663 2,193,5t3

104.08&J1"'.'Jf!.,

13.516

23.394 6,435 20,380

452

37.930 19,951 36,494 188,945 6,287 600 6,600

600 2,100 309,420 60,000 369.420

527,327

2,777,484

527,327

60,000 2,B37,484-

(1.236,173)

429,445

162,758

(643,971)

5,856,509 1,730 503,5n

74,133

5.930,642 1,730

{503.577!

0

$5.125.643

$0

$162,758

~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 Post-Petition periods ended December 31,1991 (See Accountant's Compilation Report) Cumulative for Post-Petition Periods Consolidated Tems DBbtolS Consolidated Total To 10[31[91 To 10{31/91 Since 11[01/91

•

Hamilton Toft

D9t~i! 12~

• •

Otheo: Re!:;>9ipt.s: 97,455 24,974 31,842

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

$32.109

Monthly service fees Returned customer checks (Pre-Petition) Net customer funds (Tax Agency funds) Other receipts Total 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-Petilion Costs allocated to other affiliates Prepaid expenses & deposits Property and equipment

13,699

9,875 17.453 14.147

1.573 855 20,550

609

2,946 128,035

234 30,699 36,397 5,814

2,946 127,426 62,522 1,814

Total other operating costs

$469,098

• •

•

35,327

$14,926 86,626 12,632 37,074 87,527 21,212 4,801 12,961 15,905 121,684 11,873 27,021 18,308 34,697

A-03

$7.885 10,988 6,375 124 15,398 518

(143,554) 5,490

$16.829

(143,554) 68,012

435

2,249

$79,009

$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 Taft Texas Debtors Consolidated Consolidated To 10/31/91 To 10/31/91 Total Since 11/01/91 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 of livestock-HTC Ranch Net proceeds from sale of 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

167,412 284

186,380 704,564

Excess of Disbursements over Receipts Beginning Cash and Cash Equivalent Balances Balance as of appointment of Trustee Ranch cash balance 8S 01 August 1, 1991 Transfer of Texas Debtors' cash balances Adjusted beginning balances

• A-04

558.621

75,197 702,452

183,741 400,000 281,067 2,097,101

482,406

195,523 195.523

20,179 21.415 41,594

57,315 662,208 719.523

469,098

(5B,645}

79,009

489,463

7,570

342,399 13,664

37,136

Other operating costs (See Detailed SchedUle) Professional Fees: Trustee and Trustee's Professionals Trustee's Attomey & 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 transfers to Petroleum Total disbursements

$713,750 (155,129)

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

445,270

Ending Cash and Cash Equivalent Balances

•

192,174 156,956 169,054

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

634,404 20,811 104,OB8 14,536

331,623 342,048

1,940,737

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

527,327

976,B03 42,045 104,088 37,930 19,851 36,494 188,945 6,287 600 6,600 2,628,629 70,500 2,699,129

(1,236,173)

471,387

162,758

(602,028)

5,856,509

32,190

13,416

16,114 188,945 5,835

23,394 6,435 20,380 452

600 4,500 1.940,737

527,327

5,88B,699 1,730 0

1,730

503,577

(503,577)

$5,125,643

$0

$162,758

$5.2B8,401

•

•

•

. - --

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

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

Cumulative Trustee Periods Hamilton Taft Texas Debtors Consolidated To 10131/91 To 10/31/91 Since 11/01/91

• • •

• •

Dli!tJ,IiI of Othor Raceipts: 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,frelght & shipping Publication costs Relocation costs Rent Supplies Telephone Travel & aulo expenses Work-In-Process: Real Estate

75.197

19,490

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

$1B6.380

$75,197

$19,490

$281 ,067

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)

435

65,262 2,249

$79,009

$489,463

$9,979

51,006

261

2,946 127,426

• A-OS

10.98B

27,382

o

Total other operating costs

7,885

o

4,283 12,951 15,905 72,658 11,873 15,573

•

•

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

78,741 1,411

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

Consolidated Total

62,522 1,814

2,740

$409,098

($58,645)

6.375 124 15.398 518

• •

e;

&

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

•

Post- Petition Period:

4/29/91

•

•

• • •

Through 12/31191

12/31/91

$667,915 416,422 251,493

$415,613 332,'50 82,863

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

151 5,341 7,759 264.742

151 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

60,000 10,500 163,122

259,421

3.000 302,607

134,331 9,941 78 746 403 6,633 8,220 597 182 300 2,250 163,681

10,500 313.107

163,681

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

Disbursements: Employee costs Insurance Interest paid to affiliate Office expenses Property taxes Purchase of field equipment Rent Telephone Travel and entertainment Trustee's bond U.S. Trustee fees Disbursements 10r o~erations

9,941

78 767

403 6,633 14.887 6.995 182 300

Transfers To Affiliates: Transfer to Remington Total disbursements Excess receipts (disbursements)

22,136

Beginning cash balance

25,023

47,718

$47,159

$47,159

Ending cash balance

• •

Trustee Period: 7/22/91 Through

A-06

(559)

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

•

•

•• __.j

CONSOLIDATED HAMILTON TAn' & COMPANY AND TEXAS DEBTORS (A Group of Afriliated Companies in Bankroptry) aod DRESDNER PETROLEUM, INC. Notes to Statements of Cash Receipts and Disbursements For the period ended December 31, 1991

•

.

Note 1:

Consolidated Hamilton Taft & Company and Texas Debtors The accompanying consolidated statements of cash receipts and disbursements include the accounts of the following companies: 1)

2)

__ Knightsbridge Companies, Inc. (Knightsbridge);

Knightsbridge's wholly owned subsidiaries including Hamilton Taft & Company (Hamilton Taft) and The Remington Companies Inc.

•

(Remington); 3)

Remington's wholly owned subsidiaries including Dresdner Enterprises, Inc. (Enterprise) and Remington Corporate Financial Group, Inc.;

4)

Enterprise's wholly owned subsidiaries including DEl, Inc., Chayson Mortgage and Investment Company, Cal-Pacific Management Corp., and Suisse Texas, Inc.

•

Non-Consolidated Operations: Knightsbridge also owns a controlling interest in Dresdner Petroleum, Inc. (Petroleum) and Remington also owns a controlling interest in Parker Automotive (also known as Carbonclean). The operations of neither Dresdner Petroleum, Inc. nor Parker Automotive have been included in the consolidated financial statements.

•

The term "Texas Debtors" as used in these statements of cash receipts and disbursements means Knightsbridge, Remington and Enterprise. Petroleum's statement of cash receipts and disbursements is presented separately.

•

Several of the affiliated companies have filed for protection under Chapter 11 of the United States Bankruptcy Code. On March 20, 1991, an involuntary petition was flIed in San Francisco for Hamilton Taft and on March 26, 1991, Frederick S. Wyle was appointed as trustee in bankruptcy.

• •

A-O?

•

• •

CONSOLIDATED HAMILTON TAFT & COMPANY AND TEXAS DEBTORS (A Group of Affiliated Companies in Bankrnptcy) and DRFSDNER PETROLEUM, INC. Notes to Statements of Cash Receipts and Disbursements For the period ended December 31, 1991

• (Note 1 Continued) Knightsbridge med for protection under Chapter 11 of the United States Bankruptcy Code on April 19, 1991 and Remington, and Dresdner Enterprises filed on April 29, 1991, all in Dallas, Texas.

•

On July 22, 1991, Frederick S. Wyle was appointed as interim trustee in bankruptcy for Remington, Enterprises and Knightsbridge. His appointment was made permanent on November 4, 1991.

•

On November 4, 1991, the Bankruptcy Court ordered the substantive consolidation of Hamilton Taft & Company, and the Texas Debtors including Remington, Enterprises and Knightsbridge. Frederick S. Wyle was appointed trustee for the consolidated estates.

The accompanying statements of cash receipts and disbursement include both the Post-Petition periods and the periods of Trustee administration for each debtor. For Hamilton Taft, the Post-Petition period and the period of Trustee administration date from March 20, 1991 (even though the trustee was not appointed until March 26, 1991). The Post-Petition period for the Texas Debtors dates from April 19, 1991 for Knightsbridge and April 29, 1991 for Remington and Enterprises. The period of Trustee administration for the Texas Debtors dates from July 22, 1991, the date of the appointment of the interim trustee.

•

•

•

Note 2:

Dresdner Petroleum; Inc. Dresdner Petroleum filed for protection under Chapter 11 of the United States Bankruptcy Code in Dallas, Texas on April 29, 1991. On July 22, 1991, Frederick S. Wyle was appointed as interim trustee in bankruptcy. His appointment was made permanent on November 4, 1991. For the accompanying statement of cash receipts and disbllTsements, the Post-Petition period for Dresdner Petroleum dates from April 29, 1991 and the period of Trustee administration dates from July 22, 1991.

•

•

A-OS

• •

•

APPENDIX B

ACCOUNTANT'S REPORT ON SOURCE AND APPLICATION OF FUNDS FOR CONNIE C. ARMSTRONG, JR.

• •

• •

•

JANUARY 1, 1989 - JUNE 15, 1991

•

HemmingMorselnc

~

Cerrdlt:1f Public A CCOUttl8ftl~

San MaiaO Office 160 Bovel Road fnunh flDnr

San M.lee.

C~

94402

1elephDnp 1415. j7~·19KI 14'~1 3iB·dOg:,

•

i fa,

•

•

I

Frederick S. Wyle, Trustee for Hamilton Taft & Company ACCOUNTANTS'REPORT

•

We have applied certain agreed-upon procedures, as discussed below, to the accounting records of Connie C. Armstrong, Jr. and of the Annstrong Affiliated Entities, inclUding Hamilton Taft & Company, Remington Companies, Inc. and Knightsbridge Companies, Inc. study was made solely to assist you in your duties as Trustee and our report should not be used for other purposes. The procedures we performed are summarized as follows:

OUT

•

•

a)

Evaluated Connie C. Armstrong, Jr. 's source and application of funds during the period January 1, 1988 through June 15, 1991 as described in the documents prepared by l..arry D. Gillilan and further described in Note 1 to the Source and Application of Funds.

b)

Traced payments to and receipts from Mr. Armstrong, as recorded in the Affiliated Entities accounts of employee receivables owed by Connie C. Armstrong, Jr. and notes payable to Connie C. Armstrong, Jr., to the corresponding deposits and disbursements in Mr. Armstrong's personal accounts.

c)

Segregated and identified the payments on behalf of Mr. Armstrong by the Affiliated Entities that were included in accounts of employee receivables owed by Connie C. Armstrong, Jr. and notes payable to Connie C. Armstrong. Jr.

d)

Reconciled compensation paid during the 1989 through 1991 periods to Mr. Armstrong by Hamilton Taft & Company and Remington Companies, Inc. (Remington) to the corresponding deposits in Mr. Annstrong's personal accounts.

e)

Reconciled reimbursed expenses paid by Remington during 1989 to the corresponding deposits in Mr. Armstrong's personal accounts.

t)

Reconciled the acquisition of identified assets to the respective acquisition funding identified in accounts of the Affiliated Entities and of Mr. Armstrong.

• • • •

I

B-01 I

•

• •

•

•

•

Frederick S. Wyle, Esq. Accountants' Repon Page 2

Our findings are presented in the attached Source and Applialtion of Funds for the period January I, 1989 throLigh June 15, 1991, which describes a total source of funds amounting to $16.670,032 and an application of funds amounting to $16.585,263. This schedule is further described by the following schedules and notes: Schedule 1:

Payments To or On Behalf of Connie C. Armstrong, Jr.: 1989

Schedule 2:

Payments To or On Behalf of Connie C. Annstrong. Jr.: 1989-1991

Schedule 3:

Application of Funds: January 1, 1989 through June 15, 1991

•

Notes to Source and Application of Funds Because the above procedures do not constitute an examination made in accordance with generally accepted auditing standards, we do not express an opinion in accordance with those standards. In connection with the procedures referred to above, except for the discrepancies discussed in the notes to the Source and Application of Funds, no matters came to our attention that caused us to believe that the attached statement and schedules required further adjustment. Had we performed an examination in accordance with generally accepted auditing standards, other matters might have come to our attention that would have been reported to you. This report relates only to the accounts and items specified above.

•

1fe»U'IU0f

m ~,

San Mateo. C~ifomia February 19, 1992

Irr

~ fI<:-.·

• • • ,.

Hemming Morse B-02

',,"I"~ ~r:: 4rr.c.."ul1~J

..

".D~ ":!

•

•

.'

•

B-03

•

•

Schedule 1

•

• • •

•

CONNIE C. ARMSTRONG, JR. SOURCE OF FUNDS Payments To or On Behalf of Connie C. Armstrong, Jr. - 1989 (See Accompanying Notes and Accountant's Report)

I A Payments flam HTC and Affiliated Entities: 1 Compensation a) 1989 Hamilton Tafl salary, net 01 withheld taxes b) 1989 Remington salary, net otwithheld taxes 0) Director Fees SUbtotal: Compensation

2 Payments Booked As RGimbursement 01 Expenses a) Remington payments b) Hamilton Taft payments Subtotal: Payments booked as reimbursement of expenses

a) Remington payments booked as advances - 1) Cash paid to Armstrong 2) Legal fees reclassified as advance 3) Hamilton Taft purchase costs reclassified as advance 4) Payment to IRS 5) Other transactions, net of adjustments and repayments Subtotal: Remington payments booked as advances b) c) d) f}

B Payments from Other Identified Sources: 1 Rental earnings 2 Loan repayments 3 Interest eamed 4 Other receipts

$55,046.89 152,052.20 5000.00 212099.09.

65,811.93 25,184.71 90,996.64

65,811.93 2S 184.71 90,996.64

232.730.19 615,008.12 49.945.27 31199.15 928,882.73

169,005.00 232,730.19 615,008.12 49,945.27 31 199.15 1,097,887.73

3,853.20 1,000.00 8,000.00 5000.00 186858.20

928682.73

3,853.20 1,000.00 8,000.00 5,000.00 1 115740.93

489,953.93

928,882.73

1,418,836.66

169,005.00

I

-9,662.90 2.500.00 1,886.33 2,481.87

C Payments frorn unidentified sources (See note 2 c) Total 1989 payments to or on behalf of eCA, Jr.

• •

Total

$55,046.89 152,052.20 5,000.00 212,099.09

169,005.00

Cash advanced by Chase PULEC Cash advanced by Chase Condo Cash advanced by Gulftex (PIF) Cash advanced by River City SUbtotal: Other payments from Affiliated Entities

Total payment from other identified sources

•

CCA Jr.

1989 PBymen s On Behaff afCCA Jr.

3 Other Payments From Affiliated Entities

Total Payments flom HTC and Affiliates

•

To

8-04

16,531'.10

16,531.10 I

58,688.21

58,688.21 I

I $565.173.24 $926,882.731 $1,494,055.971

•

•

Schedule 2

•

CONNIE C. ARMSTRONG, JR. SOURCE OF FUNDS Payments To Or On Behalf Of Connie C. Annstrong, Jr. 1990-1991 (See Accompanying Notes and Accountant's Report)

1990-91 Payments

• •

•

I A Payments from HTC and Affiliated Entities: A.-1 Compensation a) 1990-91 HTC salary, net 01 withheld taxes b} 1990-91 Remington salary. net ofW/H taxes d} 1991 Parker salary, net of withheld taxes Subtotal: Compensation A-2 Director Fees and Other Compensation a) Remington Director Fees b) CCAJ Director Fees c) River City Director Fees d) Remington "bonus· received 4/16J90 Subtotal: Director fees and other compensation

,

A-3 Proceeds from sale 01 2 Sladium Boxes

A-4 Payments Booked As Reimbursement Of Expenses a) Remington payments b) Hamilton Taft payments c) Combined deposits of both Remington and HTC payments which have not been distinguished Subtotal: Payrrents booked as reimbursements A-5 Other Payments From Affiliated Entities a) Remington/Knightsbridge payments

•

•

•

r

On BehalfofCCA, Jr. Other

Total

Ranch

$173,397.84 351,oaa.3B 17,200.32 541,686.54

$541,686.54

12,500.00 16,000.00 5,000.00 65,100.00 98,600.00

98.600.00

265.000.00

265,000.00

33,713.15 305,707.80

2.008.100.00

(SCh.2-A)

305,707.80

367.250.00

1,856,948.89

4,232,298.e9

I

b) Winthrop Payments:

8,729,000.00

1) Payments to or for Double C Ranch 2} Payments to Armstrong

I

Total payments from HTC and Affiliates

8 Payments From Other Identified Sources: B-1 Receipt noted "tlEP FROM 1~B9 &ALA GFS" B-2 l.!lan repayments rece.illed 8-3 Dividends received 8-4 Interest received 8-5 Reimbursements for travel expenses 8 -6 Other reimbursements

Total 1990-91 payments to CCA, Jr.

868,000.00

8.729,000.00 868,000.00

48,295.21 35 000.00 2959895.21

9,096,250.00

1.856948.69

48,295.21 35000.00 13,912,594.10

4,170,389.55

9,096,250,00

1.856,948.89

I

15,123.586.44

13,348.73 5,600.00

4,180.22 3,012.78 8.641.96 17,603.56 52,387.25

52,387.251

i $4,222,n6.8D

$9,096.250.00 $1,656,948.891 $15,175,975.691

Total payments trom other identified sources

•

CCA Jr.

223.732.68 48.261.97

c) Payments from Ranch accounts d) Payment from Chase Development Subtotal: Other payments from Affiliated Entities

•

To

B-05

•

& Schedule 2-A

•

CONNIE C. ARMSTRONG, JR. SOURCE OF FUNDS Payments To Or On Behan Of Connie C. ArmstrDng, Jr. 1990-1991 Detail Of Schedule 2 A-S (8): Other Remington/Knightsbridge Payments (See Accompanying Notes Bnd Accountant's Report)

1990-9 1 P avrnants

• •

•

I

To CCA, Jr.

On Behalf of CCA, Jr. Ranch Other

Total

Other Remington/Knightsbridge Payments: 1 1990 cash transfers to Armstrong $995,100.00 2 1990 cash transfers to Ranch accounts 3 1991 cash transfers to Armstrong 1,O13,~.OO 4 Remington 10/29/90 check: to David McCall 5 Knightsbridge 1/25/91 checks to McCalls 6 Knightsbridge payments for Aspen Condo 7 Remington purchase of 3 Stadium Boxes e Remington payments for improvements to Stadium Boxes g Payment to American Cancer Society for Red Jaguar 10 Payment to CNerseas MotolS for personal auto expense s , 1 Payment for Ranch truck 12 Cash advanced toltor Colfea International 13 Other expenses paid on behalf of CCA, Jr. Subtotal: cash transactions 2.008100.00

367,250.00

367,250.00

30,000.00 500,000.00 335,000.00 390.000.00 20,631.44 105,000,00 6.626.25 27,767.68 295,000.00 33,923.52 1 843,948.691

$995,100.00 367,250.00 1,013,000.00 30,000.00 600,000.00 335,000.00 390,000.00 20,631.44 105.000.00 6,626.25 27,767.68 295,000.00 33,923.52 -4 219,298.B9

14 Other Payments per Armstrong Unidentified entry in CCA, Jr. Transaction Report Subtotal

Total other Remington/Knightsbridge payments

• • • • •

8-06

$2008100.00

13.000.00 13.000.00

13,000,00 13.000.00

$367 250.00 $1 855948.89

$4 232298.89

I

• Schedule 3-A CONNIE e. ARMSTRONG, JR. APPUCATION OF FUNDS For the period January 1, 1989 through June 15, 1991 (See Accompanying Notes and Accountant's Report)

• •

• •

Date 1 Double C Ranch: a) Acquisition of Property: 1) Purchase of Stieler Parcel (See Note 4) 2) Purchase of Williams Parcel b) Advances for Ranch operations c) Payments for Ranch improvements d} Purchases of liveslOck & equipment

Payment From eCA, Jr. Account

Payment From Affiliate Account

Various Various Various

57,969.88 42,152.00 90,979.00

1,023,439.21 1,060,797.25 512,013.54

$72,429.04 6,500,000.00 1,081.409.09 1,102,949.25 602.992.54

Total payments associated with D.Duble C Ranch

$263.529.92

$9.096,250.00

$9,359.n9.92

$615,008.12 232,730,19 847,738.31

$615,008.12 232,730.19 33,000.00 880,738.31

847,738.31

4,000.00 884,738.31

12/04/89

$72,429.04

Total

6,500,000.00

02/09f,1J

2 Investment Costs and Expenses: a) Acquisition of Hamilton Taft & Co. (See Note 3): 1) Payment to Stanley Rosenberg 05/01/89 2) Legal fees paid by Remington 3) Armstrong purchase of stock 06/2.0/89 Subtotal

33.000.00

33,000.00

4) Other payments to Hamilton Taft & Co.

4,000.00

(No purpose designated) Totsl payments to or for HTC acquisition

37,000.00

Jan-91 35-0,000.00 b) Investment in Pro-Rodeo, Inc. In addition to to this investment in Pro-Rodeo, Inc.. Winthrop paid $1.5 million, in september 1990. for an investment in Rodeo Partners.

•

c)

350,000.00

"295,000.00

Investment in Coffea. International

295,000.00

d) Other lnveslment Payments: 1) Armstrong's payments for Winthrop Realty Company,

•

Knightsbridge Guarantee Company. Knightsbridge Company. and CCAH. Inc. 2) Bank One Cashiers Check dated 11/05/90 (Classified as an Investment expense) 3) Other payments classified as iTlVes1ment expenses Subtotal: Other investment payments

1,030.00

1,030.00

105,102.50

105,102.50 884.63 1,636.755.44

884.63 494,017.13

1,142,738.31

e) Trading Losses

•

Losses experienced by Armstrong with investments through Merrill Lynch account

Various

Total investment costs and expenses

$500,027.68

• •

6,010.55

B-07

6,010.55· $1,142,738.31

$1.642.765.99

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

•

•

• •

Schedule 3-8

CONNIE C. ARMSTRONG, JR. APPUCAllON OF FUNDS For the period January 1,1989 through June 15, 1991

(See Accompanying Notes and Accountant's Report)

Date

•

Payments for 3 Stadium Boxes Payments 10r improvements to Stadium Boxes Payments associated with the purchase 01 vehicles Purchase of fumiture 1) Purchase of artwork Total acquisition of personal property

•

4 Charitable and Political Contributions: a) Charitable Contributions: American Cancer Society Cancer Research Cattle Baron's Ball Christian Service Contributions to churches Dallas Opera Ball Family Gateway Institute 10r Policy Innovation (IPI) Multiple Sclerosis Society St. Judes Research Yellow Rose Gala Other charitable contributions

66,079.41 14,656.84 6,564.47

Total

$335,000.00 390,000.00 20,631.44 132,767.68

$335,000.00 390,000.00 20,631.44 198,847.09 14,656.84 6,564.47

$B78,399,12

$965.699.84

10,000.00 4,200.00 10,000.00

68,500,00 100,000.00 5,Ooo.OD 75,000.00 275,800.00 5,000.00 10,000.00 7,151.68

603,701.68

b) Political Contributions: Beau Boulter Senator Buster Brown Doman for Congress Kent Hance Warren Harding Rob Mosbacher Senator David Sibley Clayton Williams Other political contributions

41,000.0080,000.00-

2,000.00 54,000.0010,000.00 60,000.00-

10,000.00 100,000.00 4,000.00 361,000.00.

Total charitable and political contributions

• •

Account

$33,050.00

SUbtotal: Political contributions

•

Account

$87.300.72

Subtotal: Charitable contributions

•

Payment From Affiliate

:3 Acquisitions of Personal Property B) Payments 10r Aspen Condo b) c} d) e)

•

Payment From CCA, Jr.

8-08

$964,701.68

$964,701,68

• Schedule 3-C CONNIE C. ARMSTRONG, JR. APPUCATJON OF FUNDS For the period January 1, 1989 through June 15, 1991 (See Accompanying Notes and Accountant's Report)

• • •

Date 5 Payments for Professional Services: Meadows Owens (Criminal Defense) Meadows Owens (Criminal Defense) Meadows Owens (Criminal Defense) Subtotal

03/22/91 03/26/91 04/04/91

$0.00

7 Credit Card Payments: Payments on American El<press card Payments on VISA card

•

$465,398.67

04/30/90

05/31/90 3) Payment to Remington (Stadium Box Sales) 03/25/91 4) Payment 10 Knightsbridge (Stadium Bx Stiles) 04/19/91 04/19/91

$30,000.00 600,000.00

$630.000.00

$630.000.00

$465.398.67

$8,225.00 3,nS.00 140,000.00 100,000.00 25,000.00

2n,OOO.OO

b) Repayments to Julius D. SHafer Monthly principal and interest payments during the period January 1. 1990 through June 15, 1991

Total

600,000.00

$384,439.39 80,959.28

Total credit card payments

5) Payment to Remington (Stadium Box sales) Subtotal: Repayments to Remington

$742,735.75

$30,000.00

10/29/90 01/25/91

Total loans and advances to third parties

•

Total

25,000.00 700,000.00 10,000.00 735,000.00

$742.735.75

6 Loans and Advances to Third Parties: a) Payment to David McCall b) Loans to McCalis

8 Repayments of Loans and Advances: a) Repayments to Remington: ') Payment to Remington 2) Payment to Remington

Payment From Affiliate Account

3,306.00 1,117.25 3,312.50

Eppright & Golembeck Goodwin Canton Other professionals Total payments for professional services

•

Payment From CCA, Jr. Account

repayment of loans and advances

41,122.20 $324.122.20

$324,122.20 (

• • •

9 Payments to Friends, Relatives & Employees: Payments Characterized As Loans - Connie C. Annstrong, Sr. (Father) (Fiance) Honey Gregory J.J. Kissee (Remington Employee) Terri Robbins (Remington Employee) Subtotal: payments characterized as loans

8-09

$5,121.00 42,500.00 2,000.00

32,407.57 82,028.57

•

• •

•

• •

Schedule 3-D

CONNIE C. ARMS-mONG, JR. APPUCATlON OF FUNDS For the period January 1, 1989 through June 15, 1991 (See Accompanying Notes and Accountant's Report) Payment From CCA, Jr. Date Account (Payments to Friends. Relatives & Employees - Continued) Payments Characterized As Gifts -(Mother) (Medical Expenses) 37,186.67 Harriette Annstrong Whitney FlSche (Noted as 'Miss Texas") 11.000.00 Nancye Meyer (Ex-Wife) 35,768.29 10,000.00 Punk Carter Susan Steffer (Friend) 23,400.00 Subtotal: payments characterized as gifts 117,354.96 Other Payments - Boone Armstrong Ed Ballard Christine Grambling Nancye Myer Patti Montague Tim McCall EmieMcCoy Terri Robbins Subtotal: other payments

(Brother) (Remington Employee) (Hamilton Taft Officer) (E)(-Wife) (Remington Employee) (Remington Employee) (Remington Employee)

Total payments to friends, relatives & employees

Payment From Affiliate Account

Total

8,000.00 5,316.12 6,450.0n 34,533.32.

20,420.05 4,800.00 2,500.00 14,168.24 96,187.73 $295,571.26

$295.571.26

10 Household Expenses:

•

Cleaning Domestic salaries & payroll taxes Flowers Groceries and beverages Interior decorating

•

Reimbursements paid to other indrviduals Repairs and maintenance Telephone expenses Utilities Other miscellaneous house expenses

$2,702.26 56,121.89 10,329.70 22,883.75 15,354.74 10,541.42 13,321.27 79,352.41 7,369,08 40,734.21 15,379.12

~ndscaping

$274,089.85

Total payments for house expenses

•

11 Taxes Paid: Income Taxes Penalties paid to IRS Payroll taxes paid Property taxes paid Total paymenl of taxes

•

•

B-10

$274,089.85

$75,042.84 3,543.00 3,639.67 7.408.08

$49,945.27

$124,988.11 3.543.00 3,639.67 7,408.08

$89,633.59

$49,945.27

$139,578.86

• Schedule 3-E

• •

• •

•

CONNIE C. ARMSTRONG, JR. APPUCATlON OF FUNDS For the period January 1, 1989 through June 15, 1991 (See Accompanying Notes and Accountant's Report)

Date 12 Other Personal Expenses: Payments to Identified Retailers Ashford- Trent (Manufacturing Jeweler) Neiman Marcus Victor Costa (Woman's Boutique) Tom James (Men's Clothier) Stanley Korshak (Fumer: furs purchased as Christmas gifts) Subtotal: Payments to identified retailers Other Personal Expenses Automobile expenses Cash withdrawals Child care and support payments Dallas Cowboys tickets Dues payments Payment to 'Fanuous" Medical expenses Rental property expenses (Identified as The Shelton) Settlement paid to Epprighl & Golombeck Triad Artists payment Travel expenses other payments characterized as gifts Other miscellaneous personal expenses Total other personal expenses

Grand total of items 1 - 12

•

Funds wfth uncertain applications (see note :2 a) Payments to unidentified payees (see Note 2 d)

Tolal application of funds

• B-11

Payment From Affiliate Account

Total

$19,714.36 15,979.20 20,356.40 29,000.49 98,391.64

$19,714.36 15,979.20 20,356.40 29,000.49 96,391.64

183.442.09

183,442.09

6,626.25

18,824.69 175,138.00 3(),975.00 5,562.00 12,771.28 6,250.00 8,278.74 27,874.38 18,278.00 12,500.00 13,958.07 27,760.81 14-2,515.95

12,198.44 175,13B.00 30,975.00 5,562.00 12,n1.28 6,250.00 8,278.74 27,874.38 18,278.00 12,500.00 13,958.07 27,760.81 64,393.28

78,122.67

$599,380.09

$84,748.92

$684,129.01

$4,600.491.41

$11,882,OB1.62

$16,488,573.03

77,833.34 18,856.41 $4.703.181.16

•

•

Payment From CCA, Jr. Account

n,833.34 18,856.41 $11,882,081.62

$16,585,262.78

.'

•

•

CONNIE C. ARMSTRONG, JR. NOTES TO SOURCE AND APPLICATION OF FUNDS January 1, 1989 Through June 15.1991

• •

Note 1: Sources of Information

•

The information in the Source and Application of Funds is based on documents provided to Frederick S. Wy1e, Trustee in Banlauptcy for HamiltDn Taft & Company by Larry D. Gillilan, accountant for Mr. Armstrong. These documents include the following: a)

•

Report of 1989 Cash Received and Cash Disbursed This report was compiled by Mr. Gillilan. Mr. Gillilan reconstructed this report during 1991 and it includes cash transactions in the following accounts: 1)

Guaranty Federal Savings Bank checking account 66-0427617 for the period May 31, 1989 (date of initial deposit) through December 31, 1989 (date of

report).

• b)

•

• • •

2)

United Bank and Trust checking account 6105953 for the period January 1, 1989 (this account reflected a balance forward from 1988) through December 31, 1989 when this account reflected a balance of $332.96.

3}

Texas American Bank checking account #0164590 for the period February 13, ]989 (date of initial deposit) through August 3, 1989 (date of closing withdrawal) .

Transaction Reports for the period January I, 1990 through June 15. 1991. These Transaction Reports summarize cash receipts and disbursements through five personal accounts kepf by Mr. Armstrong as follows:

1)

Bank One checking account #102056389 for the period March 1, 1990 (date of initial deposit) through June IS, 1991 (date of Transaction Report). This account is noted as the "Personal" checking account.

2)

Bank One checking account #102070992 for the period March 20, 1990 (date of initial deposit) through June 15, 1991 (date of Transaction Report). This account is noted as the "Expense" checking account.

3)

Guaranty Federal Savings Bank checking account #6-0427617 for the period January 1, 1989 (inception of Transaction Report) through May 3, 1990 (date of closing withdrawaJ).

B-12

•

•

CONNIE C. ARMSTRONG, JR. NOTES TO SOURCE AND APPLICAnON OF FllNDS January I, 1989 Through JUDe 15,1991

• •

• •

•

4)

Lindale State Bank chocking account #12-Q724-5 for the period March 7, 1990 (date of initial deposit) through June IS, 1991 (date of Transaction Report). This account is DOted as the "Household" checking account.

5)

Merrill Lynch Cash Management Account, #425-19374, for the period January I, 1990 (inception of Transaction Report) through June IS, 1991 (date of Transaction Report).

In addition to these reports, copies were provided of supporting documentation kept by Mr. Gillilan for each account during the 1990 through June 15, 1991 time period. This supporting documentation typically included bank statements, bank reconciliations and selected copies of issued checks, checks received and deposited, and various documents supporting those receipts and disbursements. In some instances, this supporting documentation included infonnation about 1989 transactions aJthough these early documents were not complete. Note 2: Discrepancies Observed In Reported Transactions: a)

•

• •

Funds With UncerUiin Applications· $77,833. Deposits for identified AffJ.1.iate payments to Mr. Annstrong amounting to $77 ,833, have not been identified in Mr. Armstrong's personal fmancial records. Compensation paid by Remington and Hamilton Taft amounting to $37,697 and reimbursed expenses paid by Remington of $40,136, for total payments of $77,833 were not identified as deposits in Mr. Armstrong's records. During 1989, Remington and Hamilton Taft's accounting records reflect compensation of $212,099 as having been paid to Mr. Armstrong. However, Mr. Armstrong's 1989 records reflect corresponding deposits of only $174,402, wbich represents a difference of $37,697. In addition, Remington's accounting records reflect payments of reimbursed expenses during 1989 of $65,812, whereas Mr. Annstrong's records reflect corresponding deposits of only $25,676, which represents a difference of $40,136. The combined difference of $17,833 is presented in the Source and Application of Funds as funds with uncertain applications.

•

•

B-13

CONNIEC. ARMSTRONG, JR. NOTES TO SOURCE AND APPUCATION OF FUNDS January 1, 1989 Through June 15,1991

• •

Other payments made by the Affiliated Entities to Mr. Armstrong have been traced to deposits in his personal accounts. These traced payments include: a) the 1990 and 1991 compensation reported by Remington and Hamilton Taft; b} payments to Mr. Armstrong classified as advances to Mr. Armstrong; and c} payments to Mr. Armstrong classified as repayments under notes payable. At this time, Remington's reimbursements for 1990 and 1991 and Hamilton Taft's reimbursements for 1989 through 1991 have not yet been analyzed.

• b)

•

-

c)

Unidentified 1989 Deposits of $58,688. Several 1989 deposits amounting to SSB,688 are listed by Mr. Gillilan with no payor or otber source of funds indicated. The largest unidentified deposit is a December 15, 1989 deposit to the Guarantee Federal Savings account in the amount of $33,288.68. These deposits often represent the receipt of severnl checks, which makes it difficult to identify them through comparison to payments by the Affiliated Entities. Consequently. these receipts are labelled as payments from unidentified sources without distinction between third party or Affiliated Entity sources.

d)

Payments to Unidentified Payees Payments by Mr. Armstrong amounting to S18,856.41 have Dot been identified in the Armstrong accounting records as to payee or classification of expenditure. These payments include a $5,000 wire transfer on April 18, 1991 and a May 20, 1991 cash withdrawal for a cashier's check in the amount of $4,000.

• •

•

Missing 1989 transactions for the Merrill Lynch Cash Management Account. The scope of Mr. Gillilan's report does not include 1989 ttaD&3.ctions in Mr. Annstrong's Merrill Lynch Cash Management Account, although this acwunt is included in the 1990-91 Transaction Reports. Mr. Gillilan does identify 1989 transfers of $100,000 to the Menill Lynch account and a ttaDsfer of $50,000 received from the Merrill Lynch account for net transfers to Merrill Lynch of $50,000.

The supporting documentation includes sufficient information on the 1989 transactions in tbe Merrill Lynch account to reconstruct the 1989 activity in this account. This analysis identifies 1989 interest earnings of $1,181 and expenditures for VISA card payments of $29,136, withdrawals for service fees of $90 and withdrawals for losses experienced on trading activity of $4,205. The remaining balance of $17,750 represents the outstanding balance of cash and investments carried forward to the January I, 1990 balance for the Merri]] Lynch account in the Tran&3.ction Report. This reconstructed activity has been included in the Source and Application of Funds under the relevant headings.

•

•

•

•

•

8-14

•

•

CONNIE C. ARMSTRONG, JR. NOTFB TO SOURCE AND APPLICAnON OF FUNDS January 1, 1989 Through June 15,1991

• •

In addition to these unidentified applications, there was a November 5, 1990 withdrawal for a cashier's check in the amount of $105,102.50. This cashier's check was classified in the Transaction Report as an "Investment Expense Other" and consequently I it has been included in the Source and Application of Funds under the heading "Investment Costs and Expenses" at Schedule 3-A in Item 2 (d) (2).

•

Armstrong's personal accounting records also show cash withdrawals amounting to $175,138 (See Schedule 3-E). Although the subsequent application of these funds is not accounted for in the Mr. Annsoung accounting records, tbey are typic.alJy characterized in those records as personal expenditures or advances for reimbursed business expenses. The cash withdrawals were typically in the amounts of $2,000 to $7,000 each. The lMgest single cash withdrawal was for $15,000.

• e)

• •

•

Unrecorded Expenditures (April 1991 Through June 1991) of $9,419.82. The Transaction Repon indicates a June 15, 1991 balance in the Lindale checking account (tbe Household account) of $9,467.15, whereas the last bank statement provided for this account reflects a balance of $47.33 as of May 31, 1991. Furtber evaluation of the Transaction Report indicates that checks written after mid-April 1991 had not been entered in the Transaction Repen. Consequently, the ending balance for this account, as shown on the Transaction Report, overstates the ending cash balances by approximately $9,420. Since this account was used primarily for housebold expenses, this difference has been included in the Source and Application of Funds as expenditures for groceries and beverages under item #10 "Household Expense" on Schedule 3-D.

Note 3: Affiliates' Characterization of Payments to Connie C. Armstrong,

Jr~

•

The transfers by Remington and Knightsbridge to Mr. Annstrong are recorded in the books of these entities as either advances to Mr. Armstrong or as repayments of a Dote from Remington to Mr. Armstrong for $1.5 million dated Febmary 9, 1990. The Remington and Knightsbridge payments for the 1990-1991 period totals $4,232,299, as shown for item A-5 (a) in Schedule 2. This amount includes cash payments to Mr. Armstrong's personal accounts of $2,008,100 and payments to the Double C Ranch accounts of $367,250.

•

The note payable arose from a $9.8 million loan from Hamilton Taft to Winthrop Realty, which Winthrop Realty in tum loaned to Mr. Annstrong, for the purchase of Double C Ranch. Out of the total loan proceeds, $1.8 million was not required for the February 1990 purchase of Double C Ranch and was instead transferred from Winthrop to Remington. Remington accounted for these funds by crediting $300,000 against Mr. Annstrong's

•

B-15

•

•

CONNIE C. ARMSTRONG, JR. NOTES TO SOURCE AND APPLICAnON OF FUNDS January 1, 1989 Through June 15,1991

• • •

•

employee receivable account and by executing the $1.5 million Dote to Mr. Armstrong. Total cash payments of $1,937,100, consisting of $1,717,100 paid to Mr. Armstrong's personal accounts and of 5220,000 paid to Double C Ranch accounts, were classified as loan repayments. When the payments classified as loan repayments exceeded the amount of the loan during Marcb 1991, this excess was reclassified and combined with other advances included in Mr. Armstrong's employee receivable account.

Note 4: Hamilton Taft & Company Acquisition Costs:

•

a)

PuTChase of Additional Hamilton Taft & Company Stock On March 29, 1989, in settlement oftbe MaxPharma Litigation, Mr. Annstrong acquired 100% of the capital stock of CR Acquisitions, Inc., which in tum beneficially owned 100% of the capital stock of Hamilton Taft. Mr. Armstrong's personal accounts reflect no payments associated with this acquisition. On May 25, 1989 Hamilton Taft authorized a 1 for 1,000 reverse stock split of the

• • •

Company's common stock and set the par value at $1 per share. Hamilton Taft also authorized 10,000 sbares of Class A preferred stock. Mr. Annstrong purchased additional shares of common and preferred stock with two checks dated June 20, 1989 in the total amount of $33,000. These checks cleared the bank on July 24, 1989, the same day that the bank records a deposit of $33,000. The July 24, 1989 deposit of $33,000 represents the proceeds of a loan from Dresdner Investments, Inc., an Annstrong company which appears to have been used for about six montbs in 1989. This loan was characterized in Dresdner Investment' s accounting records as a "loan to Chip for stock". This loan receivable was subsequently transferred to Remington where it was included with other transactions categorized as an employee receivable from Mr. Armstrong.

me

Dresdner Investments re:eived cash tnlnsfers from' Hamilton Taft of $3,248,000 during the period April 6, 1989 through July 31, 1989. These transfers represented the only material source of funds to Dresdner Investments.

• •

8-16

• CONNIE C. ARMSTRONG, JR. NOTES TO SOURCE AND APPLICATION OF FtJNDS January 1, 1989 Through June 15,1991

• •

b)

•

Payment to Stanley Rosenberg - $615,OOS.U On May 1, 1989, a cashier's check in the amount of $615,008.12 was purchased with a Dresdner Investment check number 1002. As part of the MaxPbarma settlement agreement, under which Mr. Armstrong acquired Hamilton Taft, he agreed to pay a

promissory note, with a principal amount due of $600,000, owed by MaxPharma to Mr. Rosenberg. The payor shown on this check: is titled ftDresdner Investment & Capital Corp.; Hamilton Taft Operations". This payment by Dresdner Investment was characterized as an advance to Mr. Annstrong. This receivable balance was subsequently tnnsferred to Remington where it was included with other transactions categorized as an employee receivable from Mr. Armstrong.

• c)

Legal Fees Paid By Remington - $232,730.19

On October 31, 1989, a journal entry on Remington's books reclassifies legal fees of $232,730.19 as a receivable from Mr. Armstrong. These legal fees are characterized as having been incurred prior to April 1989 and they are subsequently included as a component of the Hamilton Taft acquisition costs.

• •

• •

•

d)

Subsequent Disposition of Hamilton Taft Acquisition Costs The Hamilton Taft acquisition costs, which amounted to $880,738, were subsequently transferred to CCAH Corporation, which later became Knightsbridge Company, Inc. Knightsbridge (as CCAH) purchased the stock of Hamilton Taft from Armstrong in March of 1990 for a promissory note of $880,738.

Note 5: Acquisition of Stiefer Property

The Double C Ranch includes two parcels: a) a smaller Stiefer parcel; and b) a larger Williams parcel. The William s parcel was purchased by Armstrong through a $9.8 million loan from Hamilton Taft to Winthrop Realty Company. This purchase is accounted for in the Transaction Report, but the 1989 purchase of the Stiefer parcel has not been accounted for in the 1989 accounting records provided to the Trustee. The casb down payment for the Stiefer parcel appears to have occurred through a withdrawal from Mr. Armstrong's Guarantee Federal Savings account in the amount of $72,426.04 for a cashier's check payable to Smith County Abstract Co., on December 4, 1989. Mr. Armstrong's supporting documents characterize this payment as for the "purchase of propeny".

B-17

•

• •

• • •

•

• • •

•

CONNIE C. ARMSTRONG, JR. NOTES TO SOURCE AND APPLICATION OF FUNDS January 1, 1989 Through June 15,1991

Mr. Armstrong's supporting documents also include a Promissory Note in the amount of $181,912. This note is signed by Connie C. Armstrong, Jr., as purchaser, on November 17, 1989 and is payable to Julius Doyle Stiefer as seller. This note is secured by a Deed of Trost on 121.862 acres in Smith County, Texas. Mr. Armstrong made periodic payments of principal and interest to Mr. Stiefer during 1.990 and 1991 from his personal checking account. In 1991, Mr. Armstrong requested the Trustee's consent, which was given, to execute a deed in lien of foreclosure on.the Stiefer parcel, returning the property to Mr. Stiefer.

Note 6: Cash Transactions Prior to March 29, 1989: Prior to Mr. Armstrong's acquisition of Hamilton Taft, loan proceeds represented the primary source of funds in Remington, and Remington used Hamilton Taft funds to make payments on these loans after Mr. Armstrong acquired control of Hamilton Taft. During the period October 1, 1988 through March 31, 1989, Remington's general ledger reflects cash receipts net of returned funds of $649,636. These receipts include loan proceeds amounting to $646,009 which were comprised of: a) $300,330 from United Bank & Trust loans; b) $185,000 from an October 28, 1988 Hamilton Taft loan; and c) $160,679 from Jim Lindsey Insurance Agency loans. During this period, Jim Lindsey Insurance Agency was paid $29,117.50 against the outstanding loan balances but there were no cash payments to the other lenders reflected in Remington's general ledger.

As described in Note 3 above, DresdDer Investments began to receive cash transfers from Hamilton Taft on April 6, 1989. The cash transfers from Hamilton Taft in Dresdner Investment's account were in some instances used to pay prior expenses of Remington. During April 1989, Dresdner Investments made payments of $303,353 against these prior loan balances including an April 14, 1989, payment of $253,335 to United Bank & Trost and an April 17, 1989 payment of $50,000 to Jim Lindsey IDsuJ:ance Agency.

Other prior expenses paid with Hamilton Taft funds include fees paid to Godwin, Carlton and Maxwell, the law finn that represented Mr. Armstrong in his litigation against MaxPharma. Prior to March 31, 1989, no payments to Godwin, Carlton and Maxwell were made from Mr. Ann strong,s personal accounts or from the accounts of Remington. The first payment observed occurs on April 17, 1989 with a S130,000 payment to Godwin, Carlton and Maxwell with a check drawn on the Dresdner Investment's cash account. Neither Remington nor Mr. Armstrong bad significant cash resources immediately prior to the acquisition of Hamilton Taft. Remington began this period with a cash balance of

B-18

•

• •

•

•

&

CONNIE C. ARMSTRONG, JR. NOTES TO SOURCE AND APPliCATION OF FUNDS January 1, 1989 Through June 15,1991

$19,046 on October 1, 1988 and ended this period with a cash balance of $16,264 on March 31, 1989. The personal cash accounts identified by Mr. Annstrong reflect a beginning cash ba.1aJlce of $529 on December 31, 1988 and a cash balance of $413 OD March 31, 1989. During the first quarter of 1989, his receipts and disbursements were only $22,475 and $22.491, respectively. His receipts and disbursements increased substantially after his acquisition of Hamilton Taft..

•

• • • •

•

6-19

• •

• •

•

APPENDIX C CREDITORS CLAIMS

• • • •

•

•

• • SUMMARY OF CREDITORS CLAIMS

•

CONSOUDATED ESTATE

•

•

Maximum Potential Claims

Hamilton Taft Customer Claims

$ 91,925,160.61

S 90,790,426.62

$ 95,123,932.26

Hamilton Taft Employee Claims

82,975.21

198,393.09

204,673.85

Hamilton left Trade Claims

1,894,052.76

1,346,135.60

1,535,519.13

Other Hamilton Taf1 Claims

0.00

112,29B,nO.21

112,298,770.21

505,932.59

574,288.22

970,665.90

10.007.25

46.992.66

47.332.57

$ 94,418,148.42

$ 205,255,006.40

$ 210,181,093.92

Remington Claims Dresdner Enterprises Claims

TOTAL

$100,151,093.92

TOTAL CLAIMS EXCLUDING SOLODOFF

•

DRESDNER PETROLEUM

•

Scheduled Amounts Dresdner Petroleum Claims

371,376.03

• •

•

Proof of Claim Amounts

Scheduled Amounts

covshl.doc

C-1

Proof of Claim Amounts

651.060.93

Maximum Potential Claims

731,286.55

•

•

• NOTES TO LISTS OF CLAIKS

•

• •

1. The list of claims includes all claims and amendments filed on or before October 18, 1991. The listing of a claim or amendment filed after the bar date of september 30, 1991 does not constitute a waiver of the trustee's right to object to the claim on the ground that it was untimely filed. 2. nScheduled Amount n means the amount stated to be owing to the creditor in the Schedules of Assets and Liabilities fired by the respective Debtors. The nproof of Claim Amount" is the amount claimed to be owing by the creditor in a proof of claim filed with the Court. If no- proof of claim was filed, the "Maximum Potential Claim" is the Scheduled Amount. If a proof of claim was filed, the "Maximum Potential Claim" is the "Proof of Claim Amount", regardless of whether the proof of claim amount is higher or lower than the Scheduled amount. The "Maximum Potential Claim" does not constitute any admission by the trustee that the claim is allowable in the amount stated, and all objections are reserved. 3. All duplicate claims have been eliminated for the purpose of the list. If a proof of claim was filed against more than one Debtor, it appears only once.

4. The list of claims does not include any intercompany claims of any Debtor against another Debtor, or of any non-Debtor affiliate against a Debtor.

•

5. The list of claims does not include any classification as to priority.

• • • •

NTS219. DOC

C-2

• CONSOLIDATED Blinn: HAMIL1'ON

~

•

CUSroNBR CLAIMS

I

lJ1!c,

o

CREDITOR ACTION INSTRUMENTS CO., INC. ADVO-SYSTEM, INC. AIR CABLE, INC.

•

•

CORPORATION AMERICA WEST AIRLINES, INC. AMERICAN MICROSYSTEMS, INC. AMERICAN NUKEM CORPORATION AMERICAN RESIDENTIAL ESCROW AMERICAN RESIDENTIAL MORTGAGE ANALYTI KEM ARRAY TECHNOLOGY CORP. ~~~DcrA~EP COIN AMUSEMENT CO ATLAS HOTELS INC. BALCOR PAYROLL COMPANY BARCLAY HOLLANDER CORP BEEBE ORCHARD CO. BLU~ CRC~5 & BLUE SHIELD OF TX BLUE GOOSE GROWERS INC. BLUE GOOSE GROWERS, INC. BOARD OF TRUSTEES, STANFORD BOSTON " MAINE CORPORTATION BOSTON " HAINE CORPORTATION BOYLE MIDWAY INC, BOYLE-MIDWAY BRINKMANN INSTRUMENTS BRUNSWICK SEAT COMPANY BUD ANTLE, INC. BUD ANTLE, INC. BW / IP INTERNATIONAL, INC.

ALLEN FOAM

C " R CLOTHIERS

•

CALIFORNIA PACIFIC MED. CTR. CARTEX CORPORATION CASTLE & COOKE CASTLE & COOKE PROPERTIES CASTLE & COOKE RESIDENTIAL CASTLE

•

~

OOO~,

INC.

CASTLE COOKE RETAIL, INC. CITY OF PIEDMONT CITY OF PINOLE CITY OF' PINOLE CLFu.~::!> CORPORATION CLEVITE BRIDGESTONE CO. COAST FEDERAL BANK OOVIA PARTNERSHIP CYANOKEM

• •

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 U~GUSSA

SCHEDULE~LI d ~'i{ ______________L AMOUNT 5ioIl.·•• t}. $92,092.84 $1,779,836.08 $24,966.22 $3,226.23 $834,725.41 $267,401.62 $32,79B.B5 $849.68 $156,040.21 $31,184.29 . $35,106.01 $8,407.32 $167,024.91 $12,211.47 $3,617.50 $14,489.18 $1,156,576.76 $274,931.33 $6,285.72

AMOUNT

f\ll;~ljJ

$96,654.31 $1,796,288.32

~

MAXIMUM

POTENTIAL CLAIM $96,654.31 $1,796,288.32. $24,966.22 $~,226.23

$834,725.41 $268,237.64 $32,798.85 $175,862.00 $31,184.29 $10,218.74 $166,607.00

$1,257/~23.47

$296,991.48

$845.20 $5,572.54 $4,314.91 $7,618.24 $72,034.16 $1,096.B8 5229,477.87 $890,046.07 $370,697.23 $324,523.13 $1,106,353.90 $24,663.04 $1,889.86 $28,848.13 $74,588.42 $223,640.91 $27,522.14 $3,578.58 $2,843.17

$268,237.64 $32,798.85 S849.68 $1. 7S ,.862.00 $31,184.29 $35,106.01 $10,218.74 $166,607.00 $12,211.47 S3 J 617.S0 514,489.18 $1,257,623.47 $274.,931.33 $6,285.72 $296,991.46 $845.20 $5,572.54,....-

$4,314.91 $7,618.24 $72,034.16 S1,096.88

$386,932.78

$229,477.87 $890,046.07 $386,932.78 5324,523.1.3

$1,102,264.05

$1,102,264.05 $24,663.04 $1,889.86 $28,848.13 $74,588.42

$1,793,303.81 $49,063.07 $746,680.7B $22,552.14 $14,905.38

$1,792,401.81 549,063.07 $977,077.10 $22,851.14

$223,640.91 $27,522.14 $3,578.58 $1,221.71 $3,232.54 $164,332.89 52,733.94 $7,476.29 $1,792,401. 81 S49,063.07 $977,077.10 $22,B51.14

$47,209.72

S50,209.72 $7,421. 34 53,142,906.64

$50,209.72 $7,421.34 53,142,906.64

$45,352.57 $1.38,982.22 5710,506.56

$108.26 $45,352.57 $138,982.22 5710,506.56

S164,378.45 $2,733.94

$1,211.71 53,232.54 $164,332.89 $7,476.:29

$5,986.84 $1,592,062.34 $108.26 $45,012.29 $117,950.60 5710,506.19

02/19/92

•

PROOF OF CLAIM

C-3

$14,905.38

•

•

COHSOLIDA'1'EJ) ESTATE HAMILTON TAP"l' CUSTOMER CLAIMS

MAXIMUM

• • • •

CREDITOR FEDERAL EXPRESS CORPORATION 3.J, ....\, FIRST CAPITAL LIFE INSRNCE CO. GENSTAR STONE PRODUCTS COMPANY GLENDALE ADVENTIST MED. eTR. GUCKENHElKER ENTERPRISES, INC. GUCKENBElKER OF TEXAS, INC. H.D. HUDSON MANUYACTURI~G CO. HBO & COMPANY OF GEORGIA HEALTHQUEST 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. LUCASFILM, LTD. KASON, NUGENT & COMPANY MABON, NUGENT ,. COMPNAY MAINE CENTRAL RAILROADS CO. MCCUTCHEN,DOYLE,BROWN& ENERSEN MCI TELECOMUNICATIONS CORP. HETROMEDIA COMPANY

HILLS 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 INC. NORWEST PUBLISHING CO. NUKEH ACQUISITION CORPORAT!ON NlJJ(EH TECHNOLOGIES CORPORATION OAHU TRANSPORT co., LTD. OAKLAND ATHLETICS BASEBALL CO. OBS FINANCIAL SERVICES OCEANIC CONSTRUCTION COMPMY PAYLESS SHOE SOURCE POLYTECHNIC UNIVERSITY R.R. CONNELLEY & SONS COMPANY RECKITT , COLEMAN INC. RECKITT & COLEMAN INC. RICHMOND WHOLESALE MEAT co. RIVERSIDE SEAT COMPANY, INC. RKO GENERAL INC. RH MARKETING INc. ROCHESTER INSTITUTE OF TECH. ROOT-LOWELL MANUFACTURING CO. ROSS STORES, INC. s & S CREDIT COMPANIES, INC. S.D. WARREN CO.

SCHEDULED AMOUNT

$30,432,796.91 $127,193.73 $518,023.25 $625,353.80 $95,403.19 $9,072.69 $100,556.49 $420,317.80 $203,803.91 $1,027.79 $894.46 $157,862.79 S16/422~46

$1,078.73 5114,888.19 $3,550.91 $9,899.80 $218,065.99 $21,432.34 $954,798.68 $2,000.00 $411.01 $99,993.14 $102.95 $60,685.10 $2,163.98 $660,777.55 $146,033.47 $68,911.30

$14,454.42 $285,282.60 $2,686,12'7. 26 $7,234.95 $45,237.26 $79.62 $24,700.27 $2,209.85 $90,365.04 $4,779.92 $38,607.53 $271,349.37 $581,564.39 $4,243,286.64 $1,B88,208.34 5246,309.17 $43,424.27 $16,828.57 S4,420.63 $5,231.14 S105,673.57 $35,745.10 5701,843.46 $158,929.53 $3,206,607.68

02/19/92

•

C-4

PROOF OF CLAIM

POTENTIAL

AMOUNT

CLAIM

$28,319,089.05 $139,054.00 $603,765.00 $625,709.80 $98,091.81 $9,474.00 $101,862.64 $421,924.80 $230,626.01

S894.46 $157,862.79 $16,814.98 $1,078.73

$9,786.79 $231,857.32 $22,175.84 $985,407.53

$100,959.51 $61,317.00 $11,508.89 $650,777.55 $160,724.60 $84,147.82

$330,591.69 $553,250.70 $7,690.18

$24,700.27 $90,499.42

$1,052,856.30 $640,704.98 $5,143,366.45 $2,471,860.77 $45,222.87 $4,643.63

$36,340.00 5101,843.46

53,206,607.68

$28,319,089.05 S 139, 054.00 $603,765.00 $625,709. eo $98,09L81 $9,474.00 $101,862.64 $421,924.80 $230,626.01 $1,027.79 $894.46 $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 S100,959.51 $102.95 $61,317.00 $11, SOB. 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 S79.62 $24,700.27 $2,209.85 $90,499.42 $4,779.92 $38,607.53 $1,052,856.30 $640,704.98 $5,143,366.561 $2,471,860.77 $246,309.11 $45,222.87 $16,828.51 $4,643.63 $5,231.14 $105,673.5; $36,340.00 $701,843.46 $158,929.53 $3,206,607.68

•

•

CONSOLIDATED ESTATE HAMILTON TAP'T CUSTOMER CLAIMS

•

CREDITOR

•

SANDIA 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 ARMORLITE, 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 USA, INC. 50S CALIFORNIA DIVISION 505 ENVIRONMENTAL TCHNLG, INC. SOSTAR SOUTHLAND CORP. EHPLOYEES TRU. ·SPRINGFIELD SUGAR & PRDCTS CO. SPRINGFIELD TERMINAL RAIL. CO. SPRINGFIELD TERMINAL RAIL. CO. STANFORD UNIVERSITY HOSPITAL STATE OF ARKANSAS SUN MICROSYSTEMS FEDERAL, INC. SUN MICROSYSTEHS OF CALIFORNIA SUN MICROSYSTEMS, INC. SUN MICROSYTEHS EUROPE, INC. SUN-MAID GROWERS OF CALIFORNI~ SUNBELT BEVERAGE CORP. SUNSWEET GROWERS, INC. SYBRON TRANSITION CORPORATION T.O.S. rOODS, INC. TANDEM COMPUTERS, INC. TANDEM TELECOMMUNICATIONS SYST TEXAS OIL & GAS CORPORATION THE ALL AMERICAN GOURMET CO. THE CHRONICLE PUBLISHING CO. THE COOPER COMPANIES, INC. THE EVB COMPANY

•

THE KENDALL COMPANY THE KENDALL COMPANY OF NEVADA THE PULLMAN COMPANY THE STATE BAR OF CALIFORNIA THE VINTAGE CLUB THERHALKEM

•

TRANS-ADVO SYSTEMS, INC. UNGERMANN-BASS, INC. UNITED SAVINGS BANK VALLEY FIG GROWERS

SCHEDULED AMOUNT

PROOF OF CLAIM AMOUNT $300, 000 • 00

$206,809.05 $49,347.49 $53,553.33

$7,086,801.47 $44,471.87 $6,294.42 S830.33

$65,7B5.93

$53,553.33 $7,086,801.47 $44,471.87 $6,294.42 $830.32

$50,105.99 $6,212,016.45 $1,377,666.01 $17,195.19 $12,047.50 52,539.67 $982.72 $967.24 $420.24 $414,189.15 $5,978.17

$6,212,016.45 $1,567,207.70 $17,773.73

$12,588.32 $2,838.13

$1,572.72 $967.24 $1,010.24 $541,129.92 $10,347.03 $2,366.56

$1,590.29 -$675.53 $3,836.03 $178,993.18 $351,368.47

$8,362.82 $6,306.52 $178,993.14 $446,261.18

$51,705.83 $188,420.35 $3,512,722.32 $23,660.37 $3,085.14 $801,887.97 $528.51 $1,814.25 $235,422.69 $13,141.02 $8,671.81 $1.1,306.08

$296,014.77 $3,512,722.32 $50,011.56 $24,071. 78 $3,070.86 5191,227.64 $991.44 $9,163.44 $239,938.37 $14,925.70 $8,803.44 $12,235.50

$1,960,838.18 $40,708.11

$2,794,142.-85

$30,5B1.22 $830.74 $1,088,532.47 SIB,316.15 $11,455.66

$53,299.35 $33,974.00 $1,163,471.01 $18,289.24 532,566.74 51,320,460.00

$1,018,911.86 $331.74 $687,920.28 $36,787.19 $20,328.05 $57,303.54 $11,169.40 $1,030,844.77 $95,7.11.15 $5,988.90

02/19/92

•

$207,834.04

C-5

MAXIMUM POTENTIAL CLAIM $300,000.00 $207,834.04 $65,785.93 $53,553.33 $7,086,801.47

$44,471.87 $6,294.42 $830.32 $50,105.99 $6,212,016.45 $1,567,207.70 $17,773.73 $12,588.32 $2,838.13 $1,572.72 $967.24 $1,010.24 $541,129.92 $10,347.03 $2,306.56 $1,590.29 $8,362.82 $6,306.52

$178,993.14 $446,261.18 $51,705.83 $296,014.77 $3,512,722.32 $50,011.56 $24.071.78 $3,070.86 $791,227.64

$991. 44 $9,163.44 5239,938.37 $14,925.70 $8,803.44 $12,235.50 $2-, 7g4, 142.85

S40,708.11

$736,111.75 $23,613.57 $57,303.54

51,101,703.57 $96,675.75 $7,227.26

$53,299.35 $3.3,974.00 $1,163,471.01 $18,289.24 532,566.74 $1,320,450.00 $331. 74 5736,111. 75 $36,787.19 $23,613.57 $57,303.54 $11,169.40 $1,101,703.57

$96,675.75 $7,227.26

•

•

CONSOLIDATED BSnTE HAMILTON TAPT CUSTOMER CLAIMS

• • •

CREDITOR VERBATIM CORPORATION WAHIAWA WATER CO., INC. WAIALUA SUGAR CO., INC. WAIALUA SUGAR CO., INC. WASTE CHEM CORPORATION WBP' TECHNOLOGIES

WILLIAM MARSH RICE UNIVERSITY WILLIAM MARSH RICE UNIVERSITY WINCtIP, INC. WOODBRIDGE CORP. WOODBRIDGE ~AH FABRICATING WOODBRIDGE HOLDINGS, INC. WOODBRIDGE INOAC, INC. . WOODBRIDGE SALES & ENGINEERING ==============~===============

Total:

SCHEDULED AMOUNT

PROOF OF CLAIM AMOUNT

5391,051.78 $473.90 $46,407.38 $43,377.27 $22,385.78 $421.44 $34.26 $829,167.24 $980.19 $88,031.42 $18,528.81 $458.47 $30,799.40 $4,285.96

================ $91,925,180.61

•

• • •

• 02/19/92

•

C-6

$451,398.96

$22,385.78

$829,201.50 $980.19

$209,353.81

=====:=;======== $90,790,426.62

MAXIMUM POTENTIAL CLAIM $451,398.96 $473.90 $46,407.38 $43,377.27 $22,385.78 $421- 44 $34.26 $829,201.50 $980.19 $88,031.42 $18,528.81 $209,353.81 S30,799.40 $4,285.96

================ 595,123,932.26

,

•

•

CONSOLIDATED ESTATE HAMILTON TAP"l EMPLOYEE CLAIMS

•

• •

CREDITOR

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

AFLAK, USA ARABIA, JAIME ARMSTRONG, BOONE ASDOURIAN, JEANNE BENIPAYO, CONSUELO BERNSTEIN, MATTHEW BEWLEY, ELIZABETH LABRADO BLACHARSKI, DAN BRISCOE, EDWARD E. BOLDA, ERLINDA BURKHARDT, DIANE BUSENBARRICK, DIANA CALLAHAN, PATRICIA CARRIZALES, JUAN-JOSE CATAM., RODEL CHANG, ALBERT CHENG, MELODY

•

•

• • •

CONOVER, SALLY CORPUS, ANDREW CROWE, CINDY DANCEL, JUNE DAVIS, ELIZABETH DAVISSON, ROBERT DE LA CRUZ, DANIEL DIMALANTA, VICTORIA DUNN, DORA E. ERESE, JR., JOAQUIN ESPIRITU, AUREA FELCZAK, JOHN FIFIELD, THOMAS B. FITCH, URSULA FITCH, URSULA FONG, MICHAEL FORESTI, JAMES GAINES, BRIAN GAYO, MICHELLE GOFMAN, ROZALIA HAR1US, DARRELL HOLLOWAY, FREDERIc HUNPHRIES, THOMAS JABJA, MCHHAT KEEL, JAMES KLEINBERG, JERRY KRAUTHAMER, KURT KWOK GLORIA LAFLIN, ROBERT LANOIG, MICHAEL LAU, STEVEN LEE, CINDY LILLEF, JOHN HAGEE, ELIZABETH MANLEY, PAUL HATHERS, LINDA MENDOZA, ARACELI MILLER, MARILYN

SCHEDULED AMOUNT

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

$1,340.06 $558.68 $7,078.58 $724.78 $821. 76 $708.77 $1,606.80 $1,003.89 $6,767.64 $574.74 $527.B1 $580.03 $160.35 $334.88 $335.62 $1,120.66 $2,050.65 $439.87 $416.60 $2,255.22 $561.07 $341.60 Sl,624.()8 $674.45 $2,094.36 $1,709.85 $634.00 5759.73 5500.68 $634.94 $974.88 $1,117.83 $784.93 $751.14 $470.64 $1,946.10 $298.64 $690.34 $2,366.80 $57.01 $1,623.93 $3,614.74 $1,646.86 $744.03 $2,119.46 $453.44 $1,189.50 $1,643.53 $988.10 S288.54 $432.88 $38.86

02/19/92

•

C-7

PROOF OF CLAIM AMOUNT

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

$1,340.06 $558.58 $2,684.89 $724.78 $3,903.90 $708.77 $1,606.80 $1,003.89 $71,397.01 $574.74 $527.80 $643.28 $160.35 $334.89 $335.52 $1,120.66 S2,050.65 $439.87 $416.59 $2,255.22 $561.07 $101.09 $2,.986.56 $2,094.36 $7,211.85 5634.00 $1,670.13 $634.93 $1,583.33 $974.88 $1,117.83 S784.93 $751.14 $470.64 $1,946.10 $298.64 55,90B.82 $2,366.80 $67.01 $1,623.92 S2,000.00 $1,646.86 $1,391.83 $16,000.00 $453.44 $3,321.45 $1,643.53 $988.10 $288.54 $432.88 538.86

MAXIMUM POTENTIAL CLAIM

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

$1,340.06 $558.58 $2,684.89 $724.78 $3,903.90 $108.77 51,606.80 $1,003.89 $71,397.01 $574.74 $527.80 $643.28 $160.35 $334.89 $335.62 $1,120.66 $2,050.65 $439.87 $416.59 $2,255.22 $561.0:J $101. 09 $2,986.56 $674.45 $2,094.36 $7,211. B5 5634.00 $1,670.13 $500.68 $634.93 51,583.33 $974.88 $1,117.83 $784.93 $751.14 $470.64 $1,946.10 $298.64 $5,908.82 $2,366.80 $67.01 $1,623.92 $3,674.74 $2,000.00 $1,646.86 $744.03 $1,391.83 $16,000.00 $453.44 $3,321.45 $1,643.53 $988.10 $288.54 $432.88 $38.86

,

•

•

CONSOLIDATED ES~ATE HAMILTON ':rAPT EMPLOYEE CLAIMS

•

CREDITOR

MILLS, TOBY MONTANO,

IRENE

MUNIZ, BETTE J.

•

MURPHY, KATHLEEN

NG, DON OBERHOLTZER, DONNA

PADAOAN, EDWIN PATERA, JENNIFER QUIGLEY, JOHN

•

ROY, JOHANNA SAHAROFF, BASIL SANCHEZ, LORENE

SARMIENTO, ROMULO SCHORA, BARSHA SHEEHAN, RICHARD SIKIN, ROBERT STRUTZ, STEPHEN

•

SUSHANSKY, ANATOLY TABANGCURA, TONY

TARTAKOVSKY, YEVGENIYA TURLA, FLORA MIERKEY TUTT, GEORGE TYLER, JAKES WM.

VIRAY, DIVIN~ (DEBBIE} WATSON, KATIE ZAMBRANA, LILLI~

==========================;::; Total:

SCHEDULED

PROOF OF CLAIM

MAXIMUM POTENTIAL

AMOUNT

AMOUNT

--------------$1,462.40

--------------$1,462.40

CLAIM

5370.75 $378.13 $564.14 $414.70 $884.84 $387.54 $411. 98 $240.52 $1,011. 59 $620.14 $1.39 $453.98 $1,818.71 $1,298.45 $737.70 $1,882.10 566/.20 5793.00 5100.02 $427.20 $346.37 $2,043.44 $721.56 $848.00 $835.03

==:=.============== $82,975.21

•

• • • 02/19/92

•

C-8

$463.90 $564.14 $884.84 $387.54 $411. 98 $240.52 $2,09B.8a $620.14 $1,703.33 $11,715.17 $1,29B.45 5737.70 $1,882.10 $667.20 $793.00 $427.20 $346.37 $14,501. 77 $721.56 $848.00 $835.03

==========cz::::c:::== $198,393.09 -r...-/";:: ::~~-J'.-: ~iJ{J.; L~'~:'~/'J

--------------$1,462.40 $370.75 $463.90 $564.14 $414.70 SB84.B4 $387.54 S411.98 $240.52 $2,098.88 $620.14 S1.39 $1,703.33 $11,715.17 $1,298.45 $737.70 $1,882.10 $667.20 $193.00 $100.02 $427.20 $346.37 $14,501. 77 $721. 56 $B48.00 5835.03

==============::: $204,873.85

• CONSOLIDATED

BS~TE

•

HAMILTON TAl"T TRADE CLAIMS

•

• •

CREDITOR 191 ASSOCIATES 191 ASSOCIATES ACCOUNTANTS, INC. ALCATEL FRIDEN ALHAMBRA NATIONAL WATER CO. ALLNET COMMUNICATION SERVICES APOLLO COMMUNICATIONS APTITUDE TESTING ARA CORY ARTHUR ANDERSEN ASSOCIATED LIMOUSINES ASSOCIATED LOOSE LEAF AT&T

AT&T AT&T AT&T

•

• •

ONE LEASING CORP. BANK OF HAWAII BEKINS BOISE CASCADE OFFICE PRODUCTS BROOK FURNITURE RENTAL CALHOUN GUMP SPILLMAN & STACY CATAPULT CELLULAR ONE COCORICO PATISSERIE COMPUTOWN CONTRACT OFFICE GROUP DUPLEX PRODUCTS, INC. EATON FINANCIAL ENTRE COMPUrER CENTER EQUITABLE LIFE ASSURANCE EQUITABLE LIFE ASSURANCE SOC ERNA PJU:SS EVANS RENTS, INC. EXECUTIVE COURIER NETWORK EXPERTLY DONE FEDERAL EXPRESS CORP. FIRST INTERSTATE BANCOR? FOX HARDWARE GENERAL ELECTRIC CAPITAL CORP GILTSPORjSAN FRANCISCO GOLDEN GATEWAY CENTER GOODWIN, THOMPSON W. BANC

HAMILTON MANAGEMENT

• •

READQDARTERS COMPANIES HI-TIMES DISCOUNT OFFICE HYATT REGENCY S.F. HOTEL INMAC INNOVATIVE OFFICE SYSTEMS INTELLIGENT ELECTRONICS, INC. INTERNAL REVENUE SERVICE INTRANATIONAL COMPUTER JOHN WILLIAHS & ASSOC. KESTREL RECORDS MA1lAGEMENT

KIRK PAPEH co.

SCHEDULED AMOUNT

PROOF OF CLAIM AMOUNT

$3,250.00 $1,236.35 $640.00 $144.45 S148.10 $3,455.30 $119.57 $875.00 $426.56 $1,598,525.00 $692.94 $851.33 $1,159.09 $55.31 $542.28 $1,475.39 $7,390.40 $1,360.25 $170.13 $428.31 $115.00 $400.83 $158.39 $651.65 S134.84 S3,270.14 $22,669.50 $11,822.75 $4,233.52 $2,665.21 $1,264.42 $4.90 $150.00 $3,309.85

-

$62.36

$30,000.00 $83.81 $211.05 $1,36B.07 $130.81 $223.00

$571. 53 $1,360.25 5170.13 $10,210.94 $B,027.41 5115.00

$3,270.14

$5,660.40 $1,943.22

$3,222.35 $306,126.58 $62.36 $962.64 $6,620.96 $B15.91 $700.00

$2,131. 08

$11,811.15

$6.44 $13,640.00 $24,204.22 $43.56 $365.41

02/19/92

•

$2,831.82 $119.57 $875.00 $439.05 $432,391.00 $719.76 SBSl. 33

C-g

$11,640.00 $34,977.47

MAXIMUM POTENTIAL

CLAIM $3,250.00 $1,236.35 $640.00 $144.45 $148.10 $2,837.82 $119.51 $875.00 $439.05 $432,297.00 $779.76 $851.33 $1,759.09 $55.31 $542.28 $1,475.39 $7,390.40 $571. 53 $1,360.25 $170.13 $10,270.94 $8,027.47 $175.00 $400.83 $158.39 $651.65 $134.84 53,270.14 $22,669.50 511,822.75 $5,660.40 51,943.22 $2,665.21 $1,264.42 $4.90 $150.00 $3,222.35 $306,126.58 $62.36 $962.64 $6,620.96 $815.91 $700.00 $30,000.00 $83.81 $211.05 $2,131.08 $130.81 $223.00 $11,811. 75 $6.44 511,640.00 _ $34,977.47 543.56 $365.41

•

•

COHSOLIDATED ESTATE HAMILTON TAP"l' nADE CLAIMS

•

• •

CREDITOR

$530.00 $2,060.52

LOOKS FURNITURE LEASING LVG PROPERTIES MEADOWS OWENS COLLIER HINDENS STATIONERS MOORE BUSINESS PRODUCTS

$1,670.30 $220.00 $1,033.91 S899.34 $45.00

MORTGAGE SECURITY ADVISORS MUNICIPAL MOTOR OFFICER NEW MEXICO TAX & REVENUE OFFICE CLUB

PA BOARD OF FINANCE & REVENUE

•

• •

PROOF OF CLAIM AMOUNT

LE REGENCY LEWIS ASSOCIATES LIBERTY MUTUAL INSURANCE CO. LLOYD'S COMPUTER SERVICE LONG & LEVIT

ONE HARKET PL~ZA ONE MARKET PUZA

•

SCHEDULED AMOUNT

PACIFIC BELL P~CIFIC

BELL

PACKAGED BUSINESS PILLSBURY, MADISON & SUTRO PITNEY BOWES PLANT DESIGN PROFESSIONAL TRAINING ~SSOC RAYZBERG, DDS, ALEXANDER G. REMEDY TEMP, INC. ROBERTS OF SAN FRANCISCO S.F. NEWSPAPER AGENCY SAN FRANCISCO TOM SNACKS SECURITY PACIFIC NATIONAL BANK SNET SOUTHERN BELL STANSBURY BORAGINE & Asse STATE BOARD OF EQUALIZATION STATE OF CALIFORNIA TAB PRODUCTS CO. THE MARK HOPKINS HOTEL THE VERY LAST WORD TRANSAMERICA INS. FINANCE TRANSPORTABLE SOFTWARE UARCO, INC. OS SPRINT WLCAN BINDER & COVER WEINBERG, DORON WESTCORP SOFTWARE SYSTEMS, IN. WORD POWER ============================== Total:

$112.50

$220.00 $112.50 $14,716.50

$973.72 $340,000.00

$2,000.00 $17.42 $54.06 $88,622.38 $1,433.95 $575.11 $27.91 $10,451.25 $6,497.00

$10,143.49 $6,497.00 $72,862.69

$104.37 $176.55 $4.00

$3,600.00 $662.39 $117.00 S128.40 $340.08

$2,97B.73 $728.40 $0.00

$24.71 $89.60 $1,302.40 $500.00 $1,919.17 $58.01 $971.65 $266.43 $25,161. 67

$74.62 $1,302.40

$20,350.90 $3,897.58 $166.62

$1.87 $84.40

$16,000.00 $549.9? $293.92 ==c============

$1,894,052.76

• 02/19/92

•

$2,140.77

C-10

$1,346,135.60

MAXIMUM POTENTIAL CLAIM $530.00 $2,140.77 $220.00 $112.50 $14,716.50 $1,670.30 $220.00 $1,033.91 $973.72 $45.00 $340,000.00 $2,000.00 $17.42 $54.06 S88,822.38 $1,433.95 $575.11 $27.91 $10,143.49 $6,497.00 $72,862.69 $104.37 5176.55 $4.00 $3,600.00 $662.39 $2,978.73 $728.40 $340.08 50.00 $24.71 $74.62 $1,320.40 $500.00 $1,919.17 S58.01 $971.65 $266.43 $20,350.90 $3,897.58 $166.62 S1.87 584.40 $16,000.00 $549.97 $293.92 l::===::::========== 51,535,519.13

• COHSOLIDATED BSTATE

•

OTHER RANILTON TAFT CLAIMS

•

MAXIMUM CREDITOR

SCHEDULED AMOUNT

PBOOF OF

SECURITY PACIFIC NATIONAL BANK STEVEN SOLODOFF

•

~r:::=======~====

Total:

. $0.00

• •

•

•

• • 02/19/92

•

C-'1

CLAI~

POTENTIAL

AMOUNT

CLAIM

$2,268,770.21 5110,030,000.00

52,268,110.21 5110,030,000.00

::::::====::2==::=====

:::CCE===::;===~:=:===

$112,29B,I'70.21

5112,298,770.21

• CONSOLIDATED BS!rATB REMINGTON CLAIMS

•

MAXIMUM

SCHEDULED CREDITOR AMELIA MARTIN TRAVEL AMERICAN EXPRESS ARENA PROMOTIONS

•

AT'T BALLARD. WILLIAM E. BANK ONE, TEXAS, NA

CCAJ

THIRD CENTURY LEASING CITY WIDE DELIVERY CLKVELAHD, GENE CONNIE C. ARMSTRONG, JR •

CRASE

CUMMINS-ALLISON CORP. DALE

SIMPSON

~

DALLAS TIMES HERALD DELUX BUSINESS FORMS EATON FINANCIAL CORP. EPPRIGHT & GOLOMBECK EQUITABLE LIFE ASSURANCE EVANS PRINTING COMPJI.N¥ EVANS PRINTING COMPANY

EXCELSIOR LEGAL SOUTHWEST

EXECUTIVE COFFEE SERVICE FAIRCHILD COMMUNICATIONS FEDERAL EXPRESS FOUR SEASONS HOTEL GROCHOWSKI, GREG

•

•

HUMPHRIES, THOMAS INNOVATIVE LEASING INNOVATIVE OFFICE SYSTEMS JET EAST,

INC.

JOHN F. WILLIAMS & ASSOC. LANIER WORLDWIDE, INC. LINCOLN NATIONAL LIFE INS. CO. LLOYD'S COMPUTER SERVICE LONG" LEVIT LOOKS FURNITURE LEASING tUSK " ASSOCIATES PERSONNEL MARGULIES COMMUNICATIONS MATTKEW BENDER COMPANY MCCALL, MCBRIDE, ROBERTS KCCOY, ERNEST S.

• •

AMOUNT

$2,834.89 $43.33 $39.00 $67.91 $9.40 $273,015.97 $8,164.00 $254.50 $322.48 $104.74 $251. 00

KCCOY, ROBERT

MCCOY, ROBERT KERRILL LYNCH PIERCE NAIL, HEATHER OFFICE SUPPLY CO., INC. OIL , GAS JOURNAL PAYCHEX PEAT HARWICK MAIN & CO PILLSBURY, MADISON & SUTRO PITNEY BOWES

SI8,OBO.00

$1,661. 52

$4,937.79 $1,494.33 $22.50 $111.09 $113.66 $1,723.60

$197.12 $87.63 $326.78 $5,604.98 $645.00 $43,704.78 SI,10B.83 552.60 $3,951.47 $1,374.48 $44,968.85

$3,565.46

$224,074.90 $147.22 $225.05

S3 I 691. 40

$7,925.10 $34.61 $150.00 $24,984.73

$41,536.59 $150.00 $126,437.35

$405.29 $8,750.00 $2,500.00 $437.65 $29.30 $69.38

$1,616.74 $5.20 $668.53 $95.00 $228.18 $39,000.00 $87.68

02/19/92

•

$2,218.89

$6,411.33 $112.95

ASSOCIATES

DALLAS MORNING NEWS

•

PROOF OF CLAIM AMOUNT

$286~32

ARTS" FLOWERS

BITUMINOUS CASUALTY CORP. CALUOUW,GOHP,SPILLHAN & STACEY

•

•

C-12

$8,750.00

$3,461. 50 $69.38 $600.00 $5.20

SS8, 841. 00 $37,512.66

POTENTIAL CLAIM

$2,218.89 $43.33 $39.00 $286.32 $61.91 $9.40 $273,015.97 S18,080.00 $254.50 $322.48 $104.14 $251.00 $1,661. 52 $6,411.33 $112.95 $4,937.79 $1,494.33 $22.50 $111.09 $3,565.46 $1,723.60 $224,074.90 $147.22 $225.05 $87.63 $326.78 $3,691.40 $645.00 $43,704.78 51,108.83 $52.60 53,951.47 $1,374.48 $44,968.85 $7,925.10 $34.61 $41,356.59 5150.00 $126,437.35 $405.29 $B,750.00 $2,500.00 $431.65 $29.30 $3,461. 50 $69.38 $600.00 $1,616.74 $5.20 $668.53 $95.00 5228.78 $58,841.00 537,572.66 581.68

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

• CONSOLIDATED BSTATE

REMINGTON CLAIMS

MAXIMUM

• •

• •

P:ROOF OF CLAIM AMOUNT

SCHEDULED CREDITOR

PROFESSIONAL SECURITY COMPANY ROSADO, ROSA A. SIERRA SPRING WATER SOUTHWESTERN BELL MOBILE STRASBURGER & PRICE TEXAS EMPLOYMENT COKHI S5 ION THE GASS COMPANY THE MANSION THE HARK HOPKINS THE TRAWLERS THOMPSON & KNIGHT TODAY'S TEMPORARY TRANSAHERICA INSURANCE TU ELECTRIC WALTERS, KIM WELSH'S GREAT CAKES, INC. WHEEL COMPONENTS, INC. ZENO SYSTEMS Total:

AMOUNT $75.78

$1,052.32 $33.25 $827.45 $90.00 $395.00 $363.86 $2,221.83 $1,600:00 $18,797.99 $249.10 $2,481.33 $97.28 $22.36 S18.00 $2,126.00 $64.95

=============== $505,932.59

•

• • • 02/19/92

•

•

C-13

$275.55 $399.51

$2, Sal. 72

$25,859.01 $249.10

============e==== $574,288.22

POTENTIAL CLAIM 575.78 511,052.32 $33.25 $827.45 $275.55 $399.51 $395.00 $2, SOL 72 $2,221.83 $1,600.00 $25,859.01 $249.10 $2,481. 33 $97.28 $22.36 5118.00 $2,126.00 $64.95

=;;::=::!:::::========= $970,665.90

•

•

CONSOLIDArED ESTATE DRESDHER ENTERPRISBS CLAIHS

• • •

MAXIMUH

CREDITOR AMERICAN EXPRESS ARLINGTON UTILITIES BRACEWELL & PATTERSON COUNTY OF DALLAS FOREMOST TUBULAR PDOnuCTS FOREMOST TUBULAR PRODUCTS FOSTER, LEWIS, LANGLEY, ET.AL. GREENLEAF LAWN MAINTENANCE HARWIN, MR. & MRS. ROBERT B. THIRD CENTURY INC TV ELECTRIC UNITED BANK & TRUST

SCHEDULED AMOUNT

PROOF OF CLAIM AMOUNT

$259.75 $643.19

$259.75

$61.90 5174.35

$643.19 $174.35

$2,831. 36

$2,831. 36

$6,171.62

$6,171.62

$3,800.00 $2,827.98

$12,6B9.51 510,007.25

•

•

• • • 02/19/92

•

$17,594.90

$53.01 ========~===:;====

Total:

$17,594.90 $61.90

$2,831. 36 $5,535.98 5225.00 $1,300.00

C-14

POTENTIAL CLAIM

=====~=====::r:====

$46,992.66

$225.00 $3,800.00 $2,827.98 $53.01 $12,689.51 ================

$47,332.57

•

•

DRESDNBR PETROLEUM CLAIMS

MAXIMUM

•

• •

•

• • •

•

CREDITOR

A & B ELECTRONICS, INC. AAA TUBING TESTERS, INC. ABLE COATING SYSTEMS, INC. ACE TRANSPORTAION, INC. ARCO OIL & GAS COMPANY AT&T ATCO SERVICES, INC. B.K. DRILLING FLUIDS BERGSTEIN OILFIELD SRVCS, INC. BRADLEY SUPPLY COMPANY CHAMPION TECHNOLOGIES CITATION OIL & GAS CORP. CLARK COMMUNICATIONS, INC. CLINTON, G. C. COLORADO RIVER HNCPL WTR CST COKHERCIAL RADIO SERVICE D&H TRANSPORTS, INC. D.F.W. DEVELOPMENT CORP. DALE HARTIN & SON TIRE DANIEL, GLENN E. DAVIDSON, ROGER E. DRINNON, STEPHEN W. DST SYSTEMS, INC. E.L. FARMER & CO. EASTMAN, TRUSTEE, FRANK A. ELKCO WlRELINE SERVICES ENERGY ELECTRIC CONTRACTING FEDERAL EXPRESS FIRESTONE SERVICES FLO C02, INC. FOWLERS TEXACO SERVICE STATION G & L TOOL COMPANY G&W DANIEL CONSTRUCTION CO GOODWIN, THOMPSON W. GOOL OFFICE EQUIPMENT CO. GRAUKAN'S, INC. H & P RENTALS HALLIBURTON LOGGING SERV., INC HALLIBURTON SERVICES HANOVER COMPRESSOR CO. HARDING WELL SERVICE CO. HAWKIN'S DOZERS HENDERSON, CHARLES Ii. HIGHLAND PUMP COMPANY HINSLEY, MICHAEL INSTRUMENT MAINTENANCE CO. JIMCO ELECTRONICS AND JOHNCO SALES COMPANY JOHNSON, LLOYD E. K-l TANK RENTALS LAIN WELL SERVICE COMPANY LANE, JR., SAM LAUDERHILK, D.V.N., BOBBY LEAMCO-RUTHCO LIBERTY ANCHOR SERVICE

SCHEDULED AMOUNT

PROOF OF CLAIM AMOUNT

$324.52 $6,688.00 $1,136.63

$2,989.16 $900.00

$900.00

$49.71 $948.36 $7,049.09 $348.79 $283.84 $570.03 $1,043.57 $873.78 $22,798.18 $14,846.65

$151. 56 S1,188.60 $660.00 $116.73 $100.00 51. 56 $970.97 $995.12 $3.26

52,900.00 $1,309.04 $114.00 $48").65 $4,213.85 $3,341.86 $1,025.43 $301.50

$570.03 $1,595.88 $1,037.83 $23,023.98 $14,846.65 S151. 56 $1,188.60 S660.00 S1l5.00 $1,350.00

$3,300.00 $1,002.48

$900.00

$995.12

$283.84 $570.03 $1,595.88 $1,037.83

$23,023.98 $14,846.65 $151. 56 $1,188.60 $660.00 $115. DO

$1,350.00 $3,300.00 $1/002.48 $107.50 $995.12

UNKNOWN

UNKNOWN

$2,900.00 $2,431.42

$2,900.00 S2,431-42 $114.00 S487.65 $4,213.85 $3,342.06 $1,025.43 5301.50 $1.05

53,342.06 $1,025.43 $301- 50

$1.05 S42.02 $366.38 $1,218.75

$324.52 $6,688.00 $1,136.63 $2,089.16 $49.71 $948.36 57 ,049. 09 $348.79

$107.50

$42.02

$19,787.50 $1,838.73

$1,218.75 $5,711.54 $31,977.24 $11,869.00 $2,461.42 $19,787.50 $1,889.61

$366.38 $1,218.75 $5,711. 54 $31,977.24 $11,869.00 $2,461. 42 $19,787.50 $1,889.61

$12,861.73

$14,341.11

S14,341.11

$37,688.78 $3,899.89

$2,461. 42

$1,074.53 $1,447.99 $2,749.79

$4,930.72 $3,297.70 $1,012.14 $22,631.38 $1.05 $158.80 $1,968.56

$546.50

02/19/92

•

56,688.00

POTENTIAL CLAIM

C-15

$5,407.56

$1,074.53 $1,447.79 $2,505.16 $8,498.70 $5,407.56

$22,736.37

$22,736.37

$2,505.16 $8,498.70

$1,012.14 $1. as $158.80 $1,968.56 $546.50

•

• • •

• •

MAXIMUM

CREDITOR M & P DRILLING SERVICE INC. MDH CORPORATION MICKLER, JAMIE KIDWEST ELECTRIC COOP MIKE BYRD CASING CREWS NALCO CHEKICAL COMPANY NATIONAL OIL WELL NORTHGATE COMPUTER SYSTEMS OFPlCEKART SUPERSTORE PACKER SALES & RENTAL, INC. PARDHER WELL SERVICE, INC. PENA WELDING PERMAIN OIL FIELD ELECTRIC PETROLEUM INFORMATION PETROLEUM INFORMATION PETROWARE SYSTEMS, INC. POLLARD CHEVROLET PORTER, WILLIAM s . PREFERED PACKERS, INC. PRIDE PETROLEUM SERVICES PRO WATER SERVICE RALPH H. VINEY & ASSOCIATES ROBERTS AUTO SUPPLY ROTARY OIL & GAS CO., INC. S&S HOT OIL SERVo INC. SCOTT FUEL, INC. SHELF ENERGY SMALL FISHINC & RENTAL

SOUTHWEST TOOL COMPANY STEPHEN J. KROUGH & ASSOCIATES STONEWALL ELECTRIC CO.

•

SUBSURFACE SPECIALTY COMPANY SUNWEST MUD COMPANY TEXAS UTILITIES ELECTRIC CO. TRE REEVES COMPANY THE TRAVELERS INSUAANCE

THE WESTERN COMPANY OF TRAC POWER RENTAL

• •

DRESDlmJl PETROLJroM CLAIMS

TRANSAHERlCA INSURANCE TU ELECTRIC TURNER BIT SERVICE, INC. TWO DRAW WELDING TYRELL REAL ESTATE WEAVER SERVICES, INC. WES-TEX TELEPHONE COOP WEST TEXAS WELDERS SUPPLY WIGGINS, MARK WINSTEAD, SECHREST & MINICK =======~=~a======~==~=====;;==

Total:

SCHEDULED AMOUNT

PROOF OF CLAIM

AMOUNT

$43,688.25 $136.32 $970.97 $458.&2 $1,345.72 $11,818.80 $6,943.50 $310.00 $370.48 $2,075.29 $12,537.46 $11,469.70 $372.14 $157.92 $363.43 $2,649.96 $154.92 $2.61 $716.81 $B08.12 $537.50

$1,002.48 $448.07 $1,345.72 $19,895.47 $7,367.51

$12,537.46 S10,707.39

$520.99

$300,000.00

$4,495.00 $158.31 $7,036.47 $242.50 $264.36 $7.16 S10,828.75 $1,774.98 $170.00 S2,508.04 $13,614.37

$5,519.62 $853.00 $3,681.58 $107.25 $3,365.40 $10,280.64 $458.49 $B50.00 $1,600.00 S1,549.68 $301.15 $56.08 $100.00 $9,534.33 ::====:=====.:::::::::== $371,376.03

• 02/19/92

•

$51,387.38

C·16

$7,928.97 $242.50 $262.76

$1,774.9B $2,508.04 $13,548.81 $7,049.09 $950.79

$107.25

$850.00

$301.75 $9,999.00 ===============

$651,060.93

POTENTIAL CLAIM $51,387.38 $136.32 $1,002.48 $448.07 $1,345.72 $19,a95.47 $1,367.51 $310.00 $370.48 $2,075.29 512,537.46 $10,707.39 $372.14 $157.92 $520.99 $2,049.96 $154.92 $300,000.00 5716.81 $808.12 $537.50 $4,495.00 $158.31 $7,928.97 $242.50 $262.78 S7 .16 $10,828."15 $1,774.98 $170.00 $2,50B.84 $13,548.81 57,049.09 $950.79 $5,519.62 $853.00 $3,691.58 $107.25 $3,365.40 $10,280.84 $458.49 S8S0.00 $1,600.00 $1,649.88 $301. 75 $56.08 $9,999.00 $9,534.33 ==========;=::::==== $731,286.55

1

2 3 4

5

GILMORE F. DIEKMANN PATRICIA H. CULLISON BRONSON, BRONSON & McKINNON 505 Montgomery street San Francisco, California 94111-2514 Telephone: (415) 986-4200 Attorneys for Plaintiff FEDERAL EXPRESS CORPORATION

6

7 8

UNITED STATES DISTRICT COURT

9

NORTHERN DISTRICT OF CALIFORNIA

10

z 0 z

11

z -

12

U I~

13

FEDERAL EXPRESS CORPORATION,

) )

Plaintiff,

) )

~

'"::"'

~ ~ ~ 1;;

0

7 ~

~

;'l

~

Z.

.J

~

o~

:::::l

.,?;

-u z '" 0« Z ~ fi: z 0 0« lJ'l

Z 0

:::::

HAMILTON

TAFT

) ) )

& COMPANY,

,iJ Xl

.....

14

v.

15

) ) )

Defendant.

:z

16 17

c Cf/ o 7c;;-2 NO ..

---

Vj(W

COMPLAINT FOR INJUNCTIVE RELIEF AND FOR DAMAGES FOR BREACH OF CONTRACT, FOR BREACH OF FIDUCIARY DUTY, AND FOR BREACH OF THE AGENCY RELATIONSHIP DEMAND FOR JURy TRIAL

Plaintiff, FEDERAL EXPRESS CORPORATION, hereby alleges as

II)

18

follows:

:0

19

I.

20

PARTIES

21

1.

Plaintiff FEDERAL EXPRESS CORPORATION ("Federal

22

Express ll )

23

virtue of the laws of the state of Delaware, and maintains its

24

principal place of business in Memphis, Tennessee.

25

2.

is a corporation organized and existing 'under and by

Plaintiff is informed and believes and thereon alleges

26

that Defendant HAMILTON TAFT & COMPANY (tiHamilton Taft ll )

27

corporation organized and existing under and by virtue of the

28

laws of the state of California and maintains its principal place COMPLAINT FOR INJUNCTIVE RELIEF

is a

1

of business in

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2

3

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This is an action for breach of contract, breach of

fiduciary duty, and breach of agency relationship arising, inter alia, under the California civil Code section 2322 et seq.

The

amount in controversy exceeds the sum or value of Fifty Thousand Dollars ($50,000) exclusive of interest and costs.

The

jurisdiction of this Court is invoked pursuant to 28 U.S.C.

section 1332 . 4.

Venue is properly laid in this Court pursuant to 28

13

U.s.c. section 1391(a), in that the claims involved arose in this

14

district.

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JURISDICTION AND VENUE

15

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16

III.

17

GENERAL ALLEGATIONS

18

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Count One

20

21

22 23

2A 25

26 27

28

(Breach of Contract)

5.

Plaintiff realleges and incorporates by reference as

though fully set forth herein each and every allegation contained in paragraphs 1 through 4 of this Complaint. 6.

In December of 1989 Federal Express entered into a

payroll tax service contract with Hamilton Taft.

Pursuant to

this agreement, Federal Express would wire transfer its employee

payroll taxes to Hamilton Taft.

Under the contract Hamilton Taft

was then obligated to make disbursements to the appropriate COMPLAINT FOR INJUNCTIVE RELIEF 2

1

2 3 4

5 6

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performing this service, Hamilton Taft had the use of Federal Express' money from the time of its receipt until the time of its disbursement to the appropriate taxing authority. 7•

Federal Express has performed all of its obligations

under the contract by promptly delivering to Hamilton Taft all

9

Plaintiff has fully performed all contractual obligations except where prevented by breach of defendant. 8.

Plaintiff is informed and

belie~es

and thereon alleges

12

that defendant has breached its contractual obligations by,

13

rather than paying plaintiff's payroll taxes with the money

14

transferred for that purpose, the money would be held for an

15

additional 30 to 90 days.

16

thereon alleges that in some cases defendant then used a

17

different client's incoming funds to pay Federal Express taxes

18

and any federal or state taxing agency penalties for late

19

payments.

." N

:2

As consideration for

appropriate payroll tax summary reports and payroll tax funds.

11 -or

IRS, and state and local taxing agencies.

8

10

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taxing authorities on behalf of Federal Express including the

20

21

22 23

24

25 26

9.

Plaintiff is informed and believes and

Plaintiff is informed and believes that in other cases,

Federal Express taxes simply were not paid, and penalties may be accruing. 10.

Defendant has further breached the contract by not

providing original tax receipts evidencing the tax payments as requested by plaintiff. 11.

As a result of defendant's breach of contract plaintiff

27

has been damaged in excess of $50,000.

28

true extent of its damages plaintiff is in need of information COMPLAINT FOR INJUNCTIVE RELIEF 3

In order to discovery the

1

2 3 A-

from the defendant regarding payroll taxes paid and money currently owed to the appropriate taxing authorities..

Such

information is within the exclusive control of the defendant and has not been made available to the plaintiff as requested.

S 6

count Two

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(Breach of Fiduciary Duty) 12.

Plaintiff realleges and incorporates by reference as

though fully set forth herein each and every allegation contained in paragraphs 1 through 11 of this Complaint. 13.

Plaintiff is the trustee of the tax funds withheld from

the wages of its employee.

Plaintiff, as trustee of these funds,

is a fiduciary of the withheld funds for the purpose of paying the required amounts to the united states, and state and local agencies. 14.

As custodian of these funds, defendant owed a fiduciary

duty to the plaintiff to transmit these funds to the appropriate taxing agency promptly and in the full amount.

Defendant also

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21 22 23

had a fiduciary duty to invest these funds as a reasonably prudent investor investing his own money would have done so as not to jeopardize the principle.

On information and belief

plaintiff alleges that by investing in high risk non-liquid loans, defendant has breached this fiduciary duty.

24 25

Count Three

26 27

28

(Breach of Agency Relationship)

15.

Plaintiff hereby realleges and incorporates by

reference as though fully set forth herein paragraphs 1 through

COMPLAINT FOR INJUNCTIVE RELIEF 4

1

2 3 .4

5 6

7

16.

Pursuant to the written payroll tax service contract

entered into between the defendant and plaintiff, defendant became the agent of plaintiff. 17.

Defendant consented to the creation of this

relationship by agreeing to accept payroll tax money from the plaintiff and deposit such money on behalf of the plaintiff in the appropriate amounts and manner on or before the statutory

9

deadlines as herein alleged.

11

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of this Complaint.

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18.

In consideration of

i~s

entering into an agency

relationship with the plaintiff, defendant had the use of

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plaintiff's employee payroll tax funds from the time received by

13

defendant until the time of disbursement to the appropriate

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taxing authorities.

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Pursuant to its agency relationship with the plaintiff,

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defendant owed a duty of loyalty to the plaintiff.

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loyalty required defendant to pay the payroll tax funds owed by

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This duty of

the plaintiff to the appropriate taxing authorities in a timely

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19 20

2] 22

23

24 25 26 27

28

manner, and to refrain from administering the payroll tax funds in a manner harmful to the interest of the plaintiff, includIng imprudent investments, or investments which might expose the plaintiff to taxing authority liability. 20.

Also pursuant to its agency relationship with the

plaintiff, defendant owed a duty to disclose promptly upon demand by the plaintiff all documents, including tax receipts, relating to the defendant's administration of the plaintiff's payroll account. 21.

Defendant has breached its agency relationship by

COMPLAINT FOR INJUNCTIVE RELIEF 5

1

failing and refusing to render to Federal Express, upon its

2

demand, an accounting of its fund.

3

22.

Defendant's breach of its agency relationship has

4

caused plaintiff damages in an amount to be specifically

5

ascertained at trial but which is presently alleged to be in

6

excess of $50,000.

7 8

Count Four

9

(Injunctive Relief)

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reference as though fully set forth herein paragraphs 1 through

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22 of this complaint.

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Unless defendant is restrained by appropriate

14

injunctive relief herein from destroying or otherwise disposing

15

of tax receipts and other information in its control documenting

16

the use and transfer of plaintiff1s employee tax funds,

17

unless defendant is restrained by appropriate injunctive relief

18

from continuing to operate the "ponzi scheme", and unless

19

defendant is ordered to immediately produce tax receipts and/or

20

other information regarding the transfer and use of funds,

21

plaintiff will suffer immediate and irreparable injury for which

22

there is no adequate remedy at law herein.

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and

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24 25 26

WHEREFORE, plaintiff prays for judgment against defendant as follows:

1.

For preliminary injunctive relief restraining or

otherwise preventing defendant from destroying tax receipts

27

and/or other information regarding the transfer of payment of

28

plaintiff's payroll taxes as alleged, pending trial; COMPLAINT FOR INJUNCTIVE RELIEF 6

1

For preliminary injunctive relief ordering defendant to

2.

2

cease using plaintiff1s payroll tax funds as part of a

3

scheme", pending trial;

J1

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For a temporary restraining order enjoining defendant

3.

5

from destroying tax receipts and/or other information regarding

6

plaintiff's payroll taxes; and

7

For an order mandating the production of tax receipts

4.

8

and/or other information in control of the defendant regarding

9

the payment and transfer of plaintiff's payroll tax funds; and

10

11

For damages for the acts herein alleged in accordance

4.

with proof ..

12 13 1.4

15

JURy DEMAND

Plaintiff Federal Express Corporation hereby makes demand for jury.

16 17

Dated:

March 13, 1991

18

BRONSON, BRONSON & McKINNON

19

BY:Qz(~~

20

PATRICIA H. CULLISON Attorneys for Plaintiff

21 22 23 24 25 26 27

\PHC\29296\ 9999\COMPL T• eMP 44S9~J.Allen

28

COMPLAINT FOR INJUNCTIVE RELIEF 7

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GILMORE F. DIEhMANN, Jr. PATRICIA CULLISON

RICHARD P. WALKER BRONSON, BRONSON & McKINNON 505 Montgomery street San Francisco, California 94111-2514 Telephone: (415) 986-4200 Fax: (415) 982-1394

Attorneys for Plaintiff FEDERAL EXPRESS CORPORATION

7 8

UNITED STATES DISTRICT COURT

9

NORTHERN :DISTRICT OF CALIFORNIA

10 11

FEDERAL

12 13 14

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T AMENDED COMPLAINT R:

1. Breach of Contract . HAMILTON T & COMP J2. Breach of Fiduciary CONNIE C. TRONG, Duty REMINGTON S. INC., RICHARD ,}3. Breach of Agency FOWLES, S N LAU, CHRISTINE) puties GRAMBLING, BARRY MORGAN, AL MAY,) 4. Breach of Implied ED HARGIS, VICKY DIMALANTA, ) Covenant DRESDNER ENTERPRISES, INC., ) 5. Negligence DRESDNER PETROLEUM, H.I. ) 6. Negligent MisrepreINTERNATIONAL, C.R. ) J sentation ACQUISITIONS, INC., and ) ~ 7. Fraud KNIGHTSBRIDGE, } 8. Conversion ) 9. Violation of Racketeer )~c' Influenced and Corrupt Defendants. ________________________________) organizations Act

21

(18 U.S.C. §§1961 et~)

22

10. Unfair Business Practices . 11. False and Misleading Advertising 12. Constructive Trust 13. Accounting 14. Money Had and Received 15. Declaratory Relief 16. Injunction

23 24 25 26

27

DEMAND FOR JURy TRIAL

28

1ST AMENDED COMPLAINT

1

2

Plaintiff Federal Express Corporation ("Federal Express II) alleges as follows:

3

THE PARTIES

A

5

6

1.

organized and existing under the laws of the state of Delaware with its principal place of business in Memphis, Tennessee.

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that defendant Hamilton Taft &: Company (nHamilton Taft lf ) is a

California corporation with its principal place of business in San Francisco, California.

11

interstate commerce.

3.

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Hamilton Taft is engaged in

Plaintiff is informed and believes and thereon alleges

13

that defendant Connie C. Armstrong, Jr. (tlAnnstrong") is the

1.4

chairman and majority shareholder of Hamilton Taft, and is a

15

resident of Dallas and a citizen of the state of Texas.

16

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Plaintiff is informed and believes and thereon alleges

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Plaintiff Federal Express is a corporation duly

17

III

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Plaintiff is informed and believes and thereon alleges

defendant Remington Cos. Inc. (I'Remington lt ) is a Texas

18

corporation with its principal place of business in Dallas,

19

Texas, and is a holdinq... company for Armstrong I s interests.

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5.

Plaintiff. is informed and believes and thereon alleges

21

that defendant Richard Fowles (IiFowles") was president of

22

Hamilton Taft from March 1989 through September 1990, executive

23

24

25 26 27

28

vice president of Remington from October 1990 until January 1991,

and chief financial officer of Hamilton Taft thereafter. Plaintiff is informed and believes and thereon alleges that Fowles resides in California. 6.

Plaintiff is informed and believes and thereon alleges

that defendant steven Lau ("Lau") was a 'vice president and 1ST AMENDED COMPLAINT 2

1

director of Hamilton Taft at times relevant herein, and resides

2

in the state of California.

3 A

Plaintiff is informed and believes and thereon alleges

that defendant Christine Grambling ("Grambling tl ) was president of

5

Hamilton Taft from September 1990 until January 1991, and is and

6

was a resident and citizen of "the state of Texas.

7

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8.

Plaintiff is informed and believes that defendant Barry

8

Morgan ("Morgan") was chief accountant for Remington and

9

performed accounting functions for Hamilton Taft.

Plaintiff is

10

informed and believes and thereon alleges that Morgan is and was

11

a resident and citizen of the state of Texas.

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that defendant Al May was at all relevant times vice president of

14

operations for Hamilton Taft, and is and was a citizen and

15

resident of the state of California •

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Plaintiff is informed and believes and thereon alleges

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Plaintiff is informed and believes and thereon alleges

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that defendant vicky Oimalanta was at all relevant times an

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officer of Hamilton Taft and resides in California.

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Plaintiff is informed and believes and thereon alleges

20

that defendants H.I. International and C.R. Acquisitions, Inc.

21

are entities owned or controlled by, and affiliated with,

22

Armstrong and his affiliated entities.

23

12.

Plaintiff is informed and believes and thereon alleges

24

that defendant Ed Hargis' (ltHargis lf ) was at all relevant times

25

president of Dresdner Petroleum, and is and was a resident and

26

citizen of the state of Texas.

27

28

13.

Plaintiff is

inform~d

and believes and thereon alleges

that defendants Dresdner Enterprises, Inc. and Dresdner Petroleum 1ST AMENDED COMPLAINT 3,

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

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(collectively "Dresdner") are Texas entities with their principal place of business in Dallas, Texas, and are owned or controlled by, and affiliated with, Armstrong and his affiliated entities. 14.

Plaintiff is informed and believes and thereon alleges

that defendant Knightsbridge ("Knightsbridge") is a Texas entity with its principal place of business in Dallas, Texas, and is owned or controlled by, and affiliated with, Armstrong and his affiliated entities. 15.

Plaintiff is

inf~rmed

and believes and thereon alleges

that at all times herein mentioned, each of the defendants was the agent of each of the other defendants and in doing the things hereinafter mentioned was acting within the scope of such agency and with the permission, authority and consent of the other defendants.

16.

There exists, and at all times herein mentioned there

existed, a unity of control, interest and ownership among defendants Armstrong, Hamilton Taft, Remington, Dresdner, R.I. International, C.R. Acquisitions and Knightsbridge (collectively the tlArmstrong Defendants"), such that any individuality and separateness of the Armstrong Defendants has ceased and each of these defendants is the alter ego of each other. the fiction of the separate existence of the

Adherence to

Armstr~ng

Defendants

would permit an abuse of the corporate privilege and would sanction injustice.

Each may be held responsible for the acts of

the others. JURISDICTION AND VENUE 17.

This court has

subj~ct

matter jurisdiction pursuant to

28 U.S.C. §§1331 and 1332, 18 U.S.C. §§1964(a) et

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and the

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1ST AMENDED COMPLAINT

I

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doctrine of

penQ~nt

jurisdiction.

2

exceeds the sum or value of Fifty Thousand Dollars ($50,000.00),

3

exclusive of interest and costs .

.4

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Ven~e

is proper in this jUdicial district pursuant to

5

28 U.S.C. §§1391(b) and (c) and 18 U.S.C.

6

defendants do business and transact their affairs and the claims

7

herein arose in this jUdicial district.

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In January of 1990, Federal Express entered into a

.

Pursuant to this contract, Federal Express agreed to periodically

12

transfer its employee payroll taxes to Hamilton Taft, and

=

13

Hamilton Taft agreed to prepare and file all of Federal Express's

14

payroll tax reports with appropriate tax authorities (including

15

the Internal Revenue Service and state and local taxing

16

agencies), and to disburse Federal Express's payroll taxes to

17

taxing authorities when due.

18

these services, Hamilton Taft was permitted to earn interest on

19

the money advanced to it by Federal Express between the date

20

advanced and the date the funds were due.

21

to timely pay Federal Express's taxes, as well as any penalties

22

which resulted from Hamilton Taft's acts or omissions.

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GENERAL ALLEGATIONS

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1965, because

written payroll tax service contract with Hamilton Taft.

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The amount in controversy

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As consideration for performing

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Hamilton Taft promised

On or about March B, 1991, Federal Express was informed

24

by former Hamilton Taft controller steve Solodoff that defendants

25

were engaged in a massive scam involving tax fraud and other

26

misconduct.

27

defendants were not disbursing Federal Express's taxes to taxing

28

authorities when due.

Plaintiff was informed that, among other things,

1ST AMENDED COMPLAINT 5

1

21.

2

that rather than pay Federal Express's payroll taxes when due

3

'with the money transferred for that purpose, defendants held such

A

money for an additional period of time.

5

and believes and thereon alleges that defendants, at times, used

6

funds belonging to other Hamilton Taft clients to pay Federal

7

Express's taxes and any penalties for late payments; at other

8

~times,

9 10 11

Plaintiff is informed

defendants used funds belonging to Federal Express to pay

the taxes and penalties of' Hamilton Taft's other clients. I

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Plaintiff is informed and believes and thereon alleges

Plaintiff is further informed and believes that some of Federal Express's taxes were never paid, and penalties may

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accruing.

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that some of Federal Express's funds were misappropriated 'and

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diverted by defendants to their own use and that some of

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plaintiff's fupds were invested in high-risk, non-liquid loans.

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Plaintiff is informed and believes and thereon alleges

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FIRST CAUSE OF ACTION

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(Breach of Contract Against the Armstrong Defendants Only)

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19 20 21 22 23

23.

Plaintiff real leges and incorporates by reference

paragraphs 1 through 22, inclusive. 24.

Defendants' conduct constitutes a breach of the payroll

tax service contract. 25.

Federal Express has performed all conditions and

24

covenants on its part to be performed under the payroll tax

25

service contract, except those conditions or covenants excused or

26

prevented by defendants' breach and the wrongful acts and

27

omissions described herein.

28

1ST AMENDED COMPLAINT 6

1

2 3 ..c1

5 6

26.

Defendants have further breached the contract by not

providing plaintiff full access to plaintiff's tax records in defendants' possession, custody or control •

27.

As a direct and proximate result of defendants' breach

of contract, plaintiff has suffered damages in an amount to be proved at trial.

7

SECOND CAUSE OF ACTION

8

(Breach of Fiduciary Duty Against the Armstrong Defendants Only)

9

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28.

Plaintiff realleges and incorporates by reference

paragraphs 1 through 27, inclusive.

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of their relationship, defendants owe plaintiff a fiduciary duty

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of good faith, integrity and fair dealing.

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Federal Express placed extreme trust and confidence in

defendants that they would perform their obligations.

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30.

Plaintiff is informed and believes and thereon alleges

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that defendants breached their fiduciary obligations by failing

18

to make tax payments, representing that taxes had been timely

19

paid when in fact they were not, misapplying or misappropriating

20

Federal Express's funds; and failing to invest funds as a

21

reasonably prudent investor would invest his or her own money.

22

Defendants further breached their fiduciary obligations by

23

refusing to provide Federal ExPress immediate and full access to

2A 25 26 27 28

all documents and information in defendants' possession, custody or control relating to Federal Express's payroll taxes and funds_ 31.

As a direct and proximate result of defendants' breach

of fiduciary duty, plaintiff has suffered damages in an amount to be proved at trial. 1ST AMENDED COMPLAINT 7

1

THIRD CAUSE OF ACTION

2

(Breach of Agency Duties Against the Armstrong Defendants Only)

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32.

Plaintiff realleges and incorporates by reference

paragraphs 1 through 31, inclusive. 33.

Pursuant to the written payroll tax service contract,

defendants became plaintiff's agent. 34.

Pursuant to its agency relationship, defendants owed a

duty of loyalty to Federal·Express.

This duty of loyalty

required defendants to disburse Federal Express's payroll taxes

11

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to taxing authorities, to do so in a timely manner, and to

12

refrain from administering Federal Express's funds in a manner

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harmful to Federal Express's interests.

1.4

defendants owed plaintiff a duty to refrain from making

15

investments with Federal Express's funds, or investments which

16

might expose Federal Express to tax penalties.

17

owe a duty to Federal Express to provide immediate and full

18

access to any and all documents and information in defendants'

19

possession, custody or control relating to Federal Express's

20

payroll taxes and funds.

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agency duties.

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imprud~nt

Defendants also

Defendants' conduct constitutes a breach of their

22

2.4

Among other things,

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a direct and proximate cause of defendants' breach -.

of their agency duties, plaintiff has suffered damages in an amount to be proved at trial.

26 27 28

1ST AMENDED COMPLAINT 8

FOURTH CAUSE OF ACTION 2

(Breach of the Covenant of Good Faith and Fair Dealing Against the Armstrong Defendants Only)

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Implied in the tax service agreement is a covenant of

good faith and fair dealing whereby defendants were obligated not to take any actions Which would deprive plaintiff of the benefits of the contract and to do everythihq which the contract

11

purpose.

Defendants breached this implied covenant by failing to

timely disburse plaintiff's payroll taxes to the appropriate

13

taxing authorities, and in misapplying, misappropriating, or

14

otherwise misusing plaintiff's funds as herein alleged.

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paragraphs 1 through 36, inclusive.,

presupposed defendants would do to accomplish the contract's

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As a proximate result of defendants' breach of the

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implied covenant of good faith and fair dealing, plaintiff has

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been damaged in an amount to be proved at trial.

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FIFTH

19 20

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CAUSE OF ACTION

(Negligence Against-All Defendants) 40.

Plaintiff realleges and incorporates by reference

paragraphs 1 through 39, inclusive. 41.

By agreeing to pay Federal Express's payroll taxes, and

23

to do so in a timely manner, defendants assumed a duty to Use

2,4

such skill, prudence and' dil~gence as other members of

25 26

27 28

defendants· profession and business commonly possess and exercise. 42.

By failing to make

~imely

payments to the appropriate

tax authorities and by imprudently using plaintiff's funds, 1ST AMENDED COMPLAINT 9

1

2 3 .4

5 6

defendants have breached that duty.

have known, that Federal Express would be injured by defendants' acts and omissions • 43.

As a direct and proximate result of defendants'

negligence, Federal Express has sUffered damages in an amount to be proved at trial.

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Plaintiff realleqes and incorporates by reference

paragraphs 1 through 43, inclusive.

45.

Defendants, at the time they entered into the tax

service agreement and thereafter, represented to Federal Express

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that they would pay Federal Express's payroll taxes in a manner

14

that did not and would not harm or injure plaintiff's interests

15

or subject these interests to undue risk.

16

reasonable grounds for believing that these representations were

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true when made.

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(Negligent Misrepresentation Against All Defendants)

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Express's payroll taxes in an appropriate manner were made with

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the intent that Federal Express rely on the

representatio~s.

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Federal Express was unaware that the representations were false

22

and, believing them to be true, was induced to enter into the tax

23

service contract and to advance and continue" advancing its

2.4

25 26

27

payroll taxes to defendants. 47 •. As a direct and proximate result of defendants· negligent misrepresentations, Federal Express has suffered damages in an amount to be proved at trial.

28

1ST AMENDED COMPLAINT 10

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48.

2

oppressive, and done with the intent to injure plaintiff or with

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reckless disregard of its consequences to plaintiff, and

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justifies an award of exemplary damages.

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SEVENTH

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Federal Express's payroll taxes, and in an appropriate and timely

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manner and in a manner that did not and would not expose

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plaintiff to undue risk.

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deceive plaintiff, and made them without intending to perform

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them.

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52.

Plaintiff was ignorant of the falsity of defendants'

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representations and reasonably believed them to be true.

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justifiable reliance upon those representations, plaintiff was

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induced to enter into the tax service contract and to advance

23

funds and continue advancing "funds to defendants.

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53.

In

As a direct and proximate result of defendants' fraud,

25

plaintiff has suffered damages in an amount to be proved at

26

trial.

27' 28

54.

Defendants' conduct was fraudulent, willful and

oppressive, and plaintiff is entitled to exemplary damages. 1ST AMENDED COMPLAINT 11

1

EIGHTH CAUSE OF ACTION

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Plaintiff realleges and ·incorporates by reference

paragraphs 1 through 54, inclusive.

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At all times herein mentioned, plaintiff had, and

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continues to have, the right to possession and ownership of the

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funds conveyed to defendants for payment of Federal Express's

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payroll taxes.

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(Conversion Against All Defendants).

57.

Plaintiff is informed and believes and thereon alleges

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that defendants wrongfully converted plaintiff's funds for their

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own purposes.

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58.

Plaintiff has demanded a full accounting of all funds

13

it has conveyed to defendants, as well as the immediate return of

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all such funds still in defendants' possession or control or the

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payment of those funds to the appropriate tax authorities.

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Defendants have refused to comply with these requests.

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As a proximate result of defendants' conversion,

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plaintiff has been damaged in an amount to be ascertained at

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trial.

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Defendants' c6nduct was willful, malicious and

oppressive and justifies an award of

exemp~ary

damages.

22

NINTH CAUSE OF ACTION.

23

(Violation of RICO, IS U.S.C. §1961 et seq. Aga~nst All Defendants)

24 25 26

27 28

61.

Plaintiff realleges and incorporates by reference

paragraphs 1 through 60, inclusive. 62.

Plaintiff is informed and believes and thereon alleges

that defendants misappropriated and converted plaintiff's funds

1ST AMENDED COMPLAINT 12

1

to their own use, failed to pay amounts due to taxing

2

authorities, and misrepresented to plaintiff that its tax

3

payments were made.

.4

§1341, in that defendants used Federal Express 1 s funds for their

5

own personal benefit and carried out their scheme by means of the

6

united states mails.

7

63.

Such conduct was in violation of 18

U_S.C •

Plaintiff is informed and believes and thereon alleges

8

that, as a part of defendants' fraudulent scheme, defendants

9

mailed checks across interstate lines and communicated with

10

Federal Express that payments were made, when in fact such

11

payments had not been made and defendants had converted or

12

misappropriated federal Express's funds.

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and believes and thereon alleges that defendant engaged in

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similar conduct and predicate acts with respect to other

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customers of Hamilton Taft.

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Plaintiff is informed

Plaintiff is informed and believes and thereon alleges

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that the foregoing activities are continuous and related, and

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constitute a pattern of racketeering activity within the meaning

19

of 18 U.S.C. §1962(c).

20

believes that this pattern caused injury to plaintiff and others.

21

65.

As

Plaintiff is further informed and

a proximate result of defendants' pattern of

22

racketeering activity, plaintiff is informed and believes that it

23

has incurred damages consisting of, among other things, exposure

2~

to penalties for failure" to pay taxes when due, and liability for

25 26

taxes that defendants failed to pay. 66.

As a direct and proximate result of defendants'

27

conduct, plaintiff is entitled to recover treble damages from

28

defendants in an amount to be determined at trial. 1ST AMENDED COMPLAINT 13

1

TENTH CAUSE OF ACTION

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(Unfair Business Practices Against All Defendants)

3

67.

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paragraphs 1 through 66, inclusive.

5

68.

Defendants' acts, omissions and representations

6

constitute unfair business

7

the California Business and Professions Code.

8

69.

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practic~s

in violation of §17200 of

As a direct and proximate result of defendants' unfair

business practices, plaintiff has suffered damages in an amount

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to be proved at trial.

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ELEVENTH CAUSE OF ACTION

or

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(False and Misleading Advertising Against All Defendants)

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Plaintiff realleges and incorporates by reference each

allegation in paragraphs 1 through 69, inclusive.

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false and misleading advertising in violation of §17500 of the

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California Business and Professions Code.

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Defendants' conduct and representations constitute

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As a direct and proximate result of defendants' false

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and misleading advertising , plaintiff has suffered damages in an

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amount to be ascertained at trial.

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TWELFTH

23

(constructive Trust, Against the Armstrong Defendants Only)

2,4

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CAUSE OF ACTION

73.

Plaintiff real leges and incorporates by reference

paragraphs 1 through 72, inclusive.

74.

By virtue of the wrongful acts described above,

defendants have been unjustly enriched and hold plaintiffs 1ST AMENDED COMPLAINT 14

1

funds, as well as any proceeds of those funds, as constructive

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trustees for plaintiff.

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THIRTEENTH CAUSE OF ACTION

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(Accounting, Against the Armstrong Defendants Only)

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75.

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paragraphs 1 through 74, inclusive.

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Plaintiff has demanded, and is entitled to, a full

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accounting of all monies paid by defendants to tax authorities on

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plaintiff's behalf, and immediate and full access to all records

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in defendants' possession, custody, or control relating to

11

plaintiff's monies and payroll taxes.

12

provide such an accounting or full access to the records.

Defendants have refused to

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FOURTEENTH CAUSE OF ACTION

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(Money Had And Received, Against the Armstrong Defendants only)

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Plaintiff,realleges and incorporates by reference

paragraphs 1 through 76, inclusive.

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78.

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Plaintiff is informed and believes and thereon alleges

that defendants are indebted to

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pl~intiff

'in the amount of

plaintiff's unpaid tax liabilities and penalties, if any, in an I

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at trial.

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amount which is presently unknown but which will be ascertained

79.

Neither the whole nor any part of this sum has been

paid despite demand therefor.

The amount of any such unpaid

taxes and penalties is now due and owing to plaintiff.

26

27 28

1ST AMENDED COMPLAINT 15

1

FIFTEENTH CAUSE OF ACTION

2

(Declaratory Relief Against the Armstrong Defendants Only)

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jUdicial declaration that this express indemnity is enforceable

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and that defendants must indemnify Federal Express for any unpaid

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tax liabilities, including penalties.

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injuries caused by defendants' conduct.

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paragraphs 1 through 79, inclusive.

agreement, defendants agreed to indemnify plaintiff for all

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SIXTEENTH CAUSE OF ACTION (Injun~tion

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Against All Defendants)

Plaintiff realleges and incorporates by reference

paragraphs 1 through 81, inclusive.

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defendants from destroying or otherwise disposing or altering

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plaintiff's tax records and other documents and information in

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defendants' possession, custody or. control concerning the use and

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transfer of plaintiff's tax funds.

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injunctive relief restraining defendants from continuing their

22

wrongful course of conduct described above, and ordering

23

defendants to immediately provide plaintiff full access to all

24

documents and information in defendants' possession, custody or

25

control concerning Federal Express1s payroll taxes and funds.

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83.

Plaintiff is entitled to injunctive relief restraining

Plaintiff is also entitled to

WHEREFORE, plaintiff prays for relief as follows: 1.

For an injunction

r~straining

defendants from

destroying, removing or altering all documents and information 1ST AMENDED COMPLAINT 16

1

concerning Federal Express's payroll taxes and funds in

2

defendants' possession l custody or control and affording Federal

3

Express immediate and full access to such documents and

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information:

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2.

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i~ediately

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account of Federal Express;

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For an injunction requiring defendants to return to Federal Express any and all sums held for or on

For an injunction ordering defendants to cease using

plaintiff's payroll tax funds as part of defendants' scheme, or for any wrongful purpose, pending trial;

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For compensatory damages according to proof;

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For treble damages pursuant to 1B U.S.C. §1964(c);

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For exemplary damages in a sum sufficient to deter

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defendants from similar conduct in the future; 7.

For attorneys' fees and costs of suit incurred herein

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pursuant to contract and 18 U.S.C. §1964(c); 8.

For an accounting of all monies paid by defendants to

tax authorities on behalf of Federal Express;

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9.

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appropriate.

21

Dated:

For such

oth~r

and further relief as this Court deems

March 20, 1991

BRONSON, BRONSON & McKINNON

22

BY:Rft:!.{~~

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Attorneys for Plaintiff FEDERAL EXPRESS CORPORATION

25 26 27

28

1ST AMENDED COMPLAINT 17

1

JURy DEMAND

2

Plaintiff Federal Express hereby demands trial by jury.

3

Dated:

March 20, 1991

.4

BRONSON, ERONSON & McKINNON

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By:

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Attorneys for Plaintiff FEDERAL EXPRESS CORPORATION

P. WALKER

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1ST AMENDED COMPLAINT 18

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MICHAEL H. AHRENS (state Bar No. 44766) GILMORE F. DIEKMANN (state Bar No. 50400) LILLIAN G. STENFELDT (state Bar No. 104929) BRONSON, BRONSON & McKINNON 505 Montgomery Street San Francisco, California 94111-2514 Telephone: (415) 986-4200 Attorneys for Petitioner FEDERAL EXPRESS CORPORATION, a Delaware corporation

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UNITED STATES BANKRUPTCY COURT

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NORTHERN DISTRICT OF CALIFORNIA

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In re

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HAMILTON TAFT iii COMPANY, a California corporation,

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Debtor. 14

91 i 3SE NO.1 0" " ) ) )

Chapter 11

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INVOLUNTARY PETITION

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1.

Petitioners are the following:

(a)

Federal

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Express Corporation, a corporation organized and existing under

18

the laws of the State of Delaware; (b)

19

Hospital; and (c),} The Board of Trustees of the Leland Stanford

20

Junior University (hereinafter collectively called the

21

"Petitioners").

22

Company, One Market Plaza, spear Street Tower, 32nd Floor, San

23

Francisco, California 94105 (hereinafter called the "Debtor").

24

Petitioners hold claims against the Debtor, not contingent as to

25

liability and not subject to bona fide dispute amounting to, in

26

the aggregate, in excess of the value of any lien held by them on

27

the Debtor's properties securing such claims, to at least

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Stanford University

Petitioners are creditors of Hamilton Taft &

28

INVOLUNTARY PETITION

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$5,000.00. 2

The nature and amount of Petitioners' claims are as

follows:

3

(a)

Federal Express Corporation holds a claim

.d

exceeding $32,000,000.00 for moneys advanced to Debtor, which

5

moneys should have been used for remission to the appropriate tax

6

authorities. but were not so used.

7

actions, in excess of $32,000,000.00 is owed by Debtor to Federal

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Express Corporation;

9

(b)

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On account of Debtor's

Stanford university Hospital holds a claim

exceeding $1,700,000.00 for moneys advanced to Debtor, which I

moneys should have been used for remission to the appropriate tax

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authorities, but were not so used.

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actions, in excess of $1,700,000.00 is owed by Debtor to Stanford

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University Hospital;

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On account of Debtor's

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(c)

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The Board of Trustees of The Leland Stanford

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Junior University holds a claim exceeding $296,000.00 for moneys

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advanced to Debtor I which moneys should have been used for

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AJiJ,j ~ remission to the appropriate tax authorities, but were not so

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used.

On account of Debtor's actions, in excess

of_$~96.,OOO.OO_ r:;;:,\./;1/ ,f-/~...,J _:':"':J~!""'!~-:

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is owed by Debtor to The Board of Trustees of The Leland Stanford

21

Junior University.

22

2.

The Debtorls principal place of business or

23

principal assets have been within this district for the 180 days

24

preceding the filing of this petition or for a longer portion of

25

the IBO days preceding the filing of this petition than in any

26

other district.

27

28

3.

The Debtor is a person against whom an order for

relief may be entered under Title 11, United States Code. INVOLUNTARY PETITION 2

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4.

The Debtor is generally not paying its debts which

2

are not subject to bona fide dispute as they become due as

3

indicated by the following:

4

petition are due, and notwithstanding due demand that payment be

5

made, no payment has been promptly made by the Debtor.

Debts alleged in paragraph 1 of this

6

WHEREFORE, Petitioners pray that an order of relief be

7

entered against Debtor under Chapter 11, Title 11, united states

8

Code.

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& McKINNON

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Attorneys for creditor FEDERAL EXPRESS CORPORATION, a Delaware corporation Address: 505 Montgomery street San Francisco, CA 94111-2514

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Attorneys for STANFORD UNIVERSITY HOSPITAL Address:

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Three Embarcadero Center San Francisco, CA 94111

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McCUTCHEN, DOYLE, BROWN &

ENERSEN 23

By

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Attorneys for THE BOARD OF TRUSTEES OF THE LELAND STANFORD JUNIOR UNIVERSITY Address: Three Embarcadero center

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San Francisco, CA

4218-W<ers

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INVOLUNTARY PETITION 3

94111

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VERIFICATION 2

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the attorneys for the petitioner named in the forgoing petition, declare under penalty of perjury that the 5

foregoing is true and correct according to the best of 6

my knowledge, information and belief. 7

Executed on March 1-0

,

1991.

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, one of

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the attorneys for the petitioner named in the forgoing

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petition, declare under penalty of perjury that the 14

foregoing is true and correct according to the best of

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my knowledge, information and belief.

Executed on March s::lQ , 1991.

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, one of

21

the attorneys for the petitioner named in the forgoing

22

petition, declare under penalty of perjury that the

23

foregoing is true and correct according to the best of

24

my knowledge, information and belief.

25 26 27 28

Executed on March c2cJ

,

1991.

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the past few

daY3 .frmer

AmI'

atrong employft, Steve S\:l\odoft. befan to

.-

pn.vately llrov1dt a number of major eom· panleS lIld Institutions llIith 1\ a1mple expl&.· naUon tor !dr. AmlJtrong's suddfrUy ap-p8.rtnt lUId setrnltltly lnexhaumb\e wral!.h. BetOn! he rra1ined kut month. Mr. 8l)-

Tax Question Was the Big Spender Just Spending Money

lodoU w.u controller of

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obseurt san

Frant:laco f\rm. HaJrillton Taft , 0)•• owned by tAr. AMN:U'OIlI sinet Kareh

1889. Tilt! nrrn &r\l\ua!y pt'OCHS6 $3.$ btl· lion In payroll vtlthholdtrlr \UK O~ed to t~ Inlmlal Rl'nnllf Service and oUll!t tax npnclr!> for such chelle employen u f.'edna! ExprKl. SGny CDrp.. C8st1t" &I (MIce. Sta.nford UnlY.frslt)', the Slate Bar 01 California and the OaXland Athlell~5, Ktnd of Potu1 Sc~e Mr. SOlodotf eJletflS to federal au\I1OJitItS lind In a memorandum tU!d Wllh" fed·

Firms Owed to IRS? Texan 'Chip' Armstrong Ran SchemeProcessing Funds. Former Employee Alleges

('ral SUit that I~&d cd ptomptly de\)OS1t· Inr all or Ul.esc funds WIlli the proper fOv, munel\t atency as stfpul8.t&d by c:ontract. ~tr, Armstrong diverted many nul1kmJ to IllS own prlVDl! lISt5 111 a kJnd of PollXl scheme now on me verge af CQlIapse.. Some Ham1\lon Tan cusll:mers confirm the dJ \ets1On!. and Mr. SoJodorf estimateS that thpy total nearly llOO mUllon. Hnml/lon TaIt. It tums out. Is OM Of tile olf!iest tax PTOCWOI'l In tht countrY. But thIS 1SIl't a ~at badness to be III right now. LASt year, the ms cut the lag t1me bt[lV~n payday and w: payment$ from 111m c1aYS to one with a strumltned de\lOll! (IrcKeu, sharply eurta.lling m.arttns. all: players ll~e ADP and ftankAmtrtca

-

FedEx Frets Over $16 Million

I

~enmle tar better fees by Oftering com{lltte payroll servtcea. AtCDNhng to Mr. BolOdoff, the lure for Mr. ArmStrong VI'tlS DOt profJl.S but blliE. lOWly IIQrttUlaltfi cash flows. AcC2Sll to

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thai money has ltelped him crea[e A Ute lie could Qtlly dre:un of eluting 24-hoUr lIreboost sh114. a ~ style tlIlt woUld al· low tum to star In bl$ own rodeos anytime hp WIshes IUld rn~ tbe DallaS W01l\K he WIe
f

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How It Worked litre's hcnv tbe &eb!me worxEe,acwrcl' 1!Ii CD Mr. SOlodoffs memot6JIdum filed With flld'tal COllrt documents: ~ basLt I
f

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beeW. 10u take t!'&t new

payment wi nIl last quarter's bole. The bole ketJliS movltll forwan! one qU!rU!r, wlUlt paymentS rece[vtd tI\ eleh . EUeeeutVf qlUU1er ketp JUlini' It. ne big rtwatd for A1.I this klle·filllnr 1& the chunk Of unpaid te.lCefi trazn the &ta.nI.!lg QIlArter QUWt',

trl found money,

BUI evenrually, hO\~atUng rea very COStly. Tha t'! wb:e re dlt Plwi aspect ~s In. The IRS 1sse6SeS " 10"1. penalty p!Ils ilItet~ on C"Jelj' lA~ ~l. UnIe$t. YOU are um1l\r at \ea.st 1~ q\larterly 4~ annually I on your "fount! JnQIley"

and pass II aJonr to tJ\e

\i);

num, you Will

I

!lave to dlr the ho~ that rnQeh deeper uch ~ around to repdr 1M c1AlrIafe, As th~ blt6 il!t blrrer and mare c:l1ent5 • IN- blInn, the chanee Increases that same I , ~Iltnl W1l1 ~l a penalty nClUte and ask ' ~Jli questions. Inside Hamilton Tatt.

...~ ue ItnOW1\ as'''sensltlvt'' clltll'S, ae·

,

~J._~ ......_

In

PnlJ4' .4.6. ColwnJtJ

t

I

I

~ . -i: broker un make money

1UU\w.l1't

A

.. " ....

r .. :.1 .... ~.- r~ ..·:

.

:..---:

•.

...-.;:..------

_

'ax Question: Wag- Big-Spender 'Chip' Armstrong Just Spending Money That Others Owed to IRS? Ccmluwtd From First Page t
m

paJI)"s books bltcauu Hamilton tah hu pronded n~ dAta. Bven 10. It reeentJ,y rillled Mr. Atmro'OnI $81.000 lor

not

tt!

IU'Vlces.

'-I'he JI: is up," Sly! Mr. $Q)odOff 1D aD ~m!w. a4dinr that be has told every· Ihlng he IaloWI ~ Ibt Intemal Revenue Sel"Viee and tbt ,edml Bureau o! lnvest1· pUon. He sa)1 he discovered the allered IChemt shtlrt!Y before Migning tram Hunllton TIJt, vnere he wu employed for seven JIlDllths. "It made I'M slck to see Cbtp Wi! pain: away wtth thls." Mr. So-locioff may aJsQ be nwUva.ted by a 1IOttD~ "ward 01 up to 25~ Of any tax~ teo CtIvered onder pl'Ovislons Of the False Clauns Act. MeanW1ille. a rrowtnf number of execu·

eral Express, Lt$ ringle Iueest c:u5Um1er. filed a breacll-of-(ODtnu:t suit WedDe$!&y in federal court In sa.n Frandsco. aDd )'t5. tertlay won a lemporary restra1JIfnr onier to pre'ient the company trom destroyiDg erucial record!. Mr. SoltlClotrs mernon.n· tives are leaving Mr. ArmItrong's V'IlrtOUS d\I.m was ftIe-d Wltli the Federal Express persons.llioldlnr companJes. Depanuresln luit. and 1n MOttler document, Federll Ex· !be last fe.... months 1rIcll.ldt Steven Lau. press attorney James Mulroy CIted "IJ(' Hamllton Tatt's vtoe PtU1dent of cash treme cl'locern fw up to $16 ml1l1on Fed· eral B~rtU's funds" representing a. re-

cent Intenm tax payment.

Other c\lStOltlers ta.dng potnoaI UabUl~ ties in unpaid taXes of over 11 mll1Jon. &* :0 rdll\g to a client llst Included in court fil· ingS, tnclud.e: Sun MJcl"OS)lStem5. !andem Computer, Neunan MarC\lS Oroop, Sony Corp, Clans Corp. S &I S Cted1t Cos., Vol· ume Stloe Corp., Comlnerctal crtdit CQrp•• R..R. Donnelly" SMs. SUnlord Uruvemty, and lbt State Bar caltfomta.. One customtr's attorney says, "It loots hk@ there have been cases where they dlc1nl make payments [hey wert eon· lraeted Ie maJ(e, or ma~ them late and In· curred penalties. Now we ert to ur~ out If we art In tI1e bole. 1 surpeet we s.n but I'm rot certain. We w1lI know within a day or twO." Whet.ber these customers w1D suffer It· weI losses wtlI depend on Hanultoc Taft's a.blh!Y to renerate eash quickly from urtaln tn~sunenlS Of! Its booXs. At, of Dec. 31. It MId notes totallng I6B D1W101I !rOm comp:U\les owned by or afftlla.tea with Mr.

or

ayinr fir-

a.ceorchng to an e£lmP8J\Y balanee sheet.

Armstrong.

WWldt~

"There is IUlcertaU'lty of me company's ahll1ty to meet Its obhgaUans," says AIl-

thony DolaIlStl of KPMG Put MaMck. Ha.nullOfl Taft's aCCOWlWlL In a JUDe 1989 J'tview. PUI Marwick cited a $}g million worlllng~8.pltal debell and B&ld "substantially mote f\lnds hAve been collected fn)rn clients tha1l art currently avallahle to lIllY those clients' tues." By year-end 1990. an Internal balanee sheet 'boWl. that figure had swelled to S87 mllllon. Ptal Marw1ek says It ha.s fAUtd tor two years to complete a full audit Of U1e com-

management; Christine Grambling, Ha1nUton. Taft presidentj Barry MDrpn. a chief ~taJlt for Rem1ngton CCiS., Mr. Arm-

stronr's teal.esute coaeemi G. M1cIlael

H1Jt\S. presldent of Oresdner Bnterpmes. his 01.1 ecmpan,y. and George O'Brien. pres' ldent of KJIWltsbridge Cos.• a hOJ&ng com-

pa.ny tor many of Mr. Armttronr's eDte~ JlfIui, incJud!nr JWn1lt.erL Tatt. "! really W8l\t to tell wr side of tM 1tOr'Y." says Mr. ArmsU'ong, in a brief In· terv1eW With this newspaper. Tall and ta.D.ned. with b1s brht brown halr faWDi' over the eollar of his double-breasted IUit In a. uM1ami Vlee" look, he shoWS not the illrbtest m.ee of trlX1ety. H1S lather. Connie C. Armstrong. ~ !bown censtderable 1ntt1atlve BDd eIleru In his own de.aJmgs, a.et01'd1nr to evidl~ eonl\!Cted to hls 1987 lnd!ctment OD eharies of IlundeJ'in: DeIU'Iy Sl mUllan,

Dlrtly throui'b Premier Bank. a Dallas bank with assets of S28 mUlloo UlAt be was cJul1nTWl of.. One piea ot .vidence was A t!P!d eonversatiotl b!twetn tlIt senior Mr. ArtI'lStrQng aM a federal a:ent poslnf as a Co1ombllln money runner. A.eeord\Dg to tanner iUiS1Stant u,s. &nomey WUbam Sheetz, Mr. ArmStrOOr aaJd OIl the tape that "I can move money in W waJnes. I can v.'a.sh m~.1 want yOUr money and I Will move It." The trt&l had barely begun before be pleaded &U1Jty to ~ of the charJes and went tD 'ail. The junior Mr. AI'D1ItJ'Ol1I. the eldest of nve sons. 1Sn't t.e.1Jtlnf any more, on ad· vice of his anorney. 1Jl a letter Mr. Arm· £cronK' sent ro customers Tuesday,lle Bald,

"We will stAnd up to the lueh.est levels of scrut1Jl,y to d1$p1'OI1e these f8.1se and mail' elou.s 81legaUons" made by Mr. Solocloff. -'

He term to Mr. SolodoH as a "dlIgnm·

tled" em~. Exactly how Mr. Armstronr got control of flannltol1 Ta!t. 18 unclear. The Immer

owner. talled MuPh!rma Ine•• in July 1988 pledged tlle rt.oek Of Hamllton Talt. wbicb it Iwl Just bouftIt from Clrna Corp.. for SoU rnillloc, to • "private investor" who gave MaxPharma an emergencytsaO. 000 loan. In !4a.Mh 1.9&9. Mr. Armstron: beeame the tOle oWfl!r "in exchanre of COD' side ra.tkln (lDcludln r costs ) Of lpprtJX\'

mJJtIY

SSSl,OOO," a.eet)roln: to Internal

I:lamUto1l taft doeurnenti

Where that money came frOm is llso 8 ts eVi4enet tha.t hJs ta~r baa helped tln1nce him tn the pail. 'I'M ~ n1tlr Mr. AnnstrOn:'s Preml!rBank mAde a loan to h1S son til 1966. The Federal Deposit lnsuranc.e Corp.• lUi reee!ver for the failed bank. bas EUed the son in Da1W led· era! court. ift an attempt to ~er the loaJ\ tlroceeds. Clearly, Mr. Armstrong had rnmd plans. A corporate brochure, pnnttd In myJtety. There

Rngl1sh and French, anbclp.axed ACSoubllng Of deposits" In ODe year to $10 bll Uoo-prtSUrnably Ul~ new Hmullon Taft cUStOmers-and projected that tht bu~nr empIre would "foctI.s on f\nan cta.I services ~ch as cash anti portfolio manaJement to benefll from enonnow growth opponunilies we believe are b!-

"rrass

com1lI: ava11ahle In the new Europe."

Plans to open an office bl Geneva were

mentioned

Perhaps most tetling. I.n the brochure's

eover letter. Mr.

Annstronr writes: ".Al

we -b.ave fI'OW!I. 1 !lave never lost sigbt o!

the irnpona.nee of m.a1nta1n1ng boUi t1scJJ

and personal intefrlty. These ~p &l'I~ honest values Iff at tile roots or my Texas

-

~n~e."

c=

Litton Unit's Soviet Venture BEVERLY' HIUS. callf.-A su~a.ry

of Unoo lMutrles Inc. stined an ~ ment v.1th a SoViet concern to form a lolnl venture to provide teehnlealtervlces In tilt Rug1an republic;.

T'e"", Of UI! closed.

~nt

weren't dis

The unlt, W~rn AtWi InternationAl. of Hourtcm. llgDed the a.rreement witb TyumenneftereoftlikA. I provider of oU field servtees for' the ld1ntStrY of l1ld Gas bl the Tyumen provtaoe, which llrD" ducu about CO'YQ af the So\1let Union'5 OI! and gas. Unon is 6 dlverslhed ttehnology eompa.ny that proVIdes electronic and ~

au

ItrISe systems. resource explorulon 6e r\" k:es and lndum1al automatlOll systems.

.

Memorandum

SAC, SAN FRANCISCO

To

(196A-SF-93255)

UhL-----'

Prom

Subject

(tN¥e

3/17/91

b7C

(CHANGED)

CONNIE C. ARMSTRONG JR. AKA,

CHIP ARMSTRONG, DBA HAMILTON TAFT AND COMPANY ONE MARKET PLAZA, SUITE 3200 SPEAR STREET TOWER SAN FRANCISCO, CA. 94105 MAIL FRAUD, FBW (A), TAX FRAUD 00: SAN FRANCISCO

Title marked changed to note the true name of captioned subject Armstrong. The purpose of this memorandum is to request authority to create a series of sub files for this case. This memorandum is to be maintained on the inside cover of each of the following sub files as well as the top serial of the main file. Sub

c: All FD-302's

Sub D: Subpoenas and all correspondence regarding same.

Sub E: All correspondence and or documents received from victim corporations. A new subfile should be created when documents are received from each separate company. These may be designated E-I, E-2, etc. Sub F: All information on captioned subject Armstrong. Sub G: All Record checks, DMV, Criminal checks, photos, etc. Sub H: All correspondence with the United states -- ~Attorney's office. Sub I: All information received or sent to the IRS. : All Prentice Hall, Information America and or Dataquick inquiries. Sub K: All computerized analysis of documents and or account information. SUB L: All media coverage of thO

SgB M: All inform

(~.e(' jlj~,,1V F, Ie

SU:'J

ng forefeiture proceedings.

t::\.J

~r, l,~) Jd\/1: Jl1L [."I"~UC EARCHED

1-19 6A-S F- 93255 SUB-C

~

1/()1..J

II

ItIOEXEO

-.-.t.iIol-----II-'---'-____

196A-SF-93255

SUB N:

All correspondence and/or documents received about corporations which material amounts of money and/or property was transferred into from Hamilton Taft; And/or any other corporations

that one of Hamilton Taft's officers has monetary interest. A new subfile should be created when documents are received from each

separate company.

These may be designated N-l,

N-2, etc ..

SUB 0:

~nformation, correspondence received from the trustee appointed to handle the Hamilton Taft bankruptcy

Any

2

-- - - ------. .........~---. manticlp.:ition 01 a. pl)ssible sippi strikl"'. Thomas J. l.!sher, prpsident of USX·s

Bankruptcy Judge Appoints Trustee :: For Hamilton Tah

t,,",,

.....

..... '

~.... By RALPH T. KING JR. . , Sf.a.f!Reporter oj TKE: W ALL STREET JOURNAl.

SAN FRANCISCO - A federal bankruptcy court judge appointed a trustee to supervise RamUlon Taft & Co., a processor of payroll taxes accused of diverting as much as $100 million of customer funds in an allegedly fraudulent scheme. The decision by JUdge Lloyd King is unusual since Hamilton Taft has not sought bankruptcy protection. and the judge hasn't ruled on a motion filed by customers fot an involuntary Chapter 11 reorganl1.ation. The judge said the "extreme remedy" was needed because of "incompetence and mismanagement" at Hamilton Taft and because "the potential for mischief is great." A former Hamilton Taft officer in midMarch told some of the company's largest customers of the diversion. Since then, a raft of lawsuits have been filed in San , 'Francisco federal court against Hamilton Taft, its owner, Connie C. "Chip" Arm~.strong Jr" and various affiliate companies owned or controlled by Mr. Armstrong. The suits allege Racketeer Influenced .and Corrupt Organizations Act Violations, breach of contract, fraud. and other

. "".

.-

-,""

,,", ~

:t

.~ '

..... w, .......

-

F,:-':..\~u:--:C

A\:-\lLABlE

StrllteJ:icaffy lMart'd drr'c1(1I'I/ICllt alld illl'£'stmcllt Ihroll.~IJollt

Ihe

H111/S/flll

mnrop(llirall area.

S I/,I:.i"!cstcd II.'C.( inc/llde mixed-II ~f' ((Iwmcrcial, residcll/ial, h(lfel, retail, 111l/11Ija/IJil)' alld reslal/ront. Select properties include:

.I¥l

~

17.3 Acres - AdJ.llL'111 Freeway ,. Ll:/ .·\.;.t:i".~ PritT !6,405, 4lfS RnCTl'C' Pri(/': 12.562,1/9 f:6 Ant'- - Nt',n lnln'IlIllIllt'll!Jl Airrorr ~"

:

/'"

t

-'.'._'.J-J"",

]'7'/ !\(f'·' - II,

- ':

~-,

.

Hr.',T/'I· PmI'. 182-1,155 '.. 1, I "'I'!.,,·'·

J,.',.".,,'" /'"" St',iI-".I,:!/J

---- - - ....

_.... -

.

\.

...... '• • • _.•.• ,

_--:-~

SEALED BID SALE

"'.

-".

.

]6 PRI.\\E HOl'STO" L-\:--':D TRACTS

parce!.'

....-

;(

J-----------e

80~0 SELLER

....

.. ~ ..

•• 2

3 J

5

FELDMAN, WALDMAN & KLINE A Professional Corporation PATRICIA S. MAR L.J. CHRIS MARTINIAK AUV~ J. ZACHARIN 2700 Russ Building 2JS Montgomery Street San Francisco, CA 94104 Telephone: (415) 981-1300

o Attorneys for Trustee Frederick

s.

Wyle

7

UNITED STATES BANKRUPTCY COURT

a

NORTHERN DISTRICT OF CALIFORNIA 10 11

In re

)

BANKRUPTCY NO.

91-31077 LK

) r1

HAMILTON TAFT & COMPANY,

)

Chapter 11

)

Debtor.

13

)

------------------) IJ

IS

)

91 )

FREDERICK S. WYLE, Trustee in Bankruptcy of Hamilton Taft Company,

18 19

20

Adversary Proceeding

)

~ORANDU

)

16

17

)

Plaintiff,

) )

v.

)

F

AND AUTHORITIES IN SUPPORT OF APPLICATION FOR TEMPORARY RESTRAINING ORD~R

K

)

CONNIE C. ARMSTRONG, JR.

1

et al.

) )

Defendants.

)

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

21

22 23

25 26

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

/1bfl- Sf -73//~-p~t

TABLE OF CONTENTS 2

J

S [CTTON

J

TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . ..

5

INTRODUCTION

1

6

FACTS IN SUPPORT OF INJUNCTIVE RELIEF

J

..,,

Transfers to Affiliates

4

B

Financial Condition of Debtor

7

Consideration for Transfers and Risk of Dissipation

8

9

10

11

I.

II.

r2 13

III.

1.1

15

IV.

16

17

-;.:._~:::::

.

i

~

A TEMPORARY RESTRAINING ORDER IS APPROPRIATE UNDER THE CIRCCMSTANCES OF THIS CASE

9

THE TRUSTEE AND CREDITORS STAND TO SUFFER IRREPARABLE INJURY IF THE TRO DOES NOT ISSUE

11

AS THE AFFILIATES OBTAINED THE ASSETS THROUGH FRAUDULENT CONVEYNiCES, A CONSTRUCTIVE TRUST SHOULD BE ESTABLISHED

1]

THE INJUNCTIVE RELIEF APPLIES TO PARTIES OUTSIDE THE TERRITORIAL JURISDICTION OF THIS COURT ,

15

CONCLUS ION

16

18 19

20 2\

23

24 25

26 -i-

TABLE OF AUTHORITIES P~C~

2

-

3

C.~SES

~

Benda v. Craud Lodge of lAM, 584 F.2d J08 (9th Cir. 1978)

10

Big Shanty Land Corporation v. Comer Properties, Inc., 61 B. R. 272 (N. D. Ga. 1985)

1]

5 6

"'

I

B 9

10 i I

12 1J

calistoga civic Club v. Calistoga, 14] Cal. App. 3d III (193])

16

17

18 19

20 21

15

In Re Cumberland Investment Corporation, 118 B.R. ] (Bkrtcy. D.R. I. 1990)

12

Haskel Engineering and Supply Co. v. Hartford Accident & Indemnity Co., 78 Cal. App. 3d 371 (1978)

14

Heckmann v. Ahrnanson, 168 Cal. App. 3d 119 (1985)

15

IML Seatransit Ltd. v. United states, ]23 F. Supp. 562 (N. D. Cal. 1971) 15

14,

9

Inglis and Son Baking Co. v. ITT Continental Ban!dng Co. 526 F. 2d 86 (9th Cir. 1975)

10

Los Angeles Memorial Coliseum Com'n. v. National Football League, 6]4 F.2d 1197 (9th Cir. 1980)

10

Sturm/O'Connell v. Continental Bank, 19 B.R. 965 (1982)

12

Waffenschrnidt v. Mackay, 763 F.2d 711 (5th cir.

16

1..985)

22

23 2<1

25

-ii-

ST.l>,.TUTES 2 ]

Bankruptcy Rules Rule 7065

,::.

California Civil Codes 5

§

2224 •••••.••••••••••••••••••••••.••••.•...••.••••...••. :;.4

6

§

2223 • • • . • . • . . . • • . • • • • . • . • . . . . . . . . . . . • • . . . . . • . • • . • . . . . . . 1:.\

7

B 9 10

Federal Practice and Procedure §

2951 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . 9

§

65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • • . . . . . . . . 9

§

65(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • . . • . . . · .. 9

11

11 I]

14

\5 16 17

18 19

20

21

22 23

24 25

26

-iii-

INTRODUCTION An involuntary bankruptcy proceeding was filed

2

aga:~5:

J

Hamilton Taft & Co., Inc.

J

March 26,

5

Although the Trustee has been in office only one week, his ar.d

6

accountant's early investigation has substantiated that there have

7

been massive conveyances of assets from Debtor directly or

a

indirectly to companies affiliated with Debtor.

9

application, the Trustee seeks a temporary restraining order

(the "Debtor") on March 20,

1991.

Cn

1991, the Court appointed Frederick S. Wyle as trustee.

By this

10

preventing the affiliated entities, the defendants herein, from

II

encumbering, transferring, or disposing of any assets or any proceeds of those assets, pending determination of the Trustee's

12

adversary proceeding seeking recovery of the assets as fraudulent

1)

conveyances.

),:1

The basis for issuance of a temporary restraining order

15

and preliminary injunctive relief is clear.

16

period that Connie Chip Armstrong Jr.

17

During the two-year

("Armstrong") has owned and

controlled Debtor, extremely large sums of money collected from

18 19

h~5

, Debtor's clients for purposes of paying the clients' payroll taxes have instead been diverted to other companies owned and controlled

20

by Armstrong ("Armstrong Companies").

21

Debtor's records examined

thus far show that at least $61,000,000 has been transferred during that period.

23

Debtor's records show that there are over

$84,000,000 in unpaid and overdue tax obligations that Debtor was

obligated to pay on behalf of its clients.!

25

26

!

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-1-

The Trustee has only

~f

been able to locate about $5,000,000 in known liquid assets 2 ]

Dentor. In return for the above described transfers,

Debtor

4

received either nothing at all, or else unsecured "notes" or

5

"bonds" from the recipient companies.

6

instruments evidencing these Unotes" and "bonds" much less

7

collateral.

8

transfers, cannot meet their own operating expenses without cash

9

"loans" from Debtor, are engaged in risky and speculative

Trustee can find no written any~( i }J'

c,

The Armstrong companies that received these

:0

businesses, and have not even paid the interest due on the "notes"

11

and "bonds".

11 1]

Nevertheless, Armstrong and his affiliate companies have been spending money extravagantly, purchasing a multimillion dollar "hobby"

15 16

17

18 19

20 21

22

2] 24

25

ranch for Armstrong's residence,

installing a

multimillion dollar showhorse practice arena at the ranch,

leasing

a palatial suite at the Mark Hopkins in San Francisco for a reported $130,000, and maintaining a limousine and full time chauffeur in San Francisco for a few day'S use per month. The legal requirements for issuing injunctive relief are The likelihood of success by the

well satisfied on these facts.

Trustee on the merits of the claims set forth in the complaint is compellingly high.

Virtually every ground for finding a fraudu-

lent conveyance exists here.

The Debtor has not been able to meet

its payment obligations when due for virtually the entire period Armstrong has controiled Debtor.

Conveyances have been made

26

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-2-

without receiving reasonably equivalent value. 2

And each

t~ans:=c

left Debtor more insolvent and undercapitalized.

]

The risk that the assets will be dissipated is also

J

compellingly high.

At least $80,000,000 has been transferred to

5

entities under the control of the very person who engineered the

6

transfers, who has spent money lavishly, and who has refused to

7

provide any information to the Trustee about the transfers and

8

disposition of the Debtor's assets by the Armstrong Companies. Armstrong knew that the transfers would render the

9 10

Debtor insolvent and wou_d prevent Debtor from meeting its

il

contractual obligations.

12

recipients, who were owned and controlled by Armstrong.

1]

they also should have known that the consideration,

14

in exchange for the transfers were not reasonably equivalent in

15 16

Such knowledge is imputed to the He and

if" any,

given

value. Certainly the balance of potential harm tips strongly in

17

favor of granting the requested relief and protecting the estate

18

from further dissipation of the transferred assets.

,9

injunctive relief should be issued forthwith.

20 21

22 23

24 25 26

The requested

FACTS IN SUPPORT OF INJUNCTIVE RELIEF The facts on which this application is based are set forth in the declarations of the Trustee,

Frederick S. Wyle

("Wyle"), the Trustee's accountant, Lee Ba1y ("aaly") and investigator Fred Daulton ("Daulton")

filed with this application

for injunctive relief, as well as the declarations of Debtor's former treasurer James Paille ("Paille") and Debtor's former

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-)-

controller Steven SolodoEf ("Solodoff") filed in connection

~it~

the motion of Federal Express Corporation for appointment of a 3

trustee.

J

respective declarations.

5

Transfers to Affiliates

References are to the specified paragraphs of their

1.

Since March 1989, Armstrong has been the sale owner

7

and in control of Debtor.

8

number of related companies inclUding the following:

9

Remington Companies, Inc.: Winthrop Realty Company: CCA Holdings,

10

Inc.: CCAJ Corporation: Chase Development Corp.: Chayson Mortgage

11

and Investment Company; Cal-Pacific Management Corp.; C.R.

12

Acqu isi t ions; Dei, Inc.: Dresdner -F inancial Management

13

Corporation; Dresdner Enterprises,

1.1

H.T. International, Inc.; Suisse Texas, Inc.; Knightsbridge

15

Companies, Inc.: and Knightsbridge Guaranty Company.

16

Daul ton,

17

~

Armstrong also owns and controls a

The

Inc.; Dresdner Petroleum, Inc.;

(Wyle,

~

J;

10.) 2.

Debtor's books and records show that during

18

Armstrong/s control of Debtor, there have been numerous transfers

19

from Debtor to Armstrong Companies (directly or through investment

20 2\

22 23

24 25 26

accounts at Merrill Lynch and/or accounts at Bank One in Dallas) primarily to Armstrong's umbrella companies, Knights Bridge Inc. and Remington.

At least $61,000,000 has been so transferred

during Armstronq/s control oE Debtor, as reflected in the increase of intercompany receivables from approximately $18.9 million shortly after Armstrong acquired Debtor to $68.9 million as of the end of 1990, plUS transfers tota11lng $11,000,000 in January and

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-4-

february of 1991.

There are currently over $80,000,000 in

2

receivables from the Armstrong companies shown on Debtor's bock3

3

and records. ]

J

(Wyle,

.

~

7;

Baly,

~~

4-6 and 12; Solodoff,

Cj

17.)

On September 12, 1990 Debtor's books and records

5

reflect a transfer of $],]00,000 to Remington with the annotation

6

that this was "at Chip Armstrong's request". 4.

"7

(Sa 1 y,

~

9.)

According to the former cash manager of Armstrong's

8

various companies,

Patti Montague, upon obtaining control of

9

Debtor, Armstrong immediately wired about $2,000,000 to the

10

holding company for some of the Armstrong Companies.

!1

4J

12 1] 14

15 16

17 18 19

20 21

22 2]

24 25

26

(Daulton,

9.)

5.

According to Debtor's former treasurer, James R.

Paille, in JUly, 1939, Armstrong transferred approximately $J million of funds belonging to the Debtor to Dresdner Enterprises, Inc., a company which formerly owned the Debtor and is currently owned by Armstrong. 6.

(Paille,

~

8).

According to Paille, in July 1989, Armstrong

ordered $9,000,000 transferred from Debtor to Morgan Guaranty 8ank to the account of Dresdner Enterprises, Inc. 7.

(Paille,

~

9).

According to Paille, in August, 1989, Armstrong

transferred $7 million of the Debtor's money to an account of Dresdner Enterprises, Inc. in order to purchase a shopping center that Armstrong or one of the Armstrong Companies was buying. (Paille, 1 11). 8.

According to Montague,

in February 1990, Armstrong

transferred approximately $10 million of the Debtor's funds to

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-5-

Winthrop for purchase of a showpiece ranch of over 2,000

aC~ES

2

Armstrong's personal residence.

)

approximately $6.4 million was booked to Armstrong, who gave a

J

deed ot trust on the property to Winthrop.

5

winthrop in turn assigned the deed of trust to the Debtor.

o

Portions of the $10 million from the Debtor were also used for

7

improvements on Armstrong's ranch,

8

spent on a cutting horse arena, and for prepaid interest on

9

Armstrong's note.

~

A loan in the amount of

According to

Montag~e,

including about $2.4 million

16).

According to Montague, Armstrong transferred some

9.

\0

(Daulton,

million of the Debtor's funds into Dresdner Petroleum to

11

$3

12

purchase oil and gas leases in the name of Dresdner Petroleum.

13

(Daulton,

16 17

18 \9

20 21

22

~

15).

10.

Id

15

According to Montague, after Armstrong acquired the

Debtor, the Debtor became the primary source of funding for all of Armstrong's Dallas operations.

25 26 '

The Armstrong Companies required

some $400,000 a month in operating costs--almost $5 million a year--apart from any operating costs incurred by the Debtor itself.

The funds for such operating costs were obtained from the

Debtor.

(Daulton, 11.

~

10).

According to Montague, she prepared a weekly cash

summary projecting the Armstrong companies, cash needs for the next several months.

24

~--

If the cash flow showed that the entities

would soon run out of funds, Armstrong would transfer the Debtor's funds to the Dallas office.

These funds were then distributed to

whichever Affiliated Company needed them.

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-6-

(DaUlton, ., 11).

Financial Condition of Debtor 12.

2

Throughout the time Armstrong controlled Debter :: ~s

]

has been rendered unable to pay client tax obligations when due

~

a result of transfers to Armstrong companies. As of the end of

5

1990 there were over $84,000,000 in overdue tax obligations which

b

Debtor was supposed to pay on behalf of its clients,

7

Debtor received funds from its clients to effectuate ?ayment, but

B which have remained unpaid. 9 10 \\

4i

Solodoff, 13.

~

whic~

Substantial penalties and interest

have accrued on these unpaid tax obligations. ~

and fer

(Baly,

4J 15: Wyle,

20).

Debtor now has only about $5,000,000 in liquid This

12

assets that Trustee has been able to find and recover.

13

account may include money on deposit with Debtor for tax payments.

101

(Wy 1 e , 4f 2).

15

16 17 18 :9

20 21

22

2J

24

25 26

14.

Debtor's internally prepared budget for 1991 shows

projected gross revenues to be about $9,000,000 to meet projected operating and payroll expenses of $8,705,375 for 1991 from the following sources: (a)

About $4,130,000 in net fees and overnight deposit

earnings on legitimate business operations, and (b)

About $5,130,000 in interest expected to be paid by

affiliated entities on $57,000,000 in intercompany bond receivables. The budget does not show any interest income projected on the $11,800,000 intercompany note receivable shown on Debtor's books

and records.

(Ba ly,

~

16.)

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-7-

Consideration for Transfers and Risk of Dissipation 15.

On Debtor's records, the intercompany receivac:es

J

are recorded as either "short term receivables", "long ter::!

4

or ul ong term bonds".

5

(a)

6

obligations,

(b) collateral or security agreements securing such

7

obligations,

(c) evidence of repayment of any portion of long

8

obl igat ions,

(d) evidence of payment a E interest on such

notes,

II

12 I]

IJ

15 16

17

20 21

9).

The primary business of the Armstrong Companies

the acquisition of failing companies with the hope of turning them around.

(Wyle, 17.

~

10).

Armstrong Companies which have received funds of

Debtor have been unable to generate sufficient revenue to pay their own operating expenses and Debtsr's funds have been used co meet such expenses.

(Daulton,

~

10).

According to Montague, after February 1990, the

wire transfers from Debtor to Armstrong Companies increased, and Armstrong's personal living style became more extravagant. Armstrong or his companies purchased: (a)

a large suite of luxury rooms at the Mark

Hopkins Hotel in San Francisco, at a cost of over $130,000; (b)

24 25

~

ter~

appears to be somewhat risky and speculative in that i t involves

22

23

(Wyle,

16.

18. 19

However, the Trustee has nat found any:

bonds, or other instruments evidencing the intercoDpany

obligations. 10

not.E:5"

a red Jaguar for $105,000 at the 1990 "Cattle

Baron's Ball;1I

26

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-8-

2

(cl

a Rolls Royce for $135,000 at another

(d)

a

event. 8~~

for $36,000 (paid for by Debtor)

J

Hamilton Tart vice president, Christine Grambling.

5

None of Armstrong's companies, other

o

revenues or funds available to fund these expenses.

7'

Cl

~han

f~L

a

Debtor, had sUfficient (Daulton,

17.)

Armstrong has, through his attorneys, refused to

19.

3 9

char~~i

tell the trustee whether and where the notes and bonds can be

:0

found,

I I

the notes and bonds, why interest is not being paid, or any other

r2 I

J

what assets are owned by the Armstrong Companies to support

information regarding transfers of the Debtors assets and disposition of the transferred funds.

loJ

1.

20 2I

22 23 24

25

8).

A TEMPORARY RESTRAINING ORDER IS APPROPRIATE UNDER THE CIRCUMSTANCES OF THIS CASE Bankruptcy Rule 7065 provides that Federal Rule of civil

17

19

~

DISCUSSION

15

18

(Wyle,

Procedure Rule 65 applies in adversary proceedings.

FRCP 65(bl

sets Earth the circumstances under which a temporary restraining arder may be granted. a~in

to those required to prevail on a motion for preliminary

injunction. §

The tests for issuance of such an order are

2951

states,

11 Wright &

Mi~ler,

(1973 anJ 1986 Supp.): J2J

F.

Supp. 562,

564

Federal Practice and Procedure

see, (N.D.

Ninth Circuit:

26

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-9-

IML Seatransit Ltd. v. Cal.

1971).

United

As held by the

2 J

5 6

,

~

8 9

10

II

12 1) 14 !5 16

17 18

\9

20 21 22 '23

24

25 26

In this circuit the moving party may meet :ts burden by demonstrating either 1) a combination of probable success on the merits and the possibility of irreparable injury or 2) that serious questions are raised and the balance of hardships tips sharply in its favor. Inalis rand Son Bakinq Co. v. ITT Continental Banking Co.] 526 F.2d [86] at 88 [9th Cir. 1975). These are not separate tests, but the outer reaches "of a single continuum" Benda rv. Craud Lodge of IA~, 584 F.2d J08 (9th Cir. 1978) J at ]15. Los Anoeles Memorial Coliseum Com/no v. National Football league, 6]4 F.2d 1197, l02~ (9th Cir. 1980) .

The foregoing facts support the following conclusions which warrant issuance of injunctive relief: 1.

Debtor is, and for months has been,

insolvent in

that Debtor cannot, and for months has been unable to,

pay when

due the tax obligations for which it collected money from clients and Debtor's liabilities exceed its assets. 2.

Many or most of the transfers constitute converSlon

or misappropriation of the assets of the Debtor by Armstrong, or commingling of Debtor/s funds with those of Armstrong Companies, and therefore assets of the Debtor are being wrongfully held by such transferees. 3.

Even if some of the transfers were in exchange for

an oral (or even an as yet unfound written) promise to repay,

the

transfers are not for reasonably equivalent value, since the fair market value of such long term, undocumented, and unsecured obligations from privately held,

financially shaky companies under

the control of a spendthriEt (Armstrong), would be a small fraction of their principal value of 568.8 million, and clearly

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-10-

not reasonably equivalent in value to the transfers. 1

4.

(a)

(b)

(c)

(d)

15

5.

18 19

20 21

such transfers would prevent Debtor from and

Debtor was insolvent at the time the transfers

There is a substantial risk of dissipation of the

assets of the Debtor that have been fraudulently conveyed to the Armstrong companies controlled by Armstrong. 6.

16

17

such transfers would interfere with and

were made.

13 1d

the money transferred was provided to Debtor

paying its obligations as they came due,

\I

12

that

prevent Debtor from performing its contractual obligations,

9

10

imputed through Armstrong,

Compan~e3

by Debtor's clients for tax payments,

7

8

All transfers were made to such Armstrong

with their knowledge,

5

6

t:-.e

transfers to Armstrong Campanies were fraudulent conveyances.

) j

Thus,

Armstrong breached his fiduciary duties to Debtor

by causing the transfers in that he failed to prudently invest and protect the funds under his custody and control, he put himself 1n

a conflict of interest, he engaged in self dealing, and he misappropriated the funds. II.

THE TRUSTEE AND CREDITORS STAND TO SUFFER IRREPARABLE INJURY IF THE TRO DOES NOT ISSUE

22

23 24 25

Debtor's own records establish that tens of millions of dollars of the Debtor were fraudulently conveyed to Armstrong Companies owned and controlled by Armstrong, the controlling

26

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-ll-

shareholder of the Debtor and the person primarily responsi=le 2

its current status.

j

By issuing a temporary restraining order, this court

J

will preserve the status quo, allow the Trustee to conduct his

5

examination, and allow the court time to resolve the Debtor's

6

rights to assets in the possession of the Armstrong Companies without fear that the Armstrong companies will dissipate

s

wrongfully held assets, either intentionally or by gross

9

mismanagement.

t~e

Should the TRO not issue there is no way of

10

preserving those assets which have been transferred from the

11

Debtor to the

12 13

Armstr~ng

Companies.

Arms~rong,

who either owns or

controls those companies, will be free to transfer the assets or further dissipate the assets either by continuing his fraudulent practices or by simple gross mismanagement. The present case is similar to the factual situation of

15 i6

17

18 19

20 21

22 2]

Sturm/o'Connell v. Continental Bank, 19 B.R. 965 (1982).

In

Sturm, the trustee of an estate asked the Bankruptcy Court to enter a preliminary injunction to prohibit the transfers of funds from a banking account held by a third party corporation alleging that although the account was in the name of another entity, the money in the account was,

in fact, that of the debtor.

The Court

issued a preliminary injunction preventing any transfers pending the completion of the trustee's investigation and disposition of the trustee's complaint in view of the serious allegations Laised

15

20

by the trustee concerning the conduct of the debtor.

In Re Cumberland Investment Corooration, 118 B.R. )

MEMO OF

~

& A IN SUPPORT

OF TEMP RESTRAINING ORDER

-12-

See, also; (Bkrtcy.

--------_.-

D.R.I. 1990)

--

(the debtor was restrained from selling coins, e:
2

~ith

J

investigation); Big Shanty Land corporation v. Comer Praoerties,

J

Inc.,

5

debtor and transferee from transferring debtor's sole asset, a

6

tract of valuable undeveloped land).

prior court approval,

pending the results of the

61 B.R. 272 (N.D. Ga. 1985)

examine~'s

(the Court enjoined a Chapter 11

The intercompany diversion of funds and gross

7 8

mismanagement of same has been specifically set forth in the

9

accompanying declarations and shall not be repeated here.

Suffice

10

it to say that the overwhelming evidence compels the conclusion

II

that the assets nominally held by the Armstrong Companies,

12 IJ , <1

15 16 17

companies either owned or operated by Armstrong are,

in legal

effect, assets of the Debtor that are subject to the protection and jurisdiction of this Court.

The preliminary injunction

pending investigation and determination of the Trustee's complaint would serve only to protect the creditors of the estate. III.

AS THE AFFILIATES OBTAINED THE ASSETS THROUGH FRAUDULENT CONVEYANCES, A CONSTRUCTIVE TRUST SHOULD BE ESTABLISHED.

18 19

20 21

22 2J

24

Because the acqUisition of the assets held by the Armstrong Companies was through fraudulent conveyances,

i.e.,

obtained through wrongful means, a constructive trust should be established to hold those funds for the benefit of the Debtor. constructive trust is a

re~edy

a person who has property to

used by a court of equity to compel

~hich

25 26

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

A

-13-

he is not justly entitled to

transfer it to the person entitled thereto. 1

The trust is

;

passive, the only duty being to convey che property.

]

Engineering and Suogly Co. v.

J

78 Cal. App.

5

Calistoga, 143 cal. App.

6

Jd J71,

Hartford Accident

~

Haskel

Inde~nitv

Co ..

]75 (1978): calistoga Ci'Jic Club v. 3d 111, 117 (1983).

The principle of constructive trust situations are

7

covered by two general Code seccions.

civil Code § 2223 provides:

8

"One who wrongfully detains a thing is an involuntary trustee

9

thereof,

for the benefit of the owner."

Civil Code § 2224

provides: "One who gains a thing by fraud, II

accident, mistake,

undue influence, the violation of a trust, or other wrongful act,

r2

is, unless he or she has some other and better right thereto, an

13

involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it."

The wrongful act giving

15 16 17

18 19

1

The trustee of a bankruptcy estate has broad powers under the Bankruptcy Code to "avoid" certain transfers of property made by the debtor either after or shortly before the filing of the bankruptcy petition. The property may be returned to the estate for the benefit of all persons who have valid claims against the debtor. In this case, all assets transferred from the Debtor to the Armstrong companies should also be avoided under section 54B.

20 21 22

23 24

25 26

Sections 548(a} (2) allows the trustee to avoid a transfer if the debtor nreceived less than a reasonably equivalent value in exchange for such transfer or obligation. n Section 548(a) (1) permits the trustee to avoid any transfer made with "actual intent to hinder, delay or defraud any entity to which the debtor was or became ... indebted. " section 550 authorizes the trustee to recover the transferred property from the initial or subsequent transferee. Any transfers of funds made by the Debtor to the Armstrong Companies within the last year are avoidable as fraudulent conveyances. MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-14-

rise to a constructive trust need not amount to fraUd or misre~resentation.

All that must be shown is thac

~~~

2

intentional

]

acquisition of the property was wrongful and that the keeping of the property by the defendant would constitute unjust enrichwent.

5

The remedy in constructive trust cases is to convey to the person entitled the property held in constructive trust or to grant such

7

person an equitable lien.

B

dependent on the absence of adequate legal remedy.

9

Ahrnanson, 168 Cal. App.

The action is not Heckmann v.

3d 119 (1985).

In the present case,

10 11

Calistoga at 117.

the evidence clearly shows that the

assets of the Armstrong Companies are, in fact,

those of the

12

Debtor obtained through various and numerous fraudulent

IJ

conveyances for which no adequate consideration was received.

14

15 16 17 18 19

As such, a constructive trust shouLd be imposed on these assets in favor of the Debtor.

Pending final jUdgment imposing a

constructive trust, injunctive relief should be granted preserving the status quo of the assets.

To fail to do so could irreparably

injure the estate's interests.

IV.

THE INJUNCTIVE RELIEF APPLIES TO PARTIES OUTSIDE THE TERRITORIAL JURISDICTION OF THIS COURT

20 21

22 23

The Trustee seeks to enjoin the transfer or disposition of the assets of the Defendants even though arguably some of the Defendants are not located within California.

It is well settled

that a district court order has nationwide application and that 25 26

parties or non-parties who reside outside the territorial jurisdiction of a district court are SUbject to that court's

MEMO OF P & A IN SUPPORT OF TEMP RESTRAINING ORDER

-15-

jurisdiction if, with actual notice of the court's

orde~,

t~ey

2

actively aid and abet a violation of the order.

3

Mackay, 763 F. 2d 711,

J

absence of other contacts with the forum.

5

Defendants are Armstrong and corporations controlled by

6

Armstrong has ample contact with the forum state through his

7

affiliation with the Debtor.

B

to grant the TRO to restrain Armstrong and his entities from

9

transferring assets that belong to the bankruptcy estate.

714

This is so despi te :::e In this case, the Armstron~.

The Court should have no reluctance

CONCLUSION

10 11

(5th Cir. 1985).

Waffen£chnidt ..

In sum, the THO should issue upon the strong evidence

11

that Defendants have acquired property from the Debtor herein

13

thr'ough fraudulent conveyances, without adequate cons idera t ion,

1<1

and the Trustee, acting on behalf of the creditors of the estate

15

of the Debtor herein, would suffer irreparable injury if the

16

injunction was not issued.

17

therefore issue restraining Defendants from encumbering,

18

transferring or disposing of assets in their possession pending a

19:

hearing on a preliminary injunction and the Court I s consideration

A temporary restraining order should

FELDMAN, WALDMAN & KLINE A Professional corporation

BY~

L. J • -,Chris Martiniak Attoroeys for Trustee Frederick s. Wy1e

-16-

-

. 4/3/91

Mr. Baker:Vf?)

ssP

RE:

ott;:: £CJ!j ',' ---

ASS_' .C'C..Do 'ft

I

i

1-

I}

CONNIE/C • .,ARMSTRONG, JR., AKA CHIP~STRONG; DBAvHAMILTON TAFT AND COMPANY;

32ND FLOOR, SPEAR STREET TOWER, CALIFORNIA; MAIL FRAUD; TAX FRAUD; 00: SAN FRANCISCO

-

SAN FRANCISCO, FRAUD BY WIRE;

San Francisco has initiated a·Fraud By Wire investigation based on information received from the former Comptroller of Hamilton Taft and Company (HTC) that the sUbject, Armstrong, has embezzled over $100 million from the firm's clients over the last three years. ·These allegations continue to be front-page news in San Francisco and on 3/15/91, the Wall street Journal ran a front~page article detailing the allegations (copy attached).

, ......

,r~

HTC contracts.with companies who owe taxes to numerous state and local taxing authorities. Client companies make a lump sum wire transfer of funds to the HTC account, and thereafter, HTC issues checks to whatever taxing authority is owed money. The former Comptroller, I I, has alleged that Armstrong diverted lump sum payments to his own use and thereafter, incurred penalties associated with late payments and passed these costs along to the client companies who were not notified of the late charges. In essence the allegation is that Armstrong is running a "Ponzi scheme" of considerable magnitude which requires increasing amounts of cash to keep the operat'on going. ~ left HTC in Februar of 1991 and on 3

J{: -3:!j

You will be kept apprised of pertinent developments. NOT APPROPRIATE FOR DISSEMINATION TO THE PUBLIC

L.1flZs Enclosure 1 - Mr. Jones 1 - Mr. Baker 1 - Mr. Potts 1 - Mr. Bryant

GDM:gdm/sw (9)

QdM~

1 - Mr. O'Hara 1 - Mr. Esposito 1 - Special Assistants, eID

1 2

3 4

5

LAW OFFICES OF CHESTER L. BROWN 2450 Broadway, Suite 550 Santa Monica, CA 90404 (310) 315-6315 SOLOMON WOLLACK 388 Market Street, Suite 1080 San Francisco, CA 94111-5315 (415) 788-9000

6

7

Attorneys for Defendant CONNIE ARMSTRONG, JR.

8 9 10

II

UNITED STATES DISTRICT COURT

12

FOR THE NORTHERN DISTRICT OF CALIFORNIA

13

14 15

UNITED STATES OF AMERlCA,

16

Plaintiff, YS.

17

18

CONNIE ARMSTRONG, JR. and RICHARD A. FOWLES,

19 Defendants. 20 21

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

22

\\\

23

\\\

24

\\\

25

\\\

26

\\\

) ) ) ) ) ) ) ) ) ) ) )

CR 94-0276 CAL MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTIONTODIS:MISS COUNTS SEVE THROUGH TWENTY-ONE; AND/OF REQUEST FOR PRETRIAL INSTRUCTION AS TO LAW OF THE CASE

27

28

000112

1

INTRODUCTION

2

On March 12, 1996, CONNIE ARlvfSTRONG, JR. filed with this court a Motion To Dism

3

Counts For Legal and Factual Insufficiency. In the March 12 motion, defense counsel asserted that t

4

Ninth Circuit's opinion in In Re Hamilton Taft & Co. l commanded dismissal of certain counts of t

5

indictment. The Ninth Circuit opinion established that client monies, once transferred to Hamilton Tc

6

became the property of Hamilton Taft -- leaving the clients with no beneficial interest in those moni·

7

other than their contractual remedies against Hamilton Taft. In the March 12 motion, Mr. Annstro

8

sought to persuade this court that, under the Ninth Circuit's opinion, all counts speaking to "diversior

9

or misuse ofUclient funds," or other post-acquisition improprieties by Mr. Armstrong, must be dismissf

]0

This court denied that motion.'

11

Mr. Armstrong now brings the instant Motion To Dismiss Counts Seven Through Twenty-Or

12

based on the NInth Circuit opinion or the logic contained therein.lP To the extent that the instant moti,

13

overlaps with the March 12 motion, Mr. Annstrong asks this court to reconsider its earlier decisic

14

Reconsideration of this matter is appropriate, on the grounds that: (1) New information has come to lig

15

which bears on the existence or non-existence of a scheme to defraud -- specifically, the fact that defer

16

counsel has now confirmed that Hamilton Taft p·aid all taxes, in compliance with its contractual dutie

17

(2) Because the indictment in this case pre-dated the Ninth Circuit opinion, there is a strong possibil

18

that counts seven through twenty-one are based on an erroneous premise of law -

19

recognized by the government itse1£ which sought to get the Nmth Circuit opinion reversed; (3) Allowi

20

lay jurors to believe that Hamilton Taft was a fiduciary for their withholding taxes is not only lega

a possibility ev

21

22

In Re Hamilton Taft & Co. (Wyle v: S & S Credit Co., Real Parties in Interest), 53 F. 285, vacated on other grounds, 68 F.3d 337 (1995) is attached as Exhibit A. 2

Because the Ninth Circuit has vacated its opinion in In Re Hamilton Taft, the partie~ the instant case disagree over the extent to which that opinion controls in this case. ~ Armstrong contends that, since the opinion exists and since it addressed a factual situat: identical to the one at issue in this cnminal case, its logic cannot be ignored -- regardl of the technical question of whether or not the opinion is still controlling per se.

3

Since the March 12 motion, defense counsel has had a chance to review the records the Internal Revenue Service, as well as the schedules of the government's own farer accounting expert, Lee Baly, which show that, except for the first quarter of 1991 wI the company was involuntalily shut down, Hamilton Taft paid all its clients' withhold taxes for each quarter.

24 25 26 27 28

2

000113

1

incorrect) but would cause tremendous prejudice and would constitute reversible error; (4) Clarificatio

2

of this issue, through dismissal of counts or, at a

3

allaying defense counsel's need to put on evidence about the character of funds and preventing constar

4

interruption of the proceedings with defense objections to the government's improper characterizatio

5

of those funds; and (5) This court's recent comments at the September 12, 1996 hearing suggested the

6

further clarification may be warranted, concerning the applicability of the Ninth Circuit opinion to count

7

seven through twenty-one of the instant case.

minimum~

instructions to the jury, will save time, b

8

STATENfENT OF FACTS

9 10 11

A.

12

DESCRIPTION OF HAMILTON TAFT'S BUSINESS -Hamilton Taft was a California corporation which provided payroll services for large

businesse~

13

such as Federal Express, Scott Paper) and The State Bar of California. Under the federal and state ta

14

laws, employers are required, every pay period) to withhold from each employee the estimated amoun

15

which the employee owes in federal , state, and local taxes, for that pay period. This system, in whic:

16

employers are charged with the duty of withholding and paying taxes on behalf of their employees, i

17

believed to enhance the ability of the Internal Revenue Service to collect income taxes from all taxpayer~

18

However, because ofthe complex and ever-changing laws and regulations which govern the withholdin

19

tax system., many companies choose to utilize the services of payroU processing finns, such as HamiJto

20

Taft.

21

Under the terms of Hamilton Taft's contracts , employers were required) each pay period, r·

22

deposit with Hamilton Taft an amount equal to the total amount of employee withholding taxes due fc

23

that pay period to federal) state, and local tax authorities. Hamilton Taft would then fill out all ofth

24

proper paperwork and write a check to the various taxing agencies, on behalf of its client. In additior

25

Ha.m.iJton Taft also prepared quarterly withholding tax return fOnTIS (Forms 941) o~ behalf of its client:

26

The 941 forms are due thirty days after the end of each quarter and declare, under penalty of perjury, th,

27

all employee withholding taxes have been paid for the previous quarter.

28

000114 3

By the tenns of its contracts, Hamilton Taft assumed responsibility for all penalties and inten 2

resulting from any late payment of client withholding taxes. In rerum for these services, Hamilton T~

3

would generally receive no fee, but would be entitled to any benefit obtained from the temporary use

4

these monies (often referred to as the Ufloat"), between the time that Hamilton Taft received the mom

5

and the time it paid them over to the appropriate taxing agencies. With but one or two exceptions.

6

client contracts contained no language limiting the types of investments which Hamilton Taft was entitl

7

to make with funds deposited by clients.

t

8 9 10

B.

HAMILTON TAFT BEFORE CONNIE ARMSTRONG --

11

Hamilton Taft was initially incorporated in July, 1979 as KnightsBridge Systems, Ltd., I:

12

changed its named to Hamilton Taft in 198 L In 1984, Hamilton Taft was acquired by CIGNA, a ma~

13

insurance company from Connecticut. Despite CIGNA's continuing efforts to pump its own funds ir

14

its subsidiary companYl Hamilton Taft continued to lose money under CIGNA' s ownership. Finally,

15

Januazy, 1988, CIGNA sold Hamilton Taft to MaxPharma, a publicly held corporation from Dallas.

16

Under MaxPharrna' s ownership, Hamilton Taft

1

S

liabilities grew wo rse, hastened by the fact tl

17

MaxPharma ' s owners made unsecured loans to themselves without the approval of MaxPharm

18

shareholders. Connie Annstrong, a shareholder in the parent company, brought a shareholder derivat

19

suit against MaxPhanna and its principles, alleging a breach of their fiduciary duty to shareholders.

20

March 29, 1989, Roberts and MaxPharma settled the suit, by transferring all stock in Hamilton Taft

21

Mr. Armstrong, who became sale owner of the company. At the time he took over the compa

22

Hamilton Taft's liabilities exceeded its assets by $18.9 million.

l

23 24 ·C.

THE MISSED TAX DEPOSITS --

25

Because Hamilton Taft had approximately 250 corporate clients with varying payroll schedu

26

it received incoming funds from clients every day and, by the same token, had payroU tax deposits

27

evezy day. Most ofthe time) Hamilton Taft paid these withholding tax deposits before the statutory

28

date. However, on one or two days per quarter, Hamilton Taft was forced to hold back client

4

000115

I

.1

deposits due to insufficient funds; as a result of these missed deposits, Hamilton Taft incurred intere

2

and penalties, for which it was liable. Hamilton Taft subsequently made up every missed tax deposit f

3

1989 and 1990 -- usually doing so just before 941 tax returns were due (thirty days after the quarter

4

end). In accordance with its contractual obligation, Hamilton Taft paid all penalties and interest ansit

5

from its late payment of these client tax deposits. 4

6

To make up the missed tax deposits, Hamilton Taft would generally use incoming monies, pa

7

by clients in the foUowing quarter. Because Hamilton Taft needed these newly incoming funds to mal

8

up the previous quarter's missed deposits, those same funds were unavailable for use in the quarter

9

which they were submitted. This, in tum, forced Hamilton Taft to hold back additional tax deposits

10

that quarter. However, at the time they deposited funds with Hamilton Taft, clients understood that tht

11

monies would not be segregated or earmarked for immediate payment to the IRS and funher undersroc

12

that they would never be held liable for late payment of their withholding taxes.

13

14

D.

THE TRANSFERS OF HAMILTON TAFT FUNDS --

15

The primary issue in the instant case involves Mr. Armstrong's wire transfers of approximatt

16

$55 million of Hamilton Taft monies to his Texas companies, in exchange for notes (and later a sinE

17

consolidated bond) of equal value. The Texas companies, whose payroll included experienced expel

18

in real estate, construction development, oil, and investment financing, then invested these mOrnl

19

pledging these investments back to Hamilton Taft as collateral for the loans. Mr. Armstrong hoped tf

20

after several years, these investments might be sold for substantial gain, which could then be put back ir

21

Hamilton Taft and applied against the $18.9 million "hole" which he inherited.

22

The government contends that Hamilton Taft's occasional missed tax deposits were brought

23

by Mr. Armstrong's inter-company transfers ofHanulton Taft funds. In counts seven through eightc

24

of the indictm~nt, they charge Mr. Armstrong with wire fraud, in connection with his supposel

25

26 27 28

4

Though Hamilton Taft made up missed tax deposits just before filing the client's 941 . returns, it did not nonnally make up penalties and interest until receiving notice from IRS requesting such payment -- a process which usually did not occur until about t quarters later. As a -result, Hamilton Taft was technically about two quarters delinqu on interest and penalties, at the time of its shutdown -- though it had not yet, at that til received notice from the IRS as to these penalties.

5

000116

1

improper "diversions" of client funds. Counts nineteen through twenty-one further allege a ucover-u

2

'by Mr. Armstrong afhis supposed misuse of client monies .

.., ..)

4

E.

THE

RUN

ON THE BANK--

5

On March 8, 1991, Steve Solodoff, a disgruntled ex-employee, called a clandestine meeting

6

Hamilton Taft clients, at which he alleged that Mr. Armstrong had "diverted" millions of dollars

7

Uclient" monies, that Mr. Armstrong was running a massive "Ponzi" scheme with other people's monit

8

and that Mr. Armstrong was likely preparing to leave the country, taking the rest of Hamilton Taft

9

money with him. (See memorandum presented to Hamilton Taft clients, entitled, "Hamilton Taft

10

Company, Description of Fraud," attached as Exhibit B).

l1

As a result of Solodoff's tortious allegations, Hamilton Taft's clients simultaneously breachl

12

their contractual duties to Hamilton Taft, by ceasing to deposit funds with the company, without givil

13

the contractually required thirty-day notice of termination. This sudden and massive breach by virtua.

14

aU of its clients, followed shortly thereafter by the involuntary bankruptcy proceedings and forced shl

15

down of Hamilton Taft's business by trustee, Fred Wyle, left Hamilton Taft with approximately $:

16

million in overdue taxes, which it was unable to make up.

17

After his appointment, Wyle shut down all of Hamilton Taft's business activities and sold all

18

the assets pledged back to Hamilton Taft. Because most of these assets were sold at a firesale value, a·

19

never given a chance to mature to their potential value, the proceeds were insufficient to make

20

Hamilton Taft's existing tax liabilities.

I

21

22

PROCEDURAL mSTORY OF NINTH CIRCUIT DECISION

23

In March, 1991, shortly before being placed in involuntary Chapter 11 receivership, Hamilton T

24

paid $7.6 million in taxes, on behalf of its client, S & S Credit. During the subsequent bankrupt

25

liquidation, trustee Fred Wyle sued S & S Credit, seeking to set aside this pre-bankruptcy transfer,

26

the grounds that the monies paid were the "property of the debtor {Hamilton Taft}," and therefc

27 28

000117 6

recoverable under the bankruptcy preference laws. S S & S opposed the suit, arguing that the money w 2

not property ofthe debtor, since Hamilton Taft held client monies in a statutory trust, for the benefit

3

the United States, under Internal Revenue Code § 7501. 6 The Bankruptcy Court ruled in favor of S

4

S Credit and was affinned by this court, in a February 18, 1993 opinion stating that, "The payments we

5

as a matter of law funds held in trust for the Internal Revenue Service and were not the property of t:

6

debtor Hamilton Taft & Company.Jl (See written opinion of this court, attached as Exhibit C). Betwe,

7

the time of this court's opinion and the time of the subsequent reversal by the Ninth Circuit, Iv

8

Armstrong was indicted by a federal grand jury on twenty-one counts of fraud.

9

On May 2, 1995, the Ninth Circuit issued a published opinion, reversing this court and holdil

10

that, under common law trust principles, the statutory trust created by § 7501 dissolves when the trust

11

transfers trust property to a third party -- in this case, Hamilton Taft. Furthermore, the Ninth CirCt

12

refused to impute to Congress an intent to abrogate these common law principles, through enactment

13

§ 7501. The court) therefore, concluded that Hamilton Taft did not hold these momes in trust, for

14

benefit of the m.S.

15 16

The Ninth Circuit also rejected any suggestion that Hamilton Taft held monies in trust for t benefit of either the client or the tax-paying employee: Nor does S & S attempt to show that it arranged with Taft for the transferred funds to be held in trust. Whil e two of Taft's eli ents arranged to have their trust-fund tax payments kept in segregated accounts, S & S and the other clients did not. Instead, Taft extensively commingled all of the funds it received and treated the funds as its own assets, using them to pay its operating expenses and investing the funds for its own benefit. Therefore, under ordinary principles oftrust Taft did not hold the funds in trust.

17 18 19 20

1

21

22

Id., at 288.

24 25

5

26 27 28

t

11 U.S.C. § 547(b) allows the bankruptcy trustee to avoid transfers to or for the be of a creditor and made within 90 days of the bankruptcy, when such transfers invo an interest of the debtor in property.11

U

6

IRe § 7501 states that, cCWhenever a person is required to collect or withhold any inti revenue tax from any other person and to pay over such tax to the United States amount of the tax so collected or withheld shall be held to be a special fund in tru! the United States." 7

000118

... 1

Thus, the court concluded that the transferred funds were indeed the property of Hamilton Ta

2

with all of the correlative rights that property ownership entails. As a result, the court held it prop'

3

under § 547, to set aside the pre-bankruptcy transfer and return the transferred funds to the Ham.ilt

4

Taft bankruptcy estate. S & S Credit promptly petitioned the court for rehearing. On May 23, 1995, the Nmth Circuit ordered the United States to file an amicus brief] addressi

5 6

I

the limited issue of whether the May 2] 1995 opinion might adversely affect the ability of the IRS

7

collect federal taxes. In August, 1995, the United States filed its amicus brief: siding with S & Scree

8

and arguing that Hamilton Taft held monies in statutory trust, for the benefit of the IRS. The brief v

9

submitted by three attorneys out of the Tax Division of the United States Department of Justice

10

Washington D.C.] but also indicated that Michael Yamaguchi] United States Attorney for the North!

11

District of California, had been consulted in an Hof counsel" capacity. (See excerpts of United Sta

12

amicus brief, attached as Exhibit D).

13

The Ninth Circuit neither granted nor denied the Petition for Rehearing,

as the case settl.ec

14

September, 1995. On October 12 1995, the court dismissed the entire appeal as moot and vacated

15

earlier published opinion.

1

16

ARGUMENT

17

18

I.

TIIE NlNTH CIRCUIT'S LEGAL CONCLUSION ABOUT THE CHARACTER OF Fill HELD BY HA1v1IL TON TAFT REQUIRES DIS:MISSAL OF COUNTS SEVEN THROl TWENTY-ONE OF THE INDICTIvlliNT.

A.

:HA.MRTON TAFT fULFn..LED ALL OF ITS CONTRACTUAL DUTIES -

19

20 21

At the hearing on Mr. Armstrong's previous motion to dismiss counts, and more recently) a

22

September 12 hearing, this court expressed skepticism about the relevance of the Ninth Circuit's op

23

to the issues in the instant case. At the September 12 hearing this court expressed its concern the

24

Ninth Circuit decision merely held that Hamilton Taft did not hold funds in trust, vis a vis the lR~

25

that the opinion took no position on whether those funds were held in trust, as to the client com~

26

themselves. However, after subsequent discussion, this court seemed to acknowledge that perhaps

27

remains a need to clarify the precise meaning of the Nmth Circuit opinion, as well as its possible i:

28

on Mr. Armstrong's criminal case. With a1J due respect, Mr. Annstrong believes the Ninth (

l

8

000119

holding to have been broader than this court initially believed and, to the extent that this coun has four 2

otherwise, he asks that it reconsider its decision.

3

While the Ninth Circuit did make clear that § 7501 IS statutory trust vis a vis the IRS does nc

4

extend to third party transferees, it then went on to examine the understanding which existed betwef

5

Hamilton Taft and its clients: Nor does S & S attempt to show that il arranged with Taft for the transferred funds to be held in trust. While two of Taft's clients arranged to have their trust-fund tax payments kept in segregated accounts, S & S and the other clients did not. Instead, Taft extensively commingled all of the funds it received and treated the funds as its own assets, using them to pay its operating expenses and investing the funds for its own benefit. Therefore 'under ordinary principles of trust, Taft did not hold the funds in trust.

6 7 8

9

1

]0

Jd., at 288.

]1 ]2

The above language has nothing to do v..rith the existence or non-existence of a trust, on beh,

13

of the IRS, but speaks only to the relationship between the contracting parties themselves. 7 Th

14

relationship, the court concluded, was not a trust, but was a traditional debtor-creditor relationship, und

15

which the monies, once transferred, became the property of the debtor, Hamilton Taft.

]6

Of course, the fact that Hamilton Taft's contractual relationship with clients was debtor-creditJ

I

17

rather than trust, does not nullify the possibility of criminal fraud. For instance, had Mr. Armstro

18

simply taken clients' monies and opened a Swiss bank account, while totally ignoring

19

to pay their taxes, he almost certainly could be charged with engaging in a scheme to defraud. 8 Howe,

20

the debtor-creditor nature ofHamilton Taft' 5 relationship does have inescapable implications, for cer1

rus contractual d·

21

22 23 7

24 25

26 27

28

I

It is worth pointing out that, under § 7501, employers hold their employees' tax mo in trust for the benefit of the IRS, not the employees. Therefore, the monies w employers contractually agreed to transfer to Hamilton Taft were never trust mOrlll the first place vis a vis the tax-paying employees. The Nmth Circuit has held that a scheme to defraud is completed at the moment tha money at issue changes hands. United States v. Cusino, 694 F.2d 185, 187 (9th 1982). Given this rule of law, even if Mr. Armstrong had wired Hamilton Taft me overseas, it is not at all clear whether such conduct would constitute mere evidence· intent never to perfonn his ~ontractual duties Of, as the government apparently \\ contend, an independent criminal act.

9

000120

.. counts in this case. 9 First it meant that, as a matter of law, client monies, once delivered to Hamilt J

2

Taft, became the property of Hamilton Taft. This, in tum, meant that Hamilton Taft was free to use t

3

money for operating expenses or to invest it for its own benefit, in any manner it wished -- wh

4

remaining cognizant of the fact that the company also owed a contractual duty to pay the dien'

5

withholding taxes.

6

commingle the tax monies of any particular client with the monies of ali other Harrulton Taft clients:

7

was not necessary that any single client's monies be placed in a separate, segregated account. Hem

8

what the government calls a uponzi ll scheme -

9

Client C's money - was not only permissible) but was exactly what Hamilton Taft's cliel!ts bargained f{

10

Third, the debtor-creditor relationship meant that clients retained no beneficial interest in the money, on

11

delivered to Hamilton Taft - having only their contractual rights against Hamilton Taft on which to re

12

The clients' contractual rights in this case were quite simple; Hamilton Taft was obligated to p

13

all client withholding taxes and to assume liability for any penalties and interest resulting from [,

14

payment. Hamilton Taft complied with these contractual duties for every quarter of 1989 and 1990

15

occasionally paying the taxes late, but assuming the penalties and interest for so doing. In the fi

16

quarter of 1991, Hamilton Taft missed certain

]7

as in previous quarters, Hamilton Taft had every intention of making up these rrussed payments,

18

would have done so, but for two key events: (1) the public allegations made by Steve Solodoff wh

19

caused the bulk of Hamilton Taft clients to simultaneously breach their contractual duties, ther·

20

suddenly and completely cutting off all cash flow to Hamilton Taft; and (2Ube March, 1991 appointIT

21

of Fred Wyle as trustee in bankruptcy, and the subsequent shutting down ofHarrulton Taft's busir

22

operations. This double-barreled assault left Hamilton Taft unable to make up approximately $50 mil

23

in overdue tax liabilities, which were to have been paid in April, 199~~i

Second, the debtor-creditor relationship meant that Hamilton Taft could fret

the payment of Client A's taxes with Client B' s a

taX deposits, just as it had done in previous quarters. ]

24

In view of the debtor-creditor nature of Hamilton Taft's contracts, coupled with the fact

25

Hamilton Taft perfonned its contractual duties without fail (when allowed to do so by the clients),

26

27 28

9

Indeed, the government itself seems to recognize that the Ninth Circuit's dec: negatively impacts their criminal case against Mr. Armstrong. This would explain IRS attorneys consulted Michael Yamaguchi himself, in an "of counse]" capacity, , the IRS was preparing its amicus brief seeking to reverse the Ninth Circuit's decisi 10

nnn1t)1

difficult to see exactly what aspect of Mr. Armstrong's conduct the government views as frauduiem 2

Counts seven through fourteen speak of "diversions" -- a term which implies misuse of monil

3

However, Hamilton Taft was certainly free to lend its own money to sister corporations or to invesi

4

for its own benefit, provided it paid the clients' taxes. Hamilton Taft's contracts did not hold Iv

5

Armstrong to any LLprudent investor standard" and did not, in any way, set parameters on the range

6

pennissible investments which Hamilton Taft could make. That Mr. Armstrong's companies may ha

7

incurred excessive operating costs (in the govemmenf s view), or that some of his investments may ha

8

depreciated in value, do not amount to criminal conduct~ in fact, absent a failure to pay clien

9

withholding taxes, this conduct does not even constitute a breach of Hamilton Taft's contractt

10

obligations.

II

Similarly, counts fifteen through twenty-one allege improper diversions and a "cover-up" of the

12

improper diversions -- conduct which, again, might arguably constitute evidence of Mr. Annstron!

13

intent never to perfonn, but which cannot itself be criminal conduct. If monies, once delivered

14

Hamilton Taft, became Hamilton Taft property, there can be no "misuse" of such property vis a vis eli·

15

companies who have already surrendered all proprietary rights in those monies. Rather, the sole quest

16

for the jury to decide is whether Mr. Armstrong fraudulently induced clients to do business with HamJl'

17

Taft, by making representations which he never intended to honor.

18 19

B.

TIllS WAS NOT A uPONZltI SCHE1V1E-

20

Since Hamilton Taft fulfilled its every contractual duty -- to the extent that clients allowed tf

21

to do so -- one might well ask: Wherein lies the so-called scheme to defraud? The government sel

22

to be of the opinion that Mr. Armstrong was operating a uponzi" scheme. IINot so, says the easel If

23

24 25

26 27 28

10

Counts one through six allege that Mr. Armstrong fraudulently induced clients tc business with Hamilton Taft, by misrepresenting the ways in which Hamilton Taft WI invest its monies. While Mr. Armstrong intends to prove his innocence of these cha at tri~ he admowledges that the Nmth Circuit opinion does not require dismissal of f counts, as a matter of pure law. The Ninth Circuif s conclusion that monies wen property of Hamilton Taft means that, while Mr. Armstrong may be charged improprieties in the acquisition of such monies, he should not be charged in conne, with conduct that post-dates his allegedly fraudulent acquisition of monies. 11

nOf\1r)f)

1

"A Ponzi scheme is a fraudulent arrangement in which an entity makes payments to investors fn

2

monies obtained from later investors rather than from any 'profits' of the underlying business ventur

3

In re United Energy Corp. 944 F.2d 589 (9th Cir. 1991). The term stems from the late Charles Par

4

a colorful and flamboyant swindler of the 1920s. Ponzi induced would-be investors to give him man

5

in order to buy foreign postal coupons, which he would then purportedly sell in other countries at ]O(

6

gain. In return for their money, Ponzi gave "investors" 90-day notes, which he would promise to re~

7

at 150% of face value. Though no foreign postal coupons actually existed, Ponzi continued to hor

8

these 90-day notes as promised, using other investors! monies to do so, and thereby causing his o'

9

debts to spiral exponentially. See Cunningham v. Brown, 44 S.Ct. 424 (1924).

l O i n United Energy, the principles sought to induce investors to purchase shares of solar enel 11

modules, by way of a down payment and annual or semi-annual installments. Though the modu

12

actually produced only a negligible amount of energy, the principles paid investors occasional sums

13

money, which they represented to be returns on investment. This, in tum, caused the initial investor~

14

continue making payments to United Energy, while also causing new investors to finance the ph(

15

project. This new money could then be used to partially pay back the old investors, in order to mak

16

appear that the venture was a success.

]7

The schemes in both Cunningham and United Energy, while holding themselves out to

18

legitimate business ventures, were nothing more than textbook Ponzi schemes, in which no investrr

19

ever existed. Conversely, Hamilton Taft's stated purpose was to provide payroll services, and it did

20

Of course, given the $18.9 million hole which he inherited, as well as the continuing interest

21

penalties attributable to that hole, it was inevitable that Mr. Annstrong would have to use newly incon

22

monies to payoff pre-existing liabilities -- holding back more tax deposits in the process

23

unlike CIGN~ which had been able to dip into its own abundant coffers to cover Hamilton Ie

24

escalating liabilities, Mr. Annstrong did not have this luxury. As a result, his only chance of til

25

Hamilton Taft's pre-existing hole, was to invest a small percentage of Hamilton Taft funds in investm

26

which, while containing some element of risk, also had the potential for tremendous returns.

27

decisions to hold back checks and to payoff old liabilities with incoming funds did not constitute a P

Moreo'

28

12

000123

1

scheme, but were simply business decisions which were not only contractually permitted, but we

2

contemplated by the clients at the time they entered the contracts.

3

In a Ponzi scheme, the victims believe they are putting their monies into an investment, althou

4

no investment exists at all. In the instant case, clients believed that Hamilton Taft would pay their taxi

5

as well as any penalties and interest, and Hamilton Taft did so -- until the clients themselves completl

6

shut off Hamilton Taft's cash flow, based on the unconfirmed allegations of a disgruntled ex-employ'

7

Indeed, it is dowruight remarkable that Mr. Armstrong now faces federal felony charges for missing 1

8

payments which his ovm clients (the supposed victims in this case) left him totally unable to make. T

9

$50 million in unpaid 1991 taxes is an_artificial creation of the clients themselves -- brought about by th

10

own sudden and unilateral decision to freeze Hamilton Taff 5 cash flow. These clients have stolen 1\

11

Armstrong's keys and pushed his car into a ditch, yet are now complaining that Mr. Armstrong cam

12

drive them to the show. l1

13

The government's u evidence of a Ponzi scheme stems solely from the fact that, in continuing

14

hold bac~ tax deposits to pay off their pre-existing debt, Hamilton Taft was incurring more and me

15

penalties and interest) thus creating the need to hold more and more future tax deposits. At worst, t

16

conduct constitutes profligate money management by Mr. Armstrong -- the stuff of shareholder pre

17

battles, but not of criminal indictments. If Mr. Armstrong can be criminally charged for running

18

increasing bills for his company, then so too can every home owner who defaults on his loan, or ev

19

corporation whose debts exceed its assets.

20

The truly arbitrary nature of this case is best captured by a rhetorical question: Would:

21

Armstrong be facing criminal charges today if one or two of his investments had reaped grand retu

22

enabling him to fill Hamilton Taft's pre-existing hole? Surely 1v1r. Annstrong' s is not the first busiJ

23

ever to make risky investments, with monies paid to it by clients. Nor is it the first business to perf

24

some of its contractual duties late. And Mr. Armstrong is not the first CEO ever to enjoy a boun

25

I

lifestyle while his company struggles to become profitable. What, then) elevates this case from a

I

26

civil dispute to a 21-count federal fraud indictment? Hamilton Taft's clients, with more than a little

27

from Fred Wyle and the Bankruptcy Court) arbitrarily chose to shut down the company befoT

28

investment program had reached fruition. With Hamilton) s Taft's business activities frozen in tim~

13

000124

government then called on its high-priced accountants, who summoned their mystical powers 2

projections, spread sheets, and mathematical assumptions, to create a loss where none actually existl

..,

Aided by such sorcery, the government was able to transfonn Hamilton Taft from a mere non-profital

.J

business into a criminal <·Ponzi" scheme.

4

5

In short, Hamilton Taft contracted to perform a service for its clients and it did so. If the die1

6

believe Hamilton Taft's late performance to be a contractual breach, let them sue Mr. Armstrong in ci

7

court. lfCongress wishes to expand the common law of trusts to include payroll processing compani

8

let them change the law. If the government believes Mr. Annstrong committed fraud in the inducemt

9

(as alleged in counts one through six), let them prove it at trial. However, to allege that Mr..A.rmstro

10

was <4diverting" funds which were his own property; or committing a Ponzi scheme. while giving I

11

clients the very service they contracted for; or that he "covered up" a scheme which, by definition,

12

have been completed at the moment clients signed their contracts, is illogical, excessive, and Iota

13

prejudicial to Mr. Armstrong' 5 right to a fair trial.

WOl

Counts seven through twenty-one should be dismissed.

14 15

II.

16

AT A MINIM1JM, THIS COURT SHOULD DECLARE THE NINTH CIRCUIT HOLDI1' TO BE THE "LAW OF THE CASE" IN MR. ARMSTRONG'S CRllv1INAL TRIAL.

17 Even if this court does not view the Nmth Circuit's opinion as dispositive of certain counts of 1

18

19 20 21

22

I

indictment, defense counsel at least urges that this court issue an order declaring the Ninth Ci~cuit' s.le; conclusions to be the law of this criminal case. Such an order would mean, inter alia, that:

1.

as the property of Hamilton Taft or Hamilton Taft cash flow. 2.

23 ..,

24

27

28

The goverrunent may not refer to those monies as "client monies" or "client funds may not state or imply that Hamilton Taft held those monies in trust.

ll (;

J.

The government may not present evidence of any advice which Mr. Armstrong receiv from la'W)'ers or other experts, to the extent that such advice was inconsistent with state of the law, as set forth in the Ninth Circuit's opinior:.

4.

This court will instruct the jury that monies, once delivered to Hamilton Taft, became property of Hamilton Taft. -

5.

This court will instruct the jury that Hamilton Taft was free to use its cash flow to co its operating expense or to mvest those monies for its own benefit and in any wa wished.

25

26

Defense counsel may refer to the monies at issue, in both opening and closing statemer

14

0001?S

6.

1 2

This court will instruct the jury that Hamilton Taft's sole duties to its clients were the duties stated contractually but that clients were free to sue for breach, if Hamilton T . ever failed to live up to those duties.

liThe law of the case doctrine 'ordinarily precludes a court from fe-examining an issue preyiou

..., J

United States v. Catenn 0,

4

decided by the same court, or a higher appellate court, in the same case.'

5

F.3d 1390, 1395 (9th Cir. 1994) (citations omitted). The doctrine "refers to a family of rules embodyi

6

the general concept that a court involved in later phases of a lawsuit should not re-open questions decic

7

... by that court or a higher one in earlier phases." Crocker v. Piedmont A viation, Inc., 49 F.3 d 7:

8

739 (D.C. Cir. 1995). {emphasis added}. Law of the case is primarily an equitable principle and, un!:

9

the principles of collateral estoppel and res judicata, is applied at the discretion of the

II

COlin.

Howev

]0

as the Ninth Circuit has observed, it is a principle which IIshould not be applied woodenly in a \\

11

inconsistent with substantial justice." United States v. Miller, 822 F.ld 828 (9th Cir. 1987).

12

In the instant case, there are arguable technicaJ reasons why the Ninth Circuit decision should r

]3

constitute the law of Mr. Annstrong's criminal case. The first such reason is that the decision \)

14

vacated after the parties settled out of court. The second is that the parties to the instant case are not

15

same as the parties to the civil dispute from which the Ninth Circuit's opinion arose. Putting aside th

16

technicalities, it is hardly a matter of dispute that the Ninth Circuit decision arose from the exact sa

]7

facts, circumstances, and issues as those that will be presented in this case. While the opinion has b·

18

vacated, it continues to stand as both a scholarly, lucid, and unassailable explication of the common

19

of trusts, as well as a "cheat sheet," which allows this court to see how the Ninth Circuit will rule, she

20

this issue comes before it again. Under these circumstances, it flies in the face of common sense to ref

21

to acknowledge the Ninth Circuit's reasoning and to pretend the opinion does not exist.

22

To simply leave this matter as a factual free-for-all, to be sorted out by the jury, is not only leg

23

erroneous, but also grossly prejudicial to :Mr. Armstrong. The character of the funds at issue is a

24

component of this case and is a matter of pure law, as even this court acknowledged in its Febru

25

1993

26

place. Because these funds were Hamilton Taft property, as a matter of law, the jury should be instru

27

that this is the case. Simply allowing the defense to present evidence that these were not trust funds

28

leave in the hands oflay-jurors the task of dissecting and applying subtle nuances of law, on which

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opinio~

were this merely a factual issue, the Nmth Circuit never would have addressed it in the

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IIIiI

Mr. Armstrong's own attorneys could not find consensus. After hearing the government refer to tht 2

funds as tldient funds," "trust funds," or "withholding funds," lay-jurors surely cannot be expected

3

understand defense counsel's highly technical arguments about commingling of funds, statutory trus

4· and third party transferees. Without a clear instruction to this court that funds transferred to Hamilt

5

Taft became Hamilton Taft property, the jury wilJ be only too ready to wrongly believe that these fur

6

were withholding monies, and that Hamilton Taft was held to the same fiduciary duty that their

7

employers have.· To allow jurors to make such an inference would be grossly prejudicial and devastati

8

to Mr. Armstrong's case.

0'

9

While Mr~ Annstrong was not himself a party to the Ninth Circuit's case, that case was

10

adversary proceeding which arose out ofthe same bankruptcy as the one which led to this criminal ca

11

By the same token, the facts which led to the Nmth Circuit's conclusions of law (that no trust existed,

12

that Hamilton Taft's relationship with clients was debtor-creditor) are the identical facts now at

13

this criminal case. Adopting the Nmth Circuit's opinion as the law of this criminal case is consistent \\

14

the principles of flexibility and efficiency with which the law of the case doctrine is customarily appli

15

Should this court be reluctant to dismiss counts seven through twenty-one, pursuant to the Ninth eire

16

opinion, 1v1r. Armstrong requests that it at least take the lesser step of declaring the Ninth Circuit's le

17

conclusions to be the law oflvlr. Armstrong's criminal case -- with all of the ramifications which t

18

finding would entail.

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26 27 28

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iSSUE

W 1

DEFENDANT ARMSTRONG'S PROPOSED SPECIAL INSTRUCTION 5

2

3

With respect to the funds paid to Hamilton Taft by the client companies, with the exception of

4

two clients who arranged to have their payments kept in separate accounts, the funds paid to Hamilton

5

Taft became the property ofHarniJton Taft and could be commingled by Hamilton Taft, treated by

6

Hamilton Taft as its own assets, used to pay Hamilton Taft's operating expenses, and invested by

7

Hamilton Taft for itsown benefit. Hamilton Taft did not hold the funds in trust as your employer might

8

hold your withholding taxes. In other words, Hamilton Taft was entitled to the use of the funds until

9

the taxes were due to be paid, pursuant to the tenns of the contract.

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

25

I

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26

Based on: 1I1 Re HamBlon Tail & CD., 53 F.3d 285, 288 (9th Cir., 1995), vacated due to mootness,

27

68 F.3d 337 (1995); Restatement (Second) of Trusts § 283 (1959); Austin W. Scott & William

28

Fratcher, The Law ofTOlsts § 283 (4th ed. 1989).

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