United States of America v. Lui

Filing 118

ORDER DENYING MOTIONS FOR CONTEMPT AND SUMMARY JUDGMENT by Judge Jon S. Tigar denying 104 Motion for Contempt; denying 109 Motion for Summary Judgment. (wsn, COURT STAFF) (Filed on 4/18/2018)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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UNITED STATES OF AMERICA,
Plaintiff,

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v.

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LAWRENCE Y. LUI,
Defendant.

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United States District Court
Northern District of California

Case No. 16-cv-00969-JST
ORDER DENYING MOTIONS FOR
CONTEMPT AND SUMMARY
JUDGMENT
Re: ECF Nos. 104, 109

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Before the Court are Plaintiff’s Motion for Contempt and Defendant’s Motion for

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Summary Judgment. ECF Nos. 104, 109. For the reasons set forth below, the motions are denied.

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I.

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BACKGROUND
The Petition arises from an Internal Revenue Service (“IRS”) investigation into the tax

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liabilities of Lawrence Y. Lui (“Lui”) and Gorretti L. Lui for the years of 2005 to 2012. ECF No.

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1 at ¶ 3. On July 8, 2014, Revenue Agent Meiling Yang, a former Revenue Agent, served

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Petitioner with a summons related to the alleged tax liabilities. Id. ¶ 7. Agent Yang interviewed

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Lui pursuant to the summons on August 4, 2014. Id. ¶¶ 9-10. Lui refused to provide testimony,

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citing his Fifth Amendment privilege against self-incrimination, as well as other privileges. Id.

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¶ 10. On July 29, 2015, Agent Lee served Lui with another summons for documents related to the

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alleged tax liabilities. Id. ¶ 11. The Government sought to compel the production of documents

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related to Wealth Grand Limited, a Hong Kong company (“WG”), Netfinity Assets Corporation, a

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British Virgin Islands company (“Netfinity”), and Jatur Sdn. Bhd., a Malaysian company

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(“Jatur”). ECF No. 1-3 at 7.

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Agent Lee interviewed Lui pursuant to the second summons on August 28, 2015. ECF No.

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1 ¶ 14. Lui provided some responsive documents, but did not provide all responsive documents or

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provide testimony. Id.
Seeking a court order compelling Lui’s cooperation with the summons, the Government

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filed a petition on behalf of the IRS on February 26, 2016. ECF No. 1. On March 15, 2016, this

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Court found that the Government had established a prima facie case and ordered Lui to show

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cause as to why he should not be compelled to produce the requested documents and testimony.

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ECF No. 6. The parties subsequently submitted briefing. ECF Nos. 21-1, 33, 43, 47.1 The

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Government also moved to quash Lui’s requests for admissions and documents. ECF Nos. 32, 38,

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45, 51, 61. Lui moved to dismiss the record summons portion of the Government’s complaint.

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ECF Nos. 59, 61, 62. The Court held a hearing on the order to show cause, as well as the other

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motions as they related to the substance of the order to show cause on December 15, 2016. The

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United States District Court
Northern District of California

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Court ultimately ordered re-briefing on the order to show cause. ECF No. 73. Lui retained new

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counsel, ECF Nos. 75, 80, and submitted an amended memorandum of points and authorities

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opposing the Governments’ summonses. ECF No. 82. The Government filed a new reply. ECF

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No. 84. Lui filed a sur-reply. ECF No. 88.
In its July 31, 2017 order, the Court concluded that Lui had sufficiently demonstrated that

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he did not possess the documents directly related to the Netfinity or WG assets, but that he had not

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demonstrated that he had no documents related to the transfer of those assets and ordered him to

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turn over any documents regarding the transfer, or to submit a declaration explaining that no such

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documents exist. ECF No. 98 at 7-8. Lui filed a declaration that explained, under penalty of

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perjury, that he did not possess or control any documents relating to the transfer on August 11,

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2017. ECF No. 99. As to the testimonial summons, the Court concluded that Lui properly

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invoked his Fifth Amendment privilege and could not be compelled to answer questions regarding

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his interests in foreign accounts or the ownership and reporting of foreign entities, and ordered Lui

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to answer only eleven questions—five general background questions identified in the parties’ joint

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brief at ECF No. 94 at 3, the question of “who keeps of the books and records of Netfinity Asset

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Lui originally moved to strike the Government’s reply to his sur-reply on the grounds that it was
untimely filed, and the Government responded. ECF Nos. 52, 55, 57. Lui then withdrew his
motion to strike. ECF Nos. 89, 90.
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Corporation,” and five specific questions regarding his lack of possession or control of the

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summoned documents as of the date of the summons, ECF No. 98 at 9-11. The Court also

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rejected Lui’s various challenges to the validity of the summons. Id. at 11-13. Finally, the Court

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granted the Government’s motions to quash Lui’s affirmative discovery against the Government,

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and denied Lui’s motion to dismiss. Id. at 15.

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On October 11, 2017, the Court held a case management conference, at which the

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Government asked the Court whether it could ask follow up questions to the eleven questions in

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the July 31, 2017 order. ECF No. 103. The Court instructed the Government to comply with the

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Court’s July 31, 2017 order.
On October 19, 2017 the Government conducted a summons interview. Three IRS agents

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United States District Court
Northern District of California

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asked Lui questions while a U.S. Attorney and a lawyer representing Mr. Lui were present. ECF

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No. 104-1. At this interview, Lui answered the eleven questions that the Court ordered him to

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answer. He based his answers in part on written notes, which he provided a copy of to the

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Government. Id. Throughout the interview, when IRS agents asked questions other than the

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eleven questions in the July 31, 2017 order, Lui’s attorney instructed him not to answer. Id. For

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example, when IRS Agent Lee asked Lui to “describe all positions you have had the for past 20

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years,” Id. at 14, and “Did you receive any stock distribution of dividend or interest income from

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Netfinity?,” Id. at 54, Lui’s lawyer directed his client not to answer. Lui did occasionally answer

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follow-up questions that went beyond the eleven questions identified in the Court’s July 31, 2017

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order. For example, in response to a line of questioning from IRS Agent Chenoweth, Lui provided

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information concerning which documents he reviewed to prepare his answers to each of the eleven

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questions. Id. at 36-40. Lui also answered questions regarding which lawyers helped him prepare

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for the interview, and over what time period. Id.

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The Government now moves for a finding of contempt, arguing that Lui failed to comply

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with the Court’s July 31, 2017 order. ECF No. 104 at 6. Specifically, the Government argues that

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Lui failed to answer questions about the transfer of Netfinity stock to his siblings, and his

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signatory authority on Netfinity and other bank accounts. Id. The Government seeks an order

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issuing remedial or coercive measures to ensure Lui’s compliance with the summons and order,
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and directing Lui to pay the Government’s costs and expenses incurred in seeking contempt. Id.

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Lui opposes the motion for contempt and seeks entry of summary judgment that he is in full

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compliance with the Court’s July 31, 2017 order. ECF Nos. 109, 110. The Government opposes

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Lui’s motion.

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II.

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LEGAL STANDARD
District courts have “inherent power to enforce compliance with their lawful orders

through civil contempt.” Cal. Dep’t of Social Servs. v. Leavitt, 523 F.3d 1025, 1033 (9th Cir.

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2008) (citation and quotation marks omitted). “A person who fails to comply with an order

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enforcing an IRS summons may be held in contempt.” United States v. Bright, No. 07-cv-00311,

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2008 WL 3876111, at *3 (D. Haw. Aug. 20, 2008) aff’d as modified, 596 F.3d 683 (9th Cir. 2010)

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United States District Court
Northern District of California

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(citing United States v. Rylander, 460 U.S. 752, 753 (1983)).

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In moving for an order finding Defendant in contempt, the Government bears “the burden

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to show (1) that [Defendant] violated [a] court order, (2) beyond substantial compliance, (3) not

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based on a good faith and reasonable interpretation of the order, (4) by clear and convincing

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evidence.” United States v. Bright, 596 F.3d 683, 694 (9th Cir. 2010) (internal quotation marks

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omitted). The Government must make those showings by clear and convincing evidence. F.T.C.

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v. Affordable Media, 179 F.3d 1228, 1239 (9th Cir. 1999). “The burden then shifts to the

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contemnor[] to demonstrate why [he was] unable to comply.” Id. (internal quotation marks

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omitted). It is a “long-standing rule,” however, “that a contempt proceeding does not open to

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reconsideration the legal or factual basis of the order alleged to have been disobeyed and thus

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become a retrial of the original controversy.” United States v. Ayres, 166 F.3d 991, 995 (9th Cir.

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1999) (citation and internal quotation marks omitted). Accordingly, a contemnor may not

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“challenge[] . . . the validity of the summons and the enforcement order” during contempt

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proceedings. Id.; Bright, 596 F.3d at 694 (“When defending against a finding of contempt after an

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adversary enforcement proceeding, a taxpayer cannot relitigate the Fifth Amendment privilege or

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lack of custody or control.”) (citation omitted).

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The alleged contemnor is entitled to “reasonable notice of the specific charges and [the]
opportunity to be heard in his own behalf.” Taylor v. Hayes, 418 U.S. 488, 499 (1974). Notice of
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the contempt charges must be “explicit.” Little v. Kern Cty. Superior Court, 294 F.3d 1075, 1081

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(9th Cir. 2002).
“Civil contempt is characterized by the court’s desire to compel obedience to a court order

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or to compensate the contemnor’s adversary for the injuries which result from the

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noncompliance.” Bright, 596 F.3d at 695–96 (internal quotation marks omitted). “Given the

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remedial purpose of the sanction, a finding of contempt must be accompanied by conditions by

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which contempt may be purged, spelled out in either the original order or the contempt order.

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Moreover, although the district court generally must impose the minimum sanction necessary to

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secure compliance, the district court retains discretion to establish appropriate sanctions.” Id.
(internal quotation marks at citations omitted).

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United States District Court
Northern District of California

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III.

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DISCUSSION
The Court concludes that Lui complied with its July 31, 2017 order. The Court’s order

instructed Lui to answer eleven specific questions:

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(1) When did you become a U.S. citizen?

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(2) Are you a citizen of any other country?

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(3) Did you take any accounting classes in college?

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(4) Did you take any accounting or tax classes in graduate school?

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(5) Do you have any education in accounting or tax matters?

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(6) Who keeps the books and records of Netfinity Asset Corporation?

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(7) Did you possess any summonsed documents as of July 29, 2015?

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(8) Who possessed the Netfinity documents on July 29, 2015?

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(9) Where do the individuals that possessed the documents on July 29, 2015 reside?

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(10) How do you know that your siblings possessed or controlled the documents on July

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29, 2015?

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(11) What documents do you possess that evidence your siblings’ possession or control of

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the Netfinity documents?

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ECF Nos. 94 at 3, 98 at 9-10. The Court’s order made clear that any further summons interview

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was limited to these questions. The Court held that Lui had properly invoked his Fifth
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Amendment privilege as to his interests in foreign accounts, and his ownership and reporting of

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foreign entities, and could not be compelled to answer questions regarding those subjects. ECF

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No. 98 at 9-11.

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The transcript of the October 19, 2017 interview shows that Lui answered these eleven

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questions. See, e.g., ECF No. 104-1 at 13-16 (answering questions 1-5, 7-11); Id. at 34

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(answering question 6). For example, in response to question six, Lui answered “I believe my four

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siblings controlled them as of today, August 4, 2014 and July 29, 2015.” ECF No. 104-1 at 61.

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And in response to question eleven, Lui described eight specific documents that showed that his

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siblings controlled the Netfinity documents. Id. at 62.

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The Government argues that Lui failed to comply with the Court’s July 31, 2017 order

United States District Court
Northern District of California

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because he “refused to answer follow-up questions about who possessed the summonsed Netfinity

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documents and how he transferred those documents.” ECF No. 104 at 6. Specifically, according

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to the Government, “Lui refused to answer questions about the transfer of Netfinity stock to his

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siblings,” and refused to “testify concerning his signatory authority on WG and Netfinity bank

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accounts.” Id. The Court did not order Lui to answer those questions, and he cannot be held in

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contempt for not answering them. ECF Nos. 94 at 3, 98 at 9-10.

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The Government also takes issue with Lui’s use of notes at the summons interview. ECF

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No. 104 at 6. The Government cites no authority, and the Court is aware of none, holding that a

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witness may not use materials to refresh his recollection during a summons interview. Perhaps

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Lui was obligated to produce his notes to the IRS, Fed. R. Evid. 612, but he did that. In any event,

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Lui’s use of notes did not convert his percipient witness testimony into “hearsay,” as the

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Government complains. ECF No. 104 at 7.

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Because the Government has not shown by clear and convincing evidence that Lui failed to

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comply with the order, it concludes that Lui should not be held in contempt, and need not reach

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the remaining steps of the contempt analysis. Bright, 596 F.3d at 694; Affordable Media, 179

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F.3d at 1239. The Government’s contempt motion is denied.

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As to Lui’s Motion for Summary Judgment, the Court is not persuaded that that form of
relief is available on the facts and procedural posture of this case. Lui’s motion is also denied.
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CONCLUSION

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For the foregoing reasons, the Court denies the Government’s Motion for Contempt and

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Lui’s Motion for Summary Judgment.

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IT IS SO ORDERED.

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Dated: April 17, 2018
______________________________________
JON S. TIGAR
United States District Judge

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United States District Court
Northern District of California

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