United States of America v. Hines et al

Filing 19

ORDER granting 10 Motion for Discovery; granting 13 Motion for Discovery subject to the limitations discussed in the attached order. Plaintiff must promptly serve defendants with the discovery proposed and defendants must respond within thirty days after being served. Defendants are warned that failure to comply could result in sanctions. Ordered by Magistrate Judge Marilyn D. Go on 7/20/2012. (Proujansky, Josh)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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UNITED STATES OF AMERICA,
Plaintiff,
ORDER
- against CV 2011 5080 (KAM)(MDG)
NAFEESAH H. HINES (individually and
d/b/a Clear Vision Financial
Solutions), and RODNEY N. CHESTNUT,
Defendants.
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In this action, the United States seeks to enjoin defendants
Nafeesah Hines and Rodney Chestnut from engaging in a fraudulent
tax scheme.

The government moves for leave to serve written

discovery requests and notices of deposition on defendants.

In

opposition, the defendants contest the jurisdiction of this Court
on various grounds.
BACKGROUND
On October 19, 2011, the United States filed a Complaint in
this action alleging that defendants Nafeesah Hines and Rodney
Chestnut implemented and promoted a tax fraud scheme known as
“redemption” or “commercial redemption.”

The United States

alleges that defendants prepared and/or submitted fraudulent tax
returns claiming refunds based on phony Internal Revenue Service
(“IRS”) Forms 1099-OID and 1099-A.

In its Complaint, the United

States seeks to enjoin defendants from: 1) advising or assisting

others to attempt to violate the internal revenue laws or
unlawfully evade the assessment or collection of their federal
tax liabilities; 2) preparing or filing federal tax returns or
forms for anyone other than themselves; and 3) advising or
assisting others with respect to federal tax matters or forms.
Complaint at 1.
At a conference held on February 29, 2012, this Court
ordered that discovery be completed by August 31, 2012 but
limited discovery to discovery against third parties absent leave
to serve discovery on defendants.
2/29/12.

See minute entry dated

Following a conference held on April 4, 2012, the

government filed a letter in response to the Court’s request
confirming an ongoing criminal investigation of the defendants
related to the alleged conduct giving rise to this action.

See

ct. doc. 11.
DISCUSSION
I.

Jurisdiction
As a preliminary matter, this Court addresses several

arguments that defendants raise in challenging the Court’s
jurisdiction.

To the extent that their arguments are

understandable, defendants contend that their names “lawfully and
properly [are] spelled only in upper and lower case letters” as
“Natural Person[s],” as opposed to “ARTIFICIAL PERSON[S],” and
that they are thus “exempt from any and all identifications,
treatments, and requirements as such pursuant to any process,

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law, code or statute or any color thereof.”

Defendants appear to

be arguing that the spelling of their names in all capital
letters in the caption of the complaint refers to an artificial
entity rather than a natural person and somehow divests the Court
of jurisdiction over them.
rejected by several courts.

Such arguments have long been
See, e.g., Greathouse v. U.S., 2009

WL 3431391, at *9 (E.D. Tax. 2009); U.S. v. Mitchell, 405 F.
Supp. 2d 602, 603-04 & n.4 (D. Md. 2005); Jaeger v. Dubuque Co.,
880 F. Supp. 640, 643 (N.D. Iowa 1995).

Obviously, the typeface

used in the caption of the complaint does not affect the Court’s
jurisdiction.
Defendants also claim that jurisdiction over this case must
be conferred under Article III, section 2 of the Constitution and
that plaintiff has not established “lawful jurisdiction.”
Article III, section 2 expressly provides, inter alia, that the
judicial power extends to any suit where the United States is a
party.

Congress has enacted statutes specifying that federal

district courts

have original jurisdiction over civil actions

arising under the federal revenue laws, 28 U.S.C. § 1340, and
civil actions commenced by the United States, 28 U.S.C. § 1345.
In addition, sections 7402, 7407 and 7408 of Title 26 expressly
authorize the United States to bring civil actions in the
district where the defendant resides.

To the extent that

defendants’ reference to Article III is intended to challenge a
U.S. Magistrate Judge’s authority to adjudicate this case, 28
U.S.C. § 636 permits magistrate judges to hear and determine any
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pretrial matter pending before the court.
Defendant Chestnut also argues that discovery is not
warranted here because “[t]here is no evidence before the court”
and that the statements by counsel for the government are not
evidence.

Of course, the right of a party to obtain discovery is

not dependent on the evidence the party submits to the court.
The Federal Rules of Civil Procedure provide for broad discovery
“regarding any nonprivileged matter that is relevant to any
party’s claim or defense.”
II.

Fed. R. Civ. P. 26(b)(1).

Stay of Discovery
This Court initially stayed first-party discovery, pending

discovery against third parties and determination of the status
of a criminal investigation of the defendants.
“[T]he Constitution does not ordinarily require a stay of
civil proceedings pending the outcome of criminal proceedings . .
.”

Kashi v. Gratsos, 790 F.2d 1050, 1057 (2d Cir. 1986); see

Nosik v. Singe, 40 F.3d 592, 596 (2d Cir. 1994).

Nevertheless,

“a court may decide in its discretion to stay civil proceedings .
. . when the interests of justice seem to require such action. .
. .”

Kashi, 790 F.2d at 1057.

“Courts are afforded this

discretion because the denial of a stay could impair a party’s
Fifth Amendment privilege against self-incrimination, extend
criminal discovery beyond the limits set forth in Federal Rule of
Criminal Procedure 16(b), expose the defense’s theory to the
prosecution in advance of trial, or otherwise prejudice the

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criminal case.”

Trustees of the Plumbers and Pipefitters Nat’l

Pension Fund v. Transworld Mech., Inc., 886 F. Supp. 1134, 1138
(S.D.N.Y. 1995).

However, a stay of a civil case is “an

extraordinary remedy.”

SEC v. Constantin, 2012 WL 1195700, at *1

(S.D.N.Y. 2012); In re 650 Fifth Avenue, 2011 WL 3586169, at *3
(S.D.N.Y. 2011); Trustees of the Plumbers, 886 F. Supp. at 1139.
In particular, a stay can protect a civil defendant from
having to make a difficult choice between invoking her Fifth
Amendment privilege which may result in a jury drawing an adverse
inference against her in the civil case or potentially making
admissions of criminal conduct that will be used against her in
the criminal investigation.

See Louis Vuitton Malletier S.A. v.

LY USA, Inc., 676 F.3d 83, 97-98 (2d Cir. 2012).
at risk is not their constitutional rights

Yet, “what is

- for they cannot be

forced to testify . . . but their strategic position in the civil
case.”

Sterling Nat’l Bank v. A-1 Hotels Int’l, Inc., 175 F.

Supp. 2d 573, 578 n. 4 (S.D.N.Y. 2001).
In determining whether such a stay should be granted due to
the pendency of the related criminal proceeding, the district
court should consider such factors as (1) the extent to which the
issues in the criminal case overlap with those presented in the
civil case; (2) the status of the criminal case, including
whether the defendants have been indicted; (3) the private
interests of the plaintiff in proceeding expeditiously weighed
against the prejudice to the plaintiff caused by the delay; (4)
the private interests of and burden on the defendants; (5) the
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interests of the courts; and (6) the public interest.

Louis

Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83, 99 & n.14
(2d Cir. 2012) (quoting Trustees of the Plumbers, 886 F. Supp. at
1139); see SEC v. Boock, 2010 WL 2398918, at *1-*2 (S.D.N.Y.
2010); Hicks v. City of New York, 268 F. Supp. 2d 238, 241
(E.D.N.Y. 2003).

No one factor is determinative.

As to the first factor, the issues in the criminal
investigation clearly overlap with the issues raised herein,
since they arise from the same alleged conduct.

The government

alleges in the complaint that defendants prepared and filed
fraudulent tax returns, the same conduct at issue in the parallel
criminal investigation.

The first factor is critical because

“[i]f there is no overlap, there would be no danger of selfincrimination and accordingly no need for a stay.”

Trustees of

the Plumbers, 886 F. Supp. at 1139.
Next, the investigation into the defendants’ activities is
ongoing and there has been no indictment.

“[D]istrict courts in

this Circuit ‘generally grant the extraordinary remedy of a stay
only after the defendant seeking a stay has been indicted.’”
Sterling Nat’l Bank v. A-1 Hotels Int’l, Inc., 175 F. Supp. 2d at
577 (quoting Citibank, N.A. v. Hakim, 1993 WL 481335, at *1
(S.D.N.Y. 1993)).

“[I]t is universally agreed that the mere

pendency of a criminal investigation standing alone does not
require a stay.”

Id. at 578.

The dangers to a defendant pre-

indictment are “at least somewhat more remote” while “the delay
imposed on the plaintiff is potentially indefinite.”
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Id. at 577.

Accordingly, this factor weighs heavily against granting a stay.
See Constantin, 2012 WL 1195700, at *2; Sterling, 175 F. Supp.2d
at 578.
Finally, this Court weighs the interests of the parties, the
public and the Court.

Because of the substantial overlap of

issues between this case and the criminal investigation,
defendants are posed with a dilemma if they participate in
discovery: either testify and waive their Fifth Amendment
privilege or invoke their Fifth Amendment rights and risk an
adverse inference.

However, as discussed below, the Court will

endeavor to minimize the prejudice to defendants caused by
participating in discovery in the absence of a stay.

On the

other hand, the government has a strong interest in the
enforcement of its tax laws and obtaining injunctive relief to
end the conduct alleged in the complaint.

The public also has an

interest in protecting the public fisc from being dissipated by
fraudulent tax refunds.

As to the court’s interests, the

indefinite suspension of civil proceedings would undermine the
speedy resolution of cases.
The written discovery sought by the government consists of
document requests and interrogatories concerning copies of tax
returns prepared by or submitted by defendants, correspondence
drafted by the defendants to the IRS and a list of the
individuals for whom defendants prepared tax returns.

Although

the Fifth Amendment does not protect the contents of voluntarily
prepared documents, the “act of production” of those documents is
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sufficiently testimonial and could incriminate the defendants
where the production implicitly communicates incriminating facts,
such as the admission that “papers existed, were in [the
producing party’s] possession or control and were authentic.”
U.S. v. Hubbell, 530 U.S. 27, 35-37 (2000); Fisher v. U.S., 425
U.S. 391, 410-11 (1976).

The act of production may result in

incriminating evidence (1) “if the existence and location of the
subpoenaed papers are unknown to the govt” and (2) “where
production would implicitly authenticate the documents.”

In re

Grand Jury Subpoena Duces Tecum Dated Oct. 29, 1992, 1 F.3d 87,
93 (2d Cir. 1993).

Here, there has been no showing that the

information sought is known to exist or to be in defendants’
possession.
However, income tax preparers are required by 26 U.S.C.
§ 6107 to retain copies of tax returns and make those documents
available upon request by the government.

The “required records

exception” is applicable where documents are sought that the
producing party is required to maintain.

Several courts have

found that copies of tax returns and lists of taxpayers for whom
the producing party prepared tax returns is covered by the
“required records exception.”

See U.S. v. Bell, 217 F.R.D. 335

(M.D. Pa. 2003); U.S. v. Mayer, 2003 WL 21791155 (M.D. Fla.
2003); U.S. v. Bohonnon, 628 F. Supp. 1026 (D. Conn. 1985).
Thus, at least some of the documents are “required records” and
their production would not implicate defendant’s Fifth Amendment
rights.
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In sum, most of the factors weigh against a stay.

However,

this Court is mindful that “when the government is a party in a
civil case and also controls the decision as to whether criminal
proceedings will be initiated, special consideration must be
given to the plight of the party asserting the Fifth Amendment.”
SEC v. Graystone Nash, Inc., 25 F.3d 187, 194 (3d Cir. 1994).

To

the extent that the Fifth Amendment is implicated by questions
that will be asked at the defendants’ depositions or by the
written discovery propounded by the government, the court should
make an accommodation to “further the goal of permitting as much
testimony as possible to be presented in the civil litigation,
despite the assertion of privilege.”

See U.S. v. Certain Real

Property and Premises Known as 4003-4005 5th Avenue, 55 F.3d 78,
83 (2d Cir. 1995) (civil forfeiture).

The Second Circuit has

upheld protective orders issued pursuant to Rule 26(c) designed
to prevent the government from using potentially incriminating
testimony against a deponent in subsequent proceedings.

See

Minepco S.A. v. Conticommodity Servs., Inc., 832 F.2d 739, 742-43
(2d Cir. 1987) (denying CFTC's motion to modify protective
order); Palmieri v. State of New York, 779 F.2d 861, 866 (2d Cir.
1985) (upholding protective order that was specifically intended
to preclude Attorney General from learning details of case);
Martindell v. Int’l Telephone and Telegraph Corp., 594 F.2d 291,
295-97 (2d Cir. 1979) (recognizing that government's "awesome"
investigatory powers "render unnecessary its exploitation of the
fruits of private litigation").

Accordingly, the discovery
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obtained in this action may be used solely for purposes of this
litigation and may not be shown, distributed or disseminated to
any other person or otherwise used for any purpose other than for
impeachment purposes in another proceeding or in connection with
a perjury prosecution arising out of the defendants’ deposition
testimony.

However, the government may use information derived

from this action against other individuals or entities in any
other proceeding.

This accommodation will minimize the prejudice

to defendants by having to choose between risking an adverse
inference being drawn against them in this action and waiving
their Fifth Amendment rights.
CONCLUSION
For the foregoing reasons, plaintiff’s motion for discovery
is granted subject to the limitations discussed herein.
Plaintiff must promptly serve defendants with the discovery
proposed and defendants must respond within thirty days after
being served.

Defendants are warned that failure to comply could

result in sanctions.
SO ORDERED.
Dated:

Brooklyn, New York
July 20, 2012
_____/s/_____________________
MARILYN DOLAN GO
UNITED STATES MAGISTRATE JUDGE

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