Florida Second DCA Challenges Status Quo On Delegation of Arbitrability

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By:  Allan A. Joseph, Esq.

On March 25, 2020, Florida’s Second District Court of Appeal issued its panel decision in Doe v. Natt, 2D19-1383, 2020 WL 1486926 (Fla. 2d DCA Mar. 25, 2020). A copy of the decision is available here.

The facts of the case are as astonishing as its holding.

A Texas couple sued Airbnb in Florida state court after learning that they had been videotaped by a voyeuristic host who had installed hidden cameras in his Longboat Key vacation condominium.

Airbnb moved to compel arbitration.

The arbitration agreement provided for arbitration in accordance with the Rules of the American Arbitration Association and that the Federal Arbitration Act would govern its interpretation.

The trial court ruled that it “the issue of arbitrability had to be decided by the arbitrator, not the court.” Natt, 2020 WL 1486926*2.

The issue before the Second DCA in Natt was whether the mere reference to the AAA Rules was “clear and unmistakable” evidence that the Does intended to delegate the issue to the arbitration panel. See, e.g., Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 70 (2010) (“An agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other.”).

The Second DCA held, in a well-reasoned opinion by Judge Matthew Lucas, that merely referencing the AAA Rules is not sufficiently clear evidence that the parties intended to delegate arbitrability and thus the Court remained the presumptive gatekeeper to determine whether the Does’ claims against Airbnb were arbitrable:

[The AAA Rules] were referenced in the click wrap agreement as a generic body of procedural rules, and that reference was limited to how “the arbitration” was supposed to be “administered.” Plainly, the agreement’s reference to the AAA Rules … addresses an arbitration that is actually commenced. In other words, the directive is necessarily conditional on there being an arbitration. If a claim is arbitrated, then the AAA Rules apply. But if the question were put, “Who should decide if this dispute is even subject to arbitration under this contract?” to respond, “The arbitration will be administered by the American Arbitration Association (‘AAA’) in accordance with the Commercial Arbitration Rules and the Supplementary Procedures for Consumer Related Disputes,” is not a very helpful answer and not at all clear.

 Natt, 2020 WL 1486926, at *7.

Natt therefore holds that merely making reference to the AAA rules, even Rule 7(a), is insufficient to “clearly and unmistakably” prove delegation. Natt, 2020 WL 1486926, at *7 (“’[Rule7(a)] merely states that the arbitrator shall have ‘the power’ to determine issues of its own jurisdiction …. This tells the reader almost nothing, since a court also has the power to decide such issues, and nothing in the AAA rules states that the AAA arbitrator, as opposed to the court, shall determine those threshold issues, or has exclusive authority to do so.”’) (citation omitted).

Judge Lucas acknowledges that the decision “may constitute something of an outlier in the jurisprudence of [the FAA].” Natt, 2020 WL 1486926, at *8. In this regard, he is referring, among other prior cases, to Terminix Intern. Co., LP v. Palmer Ranch Ltd. P’ship, 432 F.3d 1327, 1332 (11th Cir. 2005), and its progeny, which hold that agreeing to arbitrate under the AAA Rules is “sufficiently clear and unmistakable” evidence of delegation.

Collectively, [Terminix; U.S. Nutraceuticals; and Spirit Airlines] dictate that by incorporating AAA rules into an agreement parties clearly and unmistakably evince an intent to delegate questions of arbitrability. …. Th[e] default rule [that ordinarily questions of arbitrability are decided by the Court) was overcome in Terminix, though, because the arbitration agreement at issue there provided that “arbitration shall be conducted in accordance with the Commercial Arbitration Rules then in force of the [AAA].” Those rules, in turn, gave the arbitrator “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” In agreeing to arbitrate according to rules that granted this power to the arbitrator, we reasoned, the parties in Terminix clearly and unmistakably agreed that the arbitrator would have this power

JPay, Inc. v. Kobel, 904 F.3d 923, 937 (11th Cir. 2018) (citations omitted) (emphasis added).

Judge Lucas also recognizes that the Fourth and Fifth District Courts of Appeal in Younessi v. Recovery Racing, LLC, 88 So. 3d 364, 365 (Fla. 4th DCA 2012), and Reunion W. Dev. Partners, LLLP v. Guimaraes, 221 So. 3d 1278, 1280 (Fla. 5th DCA 2017), respectively, have held that where the language of the arbitration provision indicates that the AAA rules “govern” the proceedings, the parties are deemed to have clearly and unmistakably delegated arbitrability. Natt thus recognizes express and direct conflict with Younessi and Reunion:  Id. at *10 (“Because we disagree with the conclusion those courts appeared to reach concerning what constitutes sufficient clarity and unmistakability of intent to have an arbitrator, rather than a court, resolve questions of arbitrability, we certify conflict with Reunion and Younessi to the extent they are inconsistent with our decision today.”)

Although the panel decision in Natt is not final and is subject to rehearing, rehearing en banc, and, potentially, conflict review by the Florida Supreme Court, it is worth noting not only for its pro-consumer ruling, but also for providing new guidance on drafting arbitration clauses, namely: drafters should expressly indicate that the parties have agreed to delegate arbitratbility to the arbitrators.

Arbitrability and delegation are complex legal issues under both the Federal Arbitration Act and the Florida Arbitration Code. If you are confronting an issue regarding the interpretation of an arbitration provision in a written contract be sure to seek qualified legal advice. FIDJ’s commercial litigation and corporate attorneys are ready, willing and able to help.

VIDEO: Allan Joseph and Family Central Featured on BECON TV

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Allan Joseph, Chairman of the Board of Family Central – Featured on Broward County Public Schools BECON TV

Learn all about Family Central and what they do to help families and children.
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3 Ways FRCP Amendments Could Affect Companies

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By Rebekah Mintzer
December 1, 2015

It’s a big week for many in-house lawyers, outside attorneys and others concerned with litigation and e-discovery. Dec. 1 marks the first day that the first amendments to the Federal Rules of Civil Procedure in almost a decade will be operational. Since the last FRCP amendments came out in 2006, a lot has changed—for instance, the amount of electronic data produced by parties has grown exponentially.

The amendments, which were developed by an advisory committee of the Judicial Conference of the U.S. and vetted by the U.S. Supreme Court, seek to update litigation processes, particularly in the area of e-discovery. Though it remains to be seen how the amended rules will function in practice, here are three of many possible ways they may influence the work of in-house counsel and their colleagues involved in litigation:

Speeding Up the Processes

The FRCP amendments are based around an understanding that no one likes their discovery and litigation processes to be long and dragged out. “Basically, the objective behind all the amendments is to expedite timely case management and to reduce delays in litigation as well as in production and also to reduce the costs and burdens associated with litigation and high volume document production,” says Georgia Thompson, an associate at law firm Richman Greer.

The emphasis on collaborating for speedier litigation starts at the very beginning, the amendments to Rule 1 of the FRCP. Rule 1 has been modified to add a reference to the court and the parties when explaining how rules should be construed to make litigation faster, less expensive and more fair.

“What the committee is saying is that we all are in this together,” says Allan Joseph, a partner at law firm Fuerst Ittleman David & Joseph. “We all have to work—no matter how much it might not be in the interest of our client—we now all have the burden of making sure we run our cases so we can get a just and speedy determination.”

The amendments get specific about reducing time that it takes to complete certain processes in litigation. Changes to Rule 4 of the FRCP try to get litigation started faster, by reducing the time to serve a defendant from 120 days to 90 days. Rule 16 has been changed as well, making courts issue scheduling orders either 90 days after a defendant has been served or 60 days after the defendant has appeared, whichever is shorter.

Determining When ESI Spoliation Has Actually Happened

There are many reasons that a party might not be able to provide electronically stored information in e-discovery. There could be a technology problem or a deletion policy that was carried out before a company could anticipate litigation was on its way. New amendments to Rule 37 of the FRCP take into account the possibility that a party may lose information, not because the attorneys believed there was something to hide, but simply because, life happens.

The amendments could help parties avoid spoliation claims and resulting sanctions. “Before, the courts were able to impose those kinds of sanctions even where parties that failed to preserve had no bad intent,” says Thompson. “You could say that now the amendments have laid out an ‘if this, then that.’”

The changes to Rule 37 create a framework and steps to follow for a court to determine whether a party can be deemed to have intentionally failed to provide ESI. The process includes looking at whether the party took “reasonable steps,” but doesn’t expect preservation of data to be perfect.

Adding Transparency to Objections

“The rule that I think is getting the least attention but will have a far bigger impact than anyone realizes is Rule 34,” says Clifford Nichols, a senior counsel at Day Pitney. Rule 34 governs objections by the parties to requests for production of documents and ESI. The amendments change Rule 34 to ask the party objecting to a discovery request to provide specific information about their grounds for objecting—meaning that general responses like that the request is “overly broad” may no longer hold water. “Gone is the boilerplate objection,” Nichols notes.

The relevant party will also have to reveal whether or not new documents are being withheld from discovery based on the objection at hand. This will hopefully have the effect of signaling which objections may be worth pursuing, and which won’t result in getting any new information anyway, saving time and energy for all parties. “The disputes that really matter will be highlighted by these objections,” says Nichols “rather than the requesting party having to sift through a mountain load of objections and then trying to determine which ones really matter to them.”

 

 

Miami: The City of Fun, Sun and International Arbitration

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By Allan A. Joseph
November 18, 2015

Miami has long been a destination city for its unrivaled beaches, eclectic culture and fun-filled days and nights. Likewise, because of its geographic position, Miami has been a gateway to international trade. Now, the same traits that have made Miami so attractive to the international traveler have combined with recent business and legal developments to transform Miami into the new hub for international dispute resolutions.

Frustrated with the unpredictability, sluggish pace and restrictions of conventional litigation, parties increasingly are incorporating arbitration clauses into their cross-border contracts. As a result, the number of international arbitration proceedings is growing at a rapid pace. Through prescient action by Miami’s business and elected leaders, Miami has become a top-five forum for such disputes, second only to New York in popularity for proceedings handled in the United States.

The American Arbitration Association’s International Center for Dispute Resolution reports that over the past 20 years, cases filed with that organization have increased five-fold. During the past five years, Miami has experienced a similar increase, with 156 international arbitration cases filed in Miami in 2014 compared with just 49 cases in 2010, and is on pace to top that total in 2015. This impressive increase prompted the ICDR to open a new Miami office to administer the ever-growing influx of such cases. Likewise, Miami’s rise to prominence lead to its selection last year to host the biennial congress of the International Council for Commercial Arbitration, which was held in the United States for the first time since 1986.

Miami’s international arbitral growth is no accident. Miami has the built-in infrastructure to accommodate international dispute resolutions. With its large, recently upgraded airport and seaport, Miami is readily accessible from virtually anywhere in the world. Its dynamic demographics lends a wealth of multilingual, multicultural arbitrators and translators. Moreover, the costs of arbitrating a case in Miami is substantially lower than New York, London or Paris, its main arbitral competitors. The city’s rising prominence as the designated locale for international commercial arbitration has resulted in Miami being the forum for several high profile, multibillion dollar actions. Cases from Latin America and Asia figure prominently among these cases, including the globally significant arbitration proceedings to resolve disputes arising from the expansion of the Panama Canal.

Miami’s growth in this arena cannot be attributed to demographics alone. Arbitral parties are able to agree upon the chosen forum within the body of their contractual agreements. Recognizing this factor, Miami’s leaders took the initiative to package Miami as the best choice for a dispute resolution forum.

First, the Florida legislature enacted the Florida International Commercial Arbitration Act (FICAA). Under the FICAA, cross-border companies may designate Miami as their preferred arbitration locale, regardless of whether there is any nexus between Miami and the parties or the transaction. Then, capitalizing on the momentum generated by the FICAA, Miami-Dade County announced the establishment of the International Commercial Arbitration Court (ICAC), a tribunal dedicated solely to facilitate international arbitration proceedings in Miami.

The ICAC is staffed by specially trained judges and employs progressive, business-effective rules to compel arbitration, and perhaps more significantly, promptly confirm any award. As further enticement, the Florida Bar amended its rules to permit appearances and remove the restrictions on non-Florida Bar attorneys, including foreign lawyers, who appear solely for the purpose of representing their respective clients for international arbitrations in Florida. The forward thinking mechanisms created to benefit parties who select Miami as their chosen arbitration forum has catapulted Miami as the preeminent locale for the resolution of international disputes.

As one of the world’s most attractive markets for global tourism and international investment, Miami is no stranger to adapting to progressive business opportunities. Inevitably, as international arbitration grows in Miami, so will the demand for trained, multilingual professionals who can service the dispute resolution industry. Local lawyers, court reporters, translators, expert witnesses and other South Florida litigation support personnel who are proficient with the procedures and nuances of FICAA will thrive.

Importantly, the benefits of an increase in international arbitration are not limited to the legal field. Local businesses can capitalize on this increased demand by focusing their efforts on developing a solid infrastructure that caters to the logistical needs of the arbitral process. In addition to the legal field, restaurants, hotels, transportation and a myriad of other service providers will be called upon to logistically support this growth industry. Miami is now the city of fun, sun and international arbitration.

To view original article, click here.

Allan A. Joseph is a partner at Fuerst, Ittleman, David & Joseph in Miami. He can be reached at ajoseph@fidjlaw.com.

Jury Is Still Out On Scope Of Arbitration Clauses

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DailyBusinessReview

By Allan A. Joseph
September 5, 2014    

Our country rose from the discontent of oppressive power. It is within our genetic makeup to be vested with fundamental rights ensuring fairness, equality and justice. Indeed, on July 4, 1776, our Founding Fathers explained in declaring our separation from the tyrannical King of England:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government.

One of the most important rights guaranteed to us is a right to a jury trial. This right has ensured that there is a just avenue to justice without regard to the size or power of the litigants. The right to a trial by a jury of our peers has long been deemed to be the great equalizer between the might of Corporate America and the grievance of the individual. Understandably, a level playing field has not been in Corporate America’s playbook.

Companies have learned that because most consumer disputes concern relatively small amounts, and the costs of bringing such suits will far exceed the expected recovery, most consumers cannot afford to bring individual action to redress corporate misconduct. The sole vehicle for relief to the consumer is through class action procedures, where the accretive nature of the claims-by-numbers provides the economic incentive to challenge the alleged corporate misconduct. In order to block such consumer remedies, companies have taken to inserting mandatory arbitration clauses that are in fact intended to strip away the rights of consumers to have an effective avenue of redress.

Recently, the U.S. Supreme Court has handed Corporate America a series of successful decisions enforcing arbitration clauses, which effectively preclude classwide relief. In a string of decisions the court eviscerated the class action remedy and empowered Corporate America to effectively contract its way out of liability for misconduct.[1] Corporate counsel across the country celebrated with each passing decision.

However, consumers have fought back and the state courts have listened. The Florida Supreme Court recently invalidated an arbitration clause and held that even with the signatures of all parties, there must be a “meeting of minds” regarding the agreement to arbitrate.[2] The California Supreme Court served its retort by finding that arbitration clauses are unenforceable in qui tam, private attorney general cases.[3] Just last week, Florida’s Third District Court of Appeals issued the Allscripts decision, which took yet another bite from the reach of an arbitration clause.[4]

In Allscripts, the subsidiary entity entered into licensing agreements with end-user doctors for the use of electronic health care software. The doctors have contended that as a result of the cost of maintenance, coupled with the drag on its bottom line, Allscripts caused the software to be effectively discontinued and forced the end-users to migrate to another product. This forced migration would cause a dramatic loss of productivity to the doctor’s practice as the product was installed, and then cause debilitating losses while the doctor’s staff was trained on the use of the new program. Rather than explain to the doctors that their software was effectively discontinued, Allscripts misrepresented that the forced migration was simply a “free upgrade” to their existing software. A class action was filed by the doctors against Allscripts — not its subsidiary — because Allscripts itself used its officers to promote the deceptive schemes.

Parroting the tactics of Corporate America, the subsidiary incorporated an arbitration provision in its licensing agreement, which required all disputes to be arbitrated in North Carolina. However, the subsidiary added a sentence to the boilerplate clause which stated that, other than the end-user doctor and subsidiary, “no other party may sue or be sued under this agreement.” After Allscripts unsuccessfully petitioned the court to enforce its subsidiary’s arbitration provision, Allscripts appealed. The appellate court affirmed the trial court, finding that the class claims were against the nonsignatory parent, not against the signatory subsidiary. Because the claims were outside the license agreements, Allscripts had no right to seek refuge behind its subsidiary’s arbitration clause. The class action was allowed to proceed.

Corporate America should take notice of this trend by the state courts of narrowing the scope and reach of arbitration, and consider revisiting the engineering behind its protective shield. Arbitration clauses should explicitly define, among other things, what claims are intended for resolution and what claims are not intended for resolutions. However, because the arbitration clauses ultimately insulate the company from liability due to the barriers to bring arbitration, Corporate America needs to exercise a degree of caution in creating the de facto limitations of liability clauses.

In crafting the Declaration of Independence, our Founding Fathers scribed a litany of tyrannical grievances which gave rise to the extraordinary need of the American colonies to be free from British rule. The egregious deprivations included, “for depriving us, in many cases, of the benefits of Trial by Jury.” Our courts have a duty to preserve this right whenever lawfully possible.

Thus, if Corporate America becomes too greedy in its quest to insulate itself liability from its own misconduct, the arbitration tool may be whittled away to dust. But, for now, corporate counsel across the country should replace the corks in their celebratory bottles of champagne.

—By Allan A. Joseph, Fuerst Ittleman David & Joseph PL

Allan Joseph is a partner and founding member of Fuerst Ittleman David & Joseph and is located in the firm’s Miami office. 

 

Law 360: Jury Is Still Out On Scope Of Arbitration Clauses

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360

By Allan A. Joseph
August 28, 2014    

Our country rose from the discontent of oppressive power. It is within our genetic makeup to be vested with fundamental rights ensuring fairness, equality and justice. Indeed, on July 4, 1776, our Founding Fathers explained in declaring our separation from the tyrannical King of England:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government.

One of the most important rights guaranteed to us is a right to a jury trial. This right has ensured that there is a just avenue to justice without regard to the size or power of the litigants. The right to a trial by a jury of our peers has long been deemed to be the great equalizer between the might of Corporate America and the grievance of the individual. Understandably, a level playing field has not been in Corporate America’s playbook.

Companies have learned that because most consumer disputes concern relatively small amounts, and the costs of bringing such suits will far exceed the expected recovery, most consumers cannot afford to bring individual action to redress corporate misconduct. The sole vehicle for relief to the consumer is through class action procedures, where the accretive nature of the claims-by-numbers provides the economic incentive to challenge the alleged corporate misconduct. In order to block such consumer remedies, companies have taken to inserting mandatory arbitration clauses that are in fact intended to strip away the rights of consumers to have an effective avenue of redress.

Recently, the U.S. Supreme Court has handed Corporate America a series of successful decisions enforcing arbitration clauses, which effectively preclude classwide relief. In a string of decisions the court eviscerated the class action remedy and empowered Corporate America to effectively contract its way out of liability for misconduct.[1] Corporate counsel across the country celebrated with each passing decision.

However, consumers have fought back and the state courts have listened. The Florida Supreme Court recently invalidated an arbitration clause and held that even with the signatures of all parties, there must be a “meeting of minds” regarding the agreement to arbitrate.[2] The California Supreme Court served its retort by finding that arbitration clauses are unenforceable in qui tam, private attorney general cases.[3] Just last week, Florida’s Third District Court of Appeals issued the Allscripts decision, which took yet another bite from the reach of an arbitration clause.[4]

In Allscripts, the subsidiary entity entered into licensing agreements with end-user doctors for the use of electronic health care software. The doctors have contended that as a result of the cost of maintenance, coupled with the drag on its bottom line, Allscripts caused the software to be effectively discontinued and forced the end-users to migrate to another product. This forced migration would cause a dramatic loss of productivity to the doctor’s practice as the product was installed, and then cause debilitating losses while the doctor’s staff was trained on the use of the new program. Rather than explain to the doctors that their software was effectively discontinued, Allscripts misrepresented that the forced migration was simply a “free upgrade” to their existing software. A class action was filed by the doctors against Allscripts — not its subsidiary — because Allscripts itself used its officers to promote the deceptive schemes.

Parroting the tactics of Corporate America, the subsidiary incorporated an arbitration provision in its licensing agreement, which required all disputes to be arbitrated in North Carolina. However, the subsidiary added a sentence to the boilerplate clause which stated that, other than the end-user doctor and subsidiary, “no other party may sue or be sued under this agreement.” After Allscripts unsuccessfully petitioned the court to enforce its subsidiary’s arbitration provision, Allscripts appealed. The appellate court affirmed the trial court, finding that the class claims were against the nonsignatory parent, not against the signatory subsidiary. Because the claims were outside the license agreements, Allscripts had no right to seek refuge behind its subsidiary’s arbitration clause. The class action was allowed to proceed.

Corporate America should take notice of this trend by the state courts of narrowing the scope and reach of arbitration, and consider revisiting the engineering behind its protective shield. Arbitration clauses should explicitly define, among other things, what claims are intended for resolution and what claims are not intended for resolutions. However, because the arbitration clauses ultimately insulate the company from liability due to the barriers to bring arbitration, Corporate America needs to exercise a degree of caution in creating the de facto limitations of liability clauses.

In crafting the Declaration of Independence, our Founding Fathers scribed a litany of tyrannical grievances which gave rise to the extraordinary need of the American colonies to be free from British rule. The egregious deprivations included, “for depriving us, in many cases, of the benefits of Trial by Jury.” Our courts have a duty to preserve this right whenever lawfully possible.

Thus, if Corporate America becomes too greedy in its quest to insulate itself liability from its own misconduct, the arbitration tool may be whittled away to dust. But, for now, corporate counsel across the country should replace the corks in their celebratory bottles of champagne.

Allan Joseph is a partner and founding member of Fuerst Ittleman David & Joseph and is located in the firm’s Miami office. 

 

[1] See Stolt-Nielsen SA v. AnimalFeeds Int’l Corp., 559 U.S. 662, 130 S.Ct. 1758, 176 L.Ed.2d 605 (2010), (an arbitration clause must evince an express assent to class action arbitration); AT&T Mobility LLC v. Concepcion, ––– U.S. ––––, 131 S. Ct. 1740, 1746 (2011) (finding the Federal Arbitration Act preempted California’s prohibition against class action waivers); Oxford Health Plans LLC v. Sutter, ––– U.S. ––––, 133 S.Ct. 2064, 186 L.Ed.2d 113 (2013) (dicta).

[2] Basulto v. Hialeah Auto., 2014 WL 1057334, 39 Fla. L. Weekly S140 (Fla. 2014), reh’g denied (June 19, 2014).

[3] Iskanian v. CLS Transp. Los Angeles LLC, 59 Cal. 4th 348, 381, 327 P.3d 129, 147 (Cal. 2014).

[4] Allscripts Healthcare Solutions Inc. v. Pain Clinic of NW. Florida Inc., 3D13-716, 2014 WL 3930150 (Fla. 3d DCA 2014).

U.S. Tax Court Rules Silent Illinois Politician Committed Tax Fraud; Statute of Limitations does not Bar Assessment of Old Deficiency

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On July 30, 2012, the U.S. Tax Court concluded that Betty Loren-Maltese, a locally well-known Illinois politician, fraudulently underreported income on her 1994 income tax return by omitting two substantial conversions of campaign funds to personal use.  Betty Loren-Maltese v. Commissioner, T.C. Memo 2012-214, is available here.

Ms. Loren-Maltese was the President of Cicero and the Republican Committeeman of Cicero Township, Illinois in 1994.  (Some readers may recognize Cicero as a town known for the headquarters of Chicago mobster Al Capone.  Certainly, Ms. Loren-Malteses actions did not help Ciceros colorful reputation.  She is the widow of another well-known local politician, Frank Maltese, who was sentenced to prison for being a mob bookmaker and pleading guilty to a federal gambling charge.) In 2002, Ms. Loren-Maltese was sentenced to serve eight years prison for conspiracy to defraud the town through a pattern of racketeering via multiple acts of bribery, money laundering, mail and wire fraud, official misconduct and interstate transportation of stolen property. See her criminal conviction in U.S. v. Spano, 421 F.3d 599 (7th Cir. 2005) here.

In addition to her criminal conviction, the Commissioner issued a notice of deficiency alleging civil tax-fraud for tax year 1994.  The Commissioner contended that Ms. Loren-Maltese withdrew more than $350,000 from the Committeeman Fund to finance her purchase of a classic black 1993 Cadillac Allante convertible and to invest in a luxury golf course.  The Commissioner also contended that the car and investment created taxable income in which she fraudulently tried to evade the tax due on the income.

Thus, there were three issues of law in the case related to the car purchase and golf course investment: (1) the general rules of tax fraud; (2) the proper treatment of money taken by a politician from her campaign fund for personal use; and (3) the effect of taking the Fifth Amendment in civil tax litigation, right against self-incrimination. Below, we explore how the Tax Court addressed these issues.

(As a threshold matter, it is important to take notice that the Commissioner was required to establish the underpayment from the personal use of campaign funds was fraudulent because fraud stops the clock on the statute of limitations under Sections 6501(a) and (c) available here.  Because so much time had passed since Ms. Loren-Maltese filed her 1994 tax returns, proving fraud was the only way the Commissioner could prevail.)

The Car

In 1994, Ms. Loren-Maltese purchased a classic black limited edition 1993 Cadillac Allante convertible with a check that was drawn on the Committeeman Fund.  The documents, prepared by the dealer and reviewed by Ms. Loren-Maltese, indicated that she was the owner and not in a capacity for the Town of Cicero or the Republican Party.  Using the Committeeman Fund to purchase the car for personal use is critical because Ciceros town attorney informed Ms. Loren-Maltese that she did not have to disclose contributions or expenditures for the Committeeman Fund, but did have to file publicly disclosed financial reports that gave detailed lists of contributions and expenditures for the Organization Fund.  The attorney also informed her that if she took money from the funds, she would have to pay tax on it and consider it personal income.  Nonetheless, she purchased an individual auto-insurance policy, indicated the use was for pleasure, and gave the dealership her personal information such as her address and drivers license number.  Under Illinois law, the name of the title creates a prima facie presumption that she is the owner of the car.

The court explained that paper formalities were not enough to prove an underpayment existed from the failure to include the personal use of the Committeeman Fund as personal income.  In response, the Commissioner pointed to her silence at trial.  She invoked the Fifth Amendment on virtually every question about the car, including its purchase, use, reporting, and her use of Committeeman Funds to buy it.  This silence severely injured her case because it allowed the court to draw a negative inference against her and because the Commissioner had voluminous evidence against her, such as her use of personal funds for insurance payments and maintenance for the car.  Human nature also allowed the court to draw inferences from her silence if, under the circumstances, it wouldve been natural for her to object.  See U.S. v. Hale, 422 U.S. 171 (1975).  Furthermore, the car was garaged at her summer home in Indiana.  Thus, the court determined car was purchased for personal use with money she personally converted from the Committeeman Fund and failed to include that income on her tax return, which created an underpayment.

However, to prove fraud, the Commissioner was required to provide some evidence that she understood that she used campaign funds for personal use and willfully did so with the intent to evade taxes she knew would have been due.  The Commissioner already established that an underpayment existed, and subsequently, the Commissioner needed to establish some portion of that underpayment was due to fraud.  Furthermore, fraud requires a state of mind, which is commonly defined as an intentional wrongdoing on part of the taxpayer with the specific purpose to evade a tax believed to be owing.  See McGee v. Commissioner, 61 T.C. 249 (1973).  It is rare to have direct proof of someones state of mind, so the court typically relies on circumstantial evidence.  In this case, the court looked for “badges of fraud,” which were inadequate records, implausible or inconsistent explanations of behavior, concealing assets, engaging in illegal activities, and attempting to conceal activities.

The court explained that she was well-advised by the town attorney on the details of titling and tracing funds but used this knowledge to hide her use of campaign funds.  She also asked to garage the car at someone elses home after learning she was the subject of a federal investigation.  Therefore, the court found that the Commissioner had shown by clear and convincing evidence that Ms. Loren-Malteses understatement of income was due to fraud.

The Golf Course

The other item of the asserted underpayment of taxes came from Ms. Loren-Malteses investment in the Four Seasons resort and golf course in Miscauno Island, Wisconsin.  The resort was in desperate need of renovation, and the money for the work came from loans by Ms. Loren-Maltese and other investors.  Between July and September of 1994, Ms. Loren-Maltese gave and personally signed three checks totaling $350,000, also drawn from the Committeeman Funds account, to investors for the Four Seasons.

Despite her use of the Committeeman Funds account, all documents relating to the loan and promissory notes identified Ms. Loren-Maltese in her personal capacity only.  The purchase in her personal capacity only is further evidenced through the investment group commissioning research into the complicated Wisconsin laws.  The lawyer who conducted the research carefully noted the names of the parties involved, the amount of investments, and their legal capacities.  There was no mention of Ms. Loren-Maltese in any representative capacity while other investors were indentified as holding interests as partnerships.  As a result, the court determined that Ms. Loren-Maltese did not include in her personal income the money taken from the Committeeman Fund, which resulted in an underpayment of taxes. 

Once the court determined she used the Committeeman Fund for personal use, the court then determined that Ms. Loren-Maltese failed to carry her burden to establish that the understatement of income arising from the Four Seasons investment wasnt done with fraudulent intent.  She tried to argue the investment was done on behalf of the Committeeman Fund as the loan repayments were signed over to the Fund.  However, the checks were only signed over after a grand jury subpoena for information and the documents relating to investments made in the Four Seasons were served.

Additionally, her argument that the investment was done on behalf of the Committeeman Fund is inconsistent with her Form D-2s, Report of Campaign Contributions and Expenditures.  The forms indicated great discrepancies between the reported assets and the actual account balances of the Committeeman Fund and the differences do not coincide with the Four Seasons investment. Once again, her argument also failed due to her negative inference from taking her Fifth Amendment when asked at trial about whether she knowingly falsified the Form D-2s to disguise her investment in the Four Seasons.  The omissions and inconsistencies in the forms, along with her less-than-credible argument, flash another badge of fraud, which is that of implausible explanations.

Ms. Loren-Maltese also argued that she complied with state reporting requirements and treated the promissory note as an investment.  Nevertheless, there were exceptionally suspicious imprecision from the loan and repayments on note.  Other expenditures and receipts on the D-2 include exact values of modest expenses like keychains and fast-food meals.  Consequently, the court concluded that the her attempts to recharacterize the investment as an investment on behalf of the Fund, rather than a conversion of the Funds assets to her personal use failed to refute the Commissioners argument that any understatement from her failure to include the amount of her investment in the Four Seasons as income on her 1994 was due to fraud.

The court also took note of Ms. Loren-Malteses level of education and business experience as a factor in determining fraudulent intent.  She was a capable politician who managed the business affairs of the Town, understood contracts and the importance of title, understood what a nominee was, and hired attorneys to help her with the Four Seasons investment.  She also used her knowledge as an experience politician to conceal her activities.

In conclusion, the court found that both the car and golf course should have been included in her income.  Her failure to do so was due to fraud.  Thus, the statute of limitations was not barred for assessing her 1994 deficiency.

The attorneys at Fuerst Ittleman, PL have extensive civil and criminal tax litigation experience before the U.S. District Courts, the U.S. Tax Court, and the U.S. Circuit Courts of Appeal.  You can contact us by calling 305.350.5690, or by emailing us at contact@fidjlaw.com.