[00:00:00] Speaker 02:
Our next case is Dillon Trust Company versus the United States, 2024-13-14.

[00:00:06] Speaker 02:
Mr. Selinger.

[00:00:09] Speaker 03:
Mr. Hill.

[00:00:12] Speaker 02:
No, Mr. Hill, right.

[00:00:15] Speaker 03:
May I please the court?

[00:00:23] Speaker 03:
In this case, the appellants are asking the court to reverse the finding

[00:00:29] Speaker 03:
of the lower court that there was constructive knowledge here for a number of legal errors.

[00:00:36] Speaker 03:
The first being under the doctrine of inquiry notice.

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The doctrine of inquiry notice says that one who learns facts that would lead a person to inquire further but fails to do so is charged with constructive knowledge of the facts that a reasonable inquiry would have revealed.

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In the opinion below, the court acknowledged that

[00:01:00] Speaker 03:
Further inquiry would not have revealed the buyer's plans.

[00:01:04] Speaker 03:
Nonetheless, the claims court held that inquiry knowledge was satisfied by indicators of potential fraud and refusal to ask further questions, irrespective of what the plans would have been admitted.

[00:01:18] Speaker 03:
The New York law is clear that you're only charged with knowledge which a reasonable inquiry would have revealed.

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The buyer was a fraudster who lied even to his own counsel.

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He made warranties.

[00:01:29] Speaker 03:
contractual warranties that he immediately breached, given this pattern of deception.

[00:01:34] Speaker 04:
It doesn't follow from the fact, even if we all agree the fraudster himself wasn't going to tell you he was about to engage in fraud.

[00:01:42] Speaker 04:
How does it follow that you, therefore, your client has no obligation to ask any questions or do any due diligence at all?

[00:01:51] Speaker 03:
Well, in fact, Judge Stark, there were questions asked.

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and there was significant due diligence that was actually done.

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The record shows that the counsel with STEAM counsel, tax counsel, M&A counsel reviewed many transactions before this, rejected them, rejected dealings with certain

[00:02:20] Speaker 03:
in firms like BDL because he thought they were aggressive.

[00:02:25] Speaker 04:
We're reviewing a trial record and findings by a trial court.

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What if any facts that the trial court relied on to rule against you are clearly erroneous and therefore we shouldn't credit them?

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The due diligence that was done included representations and warranties which are the best form of due diligence because unlike

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talking to somebody who they tell you something, their warranties impact future conduct.

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The warranties here prevented the buyer from selling substantially all of the assets and that would have... I thought they modified that so that they only agreed to retain substantial assets.

[00:03:13] Speaker 03:
Correct.

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They agreed to retain substantial assets.

[00:03:17] Speaker 03:
The testimony from

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the tax partner was substantial assets would have been in the range of 40 percent of the assets but they didn't maintain substantial assets, they immediately sold them.

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So any negotiations that they had, any information they had, they would have been defrauded.

[00:03:36] Speaker 03:
There was nothing that raised the suspicion of the partners because everything was customary and the red flags that was supposedly shown

[00:03:47] Speaker 03:
were not even yellow flags.

[00:03:49] Speaker 04:
How could the buyer as a new entity, how could it possibly have had relevant tax attributes, which seems to have been an assumption that the buyer made that the seller would only be interested at this price level if it had those relevant tax attributes?

[00:04:05] Speaker 04:
How could a new entity even possibly have them?

[00:04:08] Speaker 03:
Well, in fact, it would have been unusual if an SPV was not involved in the transaction.

[00:04:13] Speaker 03:
The testimony

[00:04:15] Speaker 03:
was clear that 95% of M&A transactions have SPVs.

[00:04:19] Speaker 04:
I get that, but how about those net operating losses?

[00:04:23] Speaker 04:
How could a new SPV have had those?

[00:04:28] Speaker 03:
The new SPV would not necessarily have had them, but Mr. Bambino testified that there were a number of potential transactions that he was familiar with that were in the marketplace that he had dealt with

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that could have been done.

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Nothing raised a particular suspicion.

[00:04:45] Speaker 03:
There were partnership freezes.

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There were S-corp conversions.

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There were tax credit deals.

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There were potential mergers.

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This was a very sophisticated M&A tax person who was familiar with all of these transactions and was an expert in the field, as was the M&A corporate partner.

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who also testified that he saw nothing that was unusual about the transaction.

[00:05:09] Speaker 01:
How does that show that the trial judge's finding that this was a red flag, how does it show that it was clearly erroneous?

[00:05:20] Speaker 03:
Well, I think, first of all, it's a legal question that if inquiry would not have revealed the issue, any problems,

[00:05:31] Speaker 03:
you're not charged with inquiry knowledge under New York law.

[00:05:35] Speaker 01:
The other issue is whether there was... So, in other words, you don't think, so Judge Brugink found that the fact that the entity was new and, you know, how could it have had net operating losses, that that was a red flag.

[00:05:55] Speaker 01:
You don't dispute that fact-finding.

[00:05:59] Speaker 03:
No, I do dispute it because was common.

[00:06:02] Speaker 01:
How is it clearly erroneous?

[00:06:03] Speaker 01:
What is your argument for why it's clearly erroneous?

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The standard is legally erroneous because if you cannot discover the issue and the judge admitted they wouldn't have discovered the issue, you can't be held with inquiry notice.

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Otherwise you have active avoidance and there was no active avoidance.

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You have to take steps to avoid learning the facts.

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There were no steps here

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taken to avoid learning the facts.

[00:06:31] Speaker 03:
Those are legal errors, but it was clear in the marketplace and to a sophisticated tax practitioner that there were many

[00:06:40] Speaker 03:
opportunity.

[00:06:42] Speaker 01:
Your view is that it's clearly erroneous because there were things that could have been done to create those net operating losses.

[00:06:49] Speaker 03:
There were things that could have been done and the Taxpayers Council understood that and there were no active steps to avoid it and New York law does not require the seller in this case to do an audit of the taxpayers

[00:07:09] Speaker 03:
tax planning.

[00:07:12] Speaker 03:
His state of mind was that there were plenty of things to do and he had experience with that.

[00:07:17] Speaker 03:
And the expert, our expert who testified, who is an M&A expert, a Harvard law professor, written books on it, Fortune 500 Corporation Director, testified

[00:07:28] Speaker 03:
that this was all commonplace.

[00:07:30] Speaker 04:
There were at least three experts that testified extensively at trial and the trial court goes through their testimony pretty rigorously.

[00:07:40] Speaker 04:
It seems possible but irrelevant that the trial court could have come out your way, but what do we do with the extensive findings

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For instance, if you want to focus on one, that no economically rational, there's no economically rational reason for anyone to show up at this auction and pay 95% of the fair market value.

[00:08:06] Speaker 04:
That's a finding of fact based on extensive expert testimony.

[00:08:09] Speaker 04:
Don't we have to accept it?

[00:08:12] Speaker 03:
No, it's erroneous for a number of reasons.

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First of all,

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the appellee's experts were not lawyers, were not experts on auctions, due diligence, or M&A transactions.

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They'd never been involved in them.

[00:08:26] Speaker 03:
That's number one.

[00:08:27] Speaker 01:
Number two, despite the court... So are you questioning whether the court below could credit that testimony?

[00:08:35] Speaker 03:
I'm saying that the testimony should not have been credited.

[00:08:39] Speaker 03:
But the testimony we provided was all of M&A experts and people in the field that do this all the time.

[00:08:46] Speaker 01:
We as appellate judges don't do that, right?

[00:08:48] Speaker 03:
We don't look at that.

[00:08:49] Speaker 03:
No, no.

[00:08:49] Speaker 03:
We're talking about the legal standards here.

[00:08:51] Speaker 03:
But I want, can I answer Judge Stark's other question?

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While the court believed no rational actor would have bid more than around 71% of the assets market value, the reinvestment firms bid far in excess of that, plus an offer from Citibank in the 80s.

[00:09:08] Speaker 03:
the claims court ignored Deutsche Bank's offer to pay 86% of the asset's value, which was above that threshold.

[00:09:15] Speaker 03:
And the undisputed record showed that Deutsche Bank planned a vanilla hedging transaction, not fraud.

[00:09:21] Speaker 03:
So the finding of this economics is just clearly erroneous.

[00:09:28] Speaker 03:
Even a Second Circuit that the government cites, Eisenberg, explains that

[00:09:35] Speaker 03:
where there's a relatively sizable number of potential buyers can avoid or defer the tax, the fair market value of the shares might well approach the pre-tax market value of the entities underlying assets.

[00:09:48] Speaker 03:
I want to turn to the issue of the interest and we believe that the IRS clearly abused its discretion here and

[00:10:05] Speaker 03:
all you need to do is to look at the language of the statute itself.

[00:10:09] Speaker 03:
Congress clearly under section 6603 of the Internal Revenue Code said you can make deposits to suspend the running of interest on potential underpayments.

[00:10:19] Speaker 02:
But not necessarily for another entity, right?

[00:10:23] Speaker 03:
Well, yes.

[00:10:24] Speaker 03:
A taxpayer may make a deposit with the secretary which may be used.

[00:10:29] Speaker 03:
It says may be used because you can get the deposit back as you want under

[00:10:34] Speaker 03:
a shall be used if it said a taxpayer may make a cash deposit, which shall be used by the secretary.

[00:10:41] Speaker 03:
The statute would be a nullity.

[00:10:43] Speaker 03:
It wouldn't be a deposit.

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It would be a tax payment.

[00:10:45] Speaker 03:
You wouldn't be able to get it back.

[00:10:46] Speaker 04:
The IRS is arguing that that's a significant difference because you retained the right at any time to ask for the deposit back.

[00:10:55] Speaker 04:
They were within their discretion to not attribute it to

[00:11:00] Speaker 04:
the taxes ultimately as you wanted.

[00:11:02] Speaker 04:
Isn't that at least a reasonable approach?

[00:11:05] Speaker 03:
It's not a reasonable approach because Supreme Court law says you can apply a tax to any taxpayer and in fact in this case the deposit was later the tax was paid to the very entity that

[00:11:20] Speaker 03:
deposit was made for.

[00:11:22] Speaker 03:
So it's a distinction.

[00:11:25] Speaker 04:
You said it is an abuse of discretion.

[00:11:27] Speaker 04:
Do we have to find it's an abuse of discretion for you to prevail on the interest issue?

[00:11:30] Speaker 04:
Is it a question of law or is it a question of their discretion?

[00:11:36] Speaker 03:
Well, to the extent that it was claimed to be their discretion, it's an abuse of discretion.

[00:11:42] Speaker 03:
As a matter of law, the statute clearly provides for this.

[00:11:44] Speaker 03:
The law clearly provides for this.

[00:11:46] Speaker 03:
And the fact that there's a different EIN is a distinction without a difference.

[00:11:50] Speaker 01:
Don't you think, I mean, the better legal approach to this is that it's an abusive discretion standard?

[00:11:55] Speaker 01:
The reason why I say is because it says which may be used.

[00:11:58] Speaker 01:
And then of course you've got 6603 Part B that talks about, you know, to the extent it is used, there's no interest.

[00:12:06] Speaker 01:
Yes, I do.

[00:12:07] Speaker 01:
And I think.

[00:12:08] Speaker 01:
I understand and have empathy for the situation that it would have been much better had they used it.

[00:12:15] Speaker 01:
But there is a great amount of discretion, it seems, to begin with.

[00:12:20] Speaker 03:
There's really no discretion because the whole purpose is to stop the running of interest.

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And here, the deposit was made.

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The deposit was held by the government in a general account.

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No interest was paid.

[00:12:30] Speaker 03:
It wasn't returned to say we can't use the deposit.

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And they can't just arbitrarily decide not to use the deposit to pay the tax.

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That's the whole purpose of the statute.

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That's the whole purpose of Congress's intent to do it.

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And they can't have two similarly situated taxpayers and say to one, OK, we're going to apply this, and another, we're not.

[00:12:55] Speaker 03:
It says to the extent any taxpayer can

[00:13:02] Speaker 03:
pay it right in the statute.

[00:13:04] Speaker 00:
What about the Part C, 6603C, about returning the deposit?

[00:13:11] Speaker 03:
That's only in the case of Jeopardy, where there's a Jeopardy assessment, which was not here.

[00:13:16] Speaker 04:
Okay.

[00:13:16] Speaker 04:
Just quickly on the penalty argument, is that a question of law or a question of fact that we're reviewing?

[00:13:22] Speaker 04:
You don't like the $10 million penalty.

[00:13:25] Speaker 04:
Is that a fact question or a legal question?

[00:13:28] Speaker 03:
It's a legal question.

[00:13:29] Speaker 03:
The New York law says that a future creditor, in order to recover, you have to show intent to defraud.

[00:13:44] Speaker 03:
And that was not shown here.

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There was no effort to show that.

[00:13:48] Speaker 04:
There was an intent to defraud at the first two steps.

[00:13:52] Speaker 04:
If you lost on the first issue, there's not an intent to defraud for the third step.

[00:13:57] Speaker 03:
The government did not even argue there was an intent to defraud the government or on behalf of Haber.

[00:14:05] Speaker 03:
And it's clearly a future creditor because it's a completely separate year and a completely separate transaction.

[00:14:13] Speaker 03:
It does not relate to the stock sale or even the asset sale.

[00:14:16] Speaker 01:
Mr. Hill, I realize I'm confused about your last answer to my question about 6603C.

[00:14:21] Speaker 01:
And you said that only applies when the tax is in jeopardy.

[00:14:25] Speaker 01:
But it says actually, except in the case where there's jeopardy, the secretary shall return any amount which the taxpayer requests in rights.

[00:14:34] Speaker 03:
Yes.

[00:14:35] Speaker 03:
The statute provides that you can request a deposit back if you don't want to apply it as a payment.

[00:14:42] Speaker 03:
except you can't get it back if there's a jeopardy situation.

[00:14:46] Speaker 03:
So in any situation where I post a deposit, I'm entitled under the statute to get it back, but I'm also entitled under the statute to have it applied to any tax.

[00:14:56] Speaker 01:
Was there any attempt to get it back?

[00:14:57] Speaker 03:
I'm sorry?

[00:14:58] Speaker 01:
Was there any attempt to get it back?

[00:14:59] Speaker 03:
When they abused the discretion by not applying the deposit as a payment, we requested it back and we got it after we filed the mandamus action.

[00:15:09] Speaker 03:
It's supposed to be given back anyway.

[00:15:15] Speaker 03:
So we did get it back, but we wanted it applied, and we had to get it back because there was about $70 million in tax we had to pay.

[00:15:24] Speaker 02:
Counsel, you've consumed all of your time, but you are answering questions, so we'll give you two minutes for a bottle.

[00:15:29] Speaker 03:
Thank you, Your Honor.

[00:15:31] Speaker 02:
Mr. Klimas.

[00:15:43] Speaker 05:
May it please the Court, Jeff Klimas for the United States.

[00:15:46] Speaker 05:
The evidence presented at trial fully supports the Court of Federal Claims decision to collapse the relevant two transactions.

[00:15:52] Speaker 05:
One, the Dillon Trust sale of the stock of Humboldt and Shelby to HSHC.

[00:15:56] Speaker 05:
And two, HSHC's immediate sale of Humboldt and Shelby's appreciated assets.

[00:16:01] Speaker 05:
And when those transactions are collapsed, it renders us a fraudulent convenience under New York law.

[00:16:06] Speaker 05:
In other words, the transactions were, in substance, a liquidation of Humboldt and Shelby with the gross proceeds distributed to their shareholders, the Dillon Trust, while leaving the company's taxes, penalties, and interests unpaid.

[00:16:19] Speaker 05:
The standard for constructive knowledge, as articulated by the Second Circuit in HPE leasing, this is page 637 of the opinion, is that the transferee had information sufficient to alert it to the danger that creditors would not be paid.

[00:16:33] Speaker 05:
at which point the transferee has a duty to undertake a reasonably diligent inquiry to find out.

[00:16:41] Speaker 05:
A failure to undertake that diligent inquiry under those circumstances constitutes a conscious turning away or active avoidance which is sufficient to collapse the transactions and impose constructive knowledge.

[00:16:52] Speaker 04:
One of the striking facts here to me at least is they have this auction and at least three offers come in

[00:17:01] Speaker 04:
at values that I think are above what the trial court and the government think would be the fair market value if you truly account for the tax liability.

[00:17:12] Speaker 04:
And I don't know that there's any evidence about the second or the third offer having any fraudulent components to them.

[00:17:22] Speaker 04:
Doesn't that really undermine the findings of the trial court here, that what was going on here?

[00:17:28] Speaker 04:
was so clearly fraudulent that the trusts were on notice, essentially.

[00:17:33] Speaker 05:
So, you know, we think that there are a number of red flags and that was one of them.

[00:17:36] Speaker 04:
The fact, so if you look at this, I guess, is akin to a green flag.

[00:17:41] Speaker 04:
I hold an auction and three people show up and offer me a price that is consistent with me selling something that is, you know, adequately accounting for the taxes that would have to be paid.

[00:17:56] Speaker 05:
Sure, and the trust reason for holding an auction and using that method was they said they wanted to find bidders with the appropriate tax attributes.

[00:18:04] Speaker 05:
But if that was really their goal, it is not reflecting the way they structured this auction.

[00:18:08] Speaker 05:
If that's actually the goal, they should have on the front end or the back end asked for an attestation that there actually were such tax attributes and subsubstantiation thereof.

[00:18:17] Speaker 05:
They didn't do that on the front end and they didn't do that on the back end.

[00:18:19] Speaker 05:
Now, it's also important that the bid that they ultimately accepted from HSHC

[00:18:25] Speaker 05:
is from, as Your Honor pointed out, a newly formed entity and an entity without any ongoing operations.

[00:18:30] Speaker 05:
So it had neither tax attributes that it could bring to the table to offset those liabilities or the ability to generate such tax attributes on its own.

[00:18:39] Speaker 05:
Under those circumstances, you would say something's going on here if they're bidding 95% of the face value of these assets without taking an appropriate discount for the embedded tax liabilities.

[00:18:49] Speaker 05:
And if you look at what the Second Circuit said in Diebold,

[00:18:52] Speaker 05:
is that it would be the very rare case indeed where a purchasing party would assume such liability without an appropriate discount in the sale price.

[00:18:58] Speaker 05:
And what the Second Circuit said in Eisenberg is that the impact, and this is at note 15 to 16 of the opinion, is the impact of embedded tax liabilities on fair market value is a factual question that must be determined in light of all the relevant circumstances.

[00:19:11] Speaker 05:
Here, the relevant circumstances show that there was no way for HSHC at a minimum to take into account those embedded tax liabilities.

[00:19:18] Speaker 05:
We know even less about TransStar because there's nothing in the record

[00:19:21] Speaker 05:
And there was no due diligence done whatsoever on how it would absorb those tax liabilities.

[00:19:25] Speaker 05:
Now, Deutsche Bank is a little bit of a different situation.

[00:19:29] Speaker 05:
We think, as a matter of proper due diligence, it would have been incumbent upon the trust to do some measure of due diligence and say, how is it that you're going to be absorbing these tax liabilities such that you're only getting a 15% discount?

[00:19:44] Speaker 05:
If you were to come up with a situation where you'd say maybe less due diligence is required, it'd be in the context of a bidder like Deutsche Bank or like Citibank, someone who's in the financial services industry and is by the nature of their business gobbling up different kinds of assets, different kinds of financial insurance, different kinds of securities, such you could say, they probably got a portfolio such that they could absorb those tax liabilities in some way.

[00:20:06] Speaker 05:
We still think you should ask the question.

[00:20:08] Speaker 05:
We still think you should probe a little bit further.

[00:20:10] Speaker 05:
But that's very different.

[00:20:11] Speaker 05:
And if you look at the Ultraman decision, it's footnote 69.

[00:20:14] Speaker 05:
It says that that case was different because there was an ongoing business that had a plan for how it would absorb the tax liabilities.

[00:20:20] Speaker 05:
That's one of the reasons why the Ultramans did not get hit with transfer liability.

[00:20:24] Speaker 05:
It was not ultimately sustained.

[00:20:26] Speaker 05:
But it contrasts that with cases like Diebold or cases like this case where there's not an ongoing business, where it's a newly formed entity that brings no tax attributes to the table.

[00:20:34] Speaker 05:
That was a red flag that required further due diligence.

[00:20:37] Speaker 05:
And that was not done.

[00:20:39] Speaker 05:
They simply took

[00:20:40] Speaker 05:
be better at his word.

[00:20:41] Speaker 05:
This is proprietary.

[00:20:43] Speaker 05:
This is secret.

[00:20:44] Speaker 05:
You don't get to see beyond what that is.

[00:20:46] Speaker 05:
There was no follow-up question.

[00:20:47] Speaker 05:
Say, hey, at a minimum, can you tell us what you're going to do with the tax liabilities?

[00:20:52] Speaker 05:
At a minimum, can you tell us what other assets you might have?

[00:20:55] Speaker 05:
Hey, we see that you're borrowing the entire purchase price for these companies from Rabobank.

[00:21:00] Speaker 05:
Can you give us the underlying bank documents to see what is the security?

[00:21:04] Speaker 04:
If we agree with the trial court, you call it an aside, but the trial court says,

[00:21:10] Speaker 04:
even if they had asked questions, they were never going to find out about the fraud.

[00:21:15] Speaker 04:
If we agree with that, does that have any impact on the right disposition of this case?

[00:21:21] Speaker 05:
No, Your Honor, because if you look at the Fourth Circuit's decision starts, citing to and explaining what the Second Circuit was doing in Diebold, they say it's not a question of finding out the minute details of the plan to avoid taxes.

[00:21:32] Speaker 05:
It's that you have actual or constructive knowledge that there's a plan not to pay the taxes.

[00:21:38] Speaker 05:
It doesn't matter if they would have found out that HSHC was going to run a Son of Boss tax shelter, or if they were going to stack the money in pallets and ship it off to the Cayman Islands.

[00:21:48] Speaker 05:
It's a question of whether they would have found out that the taxes wouldn't be paid.

[00:21:51] Speaker 05:
And the fact that a diligent inquiry would have revealed, the fact they actually got really, really close to finding out without doing any due diligence at all, was that there was no possible way for HSHC to absorb these tax liabilities.

[00:22:04] Speaker 05:
No way they were getting paid.

[00:22:06] Speaker 05:
And their failure to inquire further on those facts, on the presence of multiple red flags, we would say constitutes conscious turning away, active avoidance.

[00:22:18] Speaker 05:
In fact, Brother Council mentioned that they walked away from BDO Sidemen because they said we didn't want to do business with a tax shelter promoter.

[00:22:25] Speaker 05:
But they didn't do any due diligence to find out whether DGI was, in fact, a tax shelter promoter.

[00:22:30] Speaker 05:
It was publicly available information at that time that, in fact, it was under an IRS investigation.

[00:22:34] Speaker 05:
The DGI was under active IRS investigation for promoting tax shelters.

[00:22:38] Speaker 05:
If that's really what their concern was in walking away from VDO, they should have walked away from this transaction too, particularly when they were secretive about their plans and what they were intending to do.

[00:22:47] Speaker 05:
And there were no follow-up questions.

[00:22:48] Speaker 05:
This is a factual finding at 47 to 49 of the appendix that

[00:22:53] Speaker 05:
Their failure to do due diligence under the circumstances with the presence of so many red flags was either monumental naivete, gross negligence, or useful fig leaf.

[00:23:03] Speaker 05:
And then the court says we find it was a useful fig leaf based on our analysis of the witnesses and the evidence that used at trial.

[00:23:08] Speaker 05:
That is not clearly erroneous.

[00:23:09] Speaker 04:
Let me ask you about the penalty, 10 and a quarter million dollars, I think.

[00:23:13] Speaker 04:
Yes, Your Honor.

[00:23:15] Speaker 04:
In order to uphold that, do we have to find that there's substantial evidence to collapse

[00:23:24] Speaker 04:
the son of boss tax fraud by Haber or HSHC, which I think was only culminated something like 18 months after the closing of the stock sale that started this.

[00:23:38] Speaker 04:
Do we have to find that all of that was part of a single collapsed transaction?

[00:23:43] Speaker 05:
No, Your Honor.

[00:23:45] Speaker 05:
We think that the correct analysis is the analysis that was done by the Ninth Circuit in Chukaritchi following the First Circuit in Shostle, which is you start with the question of what is a creditor?

[00:23:54] Speaker 05:
Who has a claim under state law?

[00:23:56] Speaker 05:
So we look at section 270 of the New York Uniform Fraudulent Conveyance Act, which broadly defines creditors who include a person having any claim, whether un-matured, un-liquidated, or contingent.

[00:24:07] Speaker 05:
And then we say, well, now we have to turn to federal law and say, what is the nature of the underlying claim for penalties here?

[00:24:13] Speaker 05:
And what courts have done, the majority of courts, with the exception of the Eighth Circuit, have said that this is a unitary claim for taxes, penalties, and interests.

[00:24:20] Speaker 05:
And they don't break it apart and say, well, the United States is a present creditor as to one, a future creditor as to the others.

[00:24:25] Speaker 05:
They say it's a unitary claim that arises and it relates back to the date of the transaction.

[00:24:30] Speaker 04:
But there was a way for Haber or HSHC, I forget who was supposed to pay the taxes, there was a way that they could

[00:24:40] Speaker 04:
put aside, I know they didn't have the financial means to pay it, but they could have avoided that $10 million penalty by doing something appropriate with respect to their tax liability at that point, correct?

[00:24:53] Speaker 05:
If they hadn't paid the liability, they would have incurred some kind of penalty, right?

[00:24:56] Speaker 05:
There'd be a non-payment type of penalty.

[00:24:57] Speaker 05:
It would necessarily have been the 40% penalty that ultimately.

[00:25:01] Speaker 04:
So I guess I'm just having a hard time understanding why all of that payment, which required an extra bad act

[00:25:10] Speaker 04:
to put it in simple terms, by somebody outside the control of the seller goes back all the way to the seller.

[00:25:20] Speaker 05:
It's certainly honoring.

[00:25:21] Speaker 05:
So we would make two points.

[00:25:23] Speaker 05:
The first of which is that when the Dillon Trust saw these red flags, which at this point are not nearly waving, but they are screaming, that there is no way for these tax liabilities to be paid.

[00:25:35] Speaker 05:
Now, they didn't know how, but they knew that they weren't going to get paid.

[00:25:38] Speaker 05:
And they, at that point, are just

[00:25:41] Speaker 05:
So I noticed that something's going to happen that causes the tax liabilities not to be paid.

[00:25:44] Speaker 05:
And therefore, they were accepting the risk that there could be penalties that went along with that, whether they're non-payment penalties, whether they're negligent penalties, whether they're gross misvaluation penalties.

[00:25:53] Speaker 05:
They knew that there were going to be penalties that followed along with that.

[00:25:55] Speaker 05:
That was a risk that they were accepting when they did no due diligence in the face of so many red flags.

[00:26:00] Speaker 05:
But alternatively, we've also said that, as Brother Council concedes, if this was an actual fraud case, that there had been a finding under 276 of actual fraud by HSHC,

[00:26:11] Speaker 05:
Then you could have liability imposed against the transferee for future creditors as well as present creditors.

[00:26:19] Speaker 05:
And the district court didn't reach or the court of federal claims rather did not reach that argument.

[00:26:22] Speaker 05:
But certainly that would be something that the court could look at if the case were remanded.

[00:26:26] Speaker 05:
We did present at 5435 to 5436 of the appendix, we did present an actual fraud argument.

[00:26:33] Speaker 04:
The court erroneously.

[00:26:34] Speaker 04:
Actual fraud by HSHC.

[00:26:36] Speaker 04:
You didn't present actual fraud evidence against the trust, correct?

[00:26:40] Speaker 05:
We did not make an actual fraud argument against the trust because that's not an element of a fraudulent transfer claim.

[00:26:47] Speaker 05:
Certainly, though, the court in rejecting the 278-2 affirmative defense did look to badges of fraud that were exhibited on behalf of the transferee, on behalf of the Dillon Trust.

[00:26:56] Speaker 05:
And we would submit that those badges of fraud, when there's multiple badges of fraud, the confluence thereof normally is conclusive evidence as to actual fraudulent intent, which would go to the transferee as well as the transferor.

[00:27:09] Speaker 04:
about on the interest issue.

[00:27:11] Speaker 04:
You write at the Red Breeze 63 to 64 that they waived by their course of conduct the argument that the IRS didn't have discretion to use this interest or to use the deposit to pay the successor trust.

[00:27:28] Speaker 04:
And I understand the conduct you're pointing to is their request for the return of the deposit.

[00:27:34] Speaker 04:
They say they only requested that after you all abused your discretion.

[00:27:38] Speaker 04:
and made it clear you weren't doing what they wanted with the deposit.

[00:27:43] Speaker 04:
Is there evidence on this?

[00:27:44] Speaker 04:
And if so, where is the evidence to help understand what really happened here?

[00:27:47] Speaker 05:
So, Your Honor, that's the correct timing.

[00:27:49] Speaker 05:
They requested that the IRS take the successor trust deposits and apply them to the original trust tax liabilities.

[00:27:57] Speaker 05:
And the IRS said, no, we're not going to do that.

[00:27:59] Speaker 05:
We don't have any guidance on this issue.

[00:28:03] Speaker 05:
We're not even sure that you, attorneys for the successor trust, have the authority to do this.

[00:28:07] Speaker 05:
On behalf of the original trust again, no guidance.

[00:28:10] Speaker 05:
We don't know exactly how this is all going to game out in terms of the law because we've never seen this before.

[00:28:14] Speaker 05:
We never done this before.

[00:28:16] Speaker 05:
At that point.

[00:28:18] Speaker 05:
The successor's trust said, we want our deposits back.

[00:28:21] Speaker 05:
And they don't just say it.

[00:28:22] Speaker 05:
As Brother Council referenced, they actually file a mandamus action saying, give us the money back, at which point the IRS can't do anything else.

[00:28:28] Speaker 05:
It'd be one thing if they filed a mandamus action asking for the deposits to be converted to payments, or an APA suit saying there's an abuse of discretion in the IRS as an equitable matter.

[00:28:37] Speaker 05:
As a matter of non-monetary relief, we need to move these deposits on behalf of the successors over into payments on behalf of the original trust.

[00:28:46] Speaker 05:
They didn't do that.

[00:28:47] Speaker 05:
They said, we want the money back.

[00:28:48] Speaker 05:
At that point, the IRS can't do anything because it's a shell statute.

[00:28:51] Speaker 05:
It's command.

[00:28:52] Speaker 05:
At that point, the IRS has to give money back.

[00:28:54] Speaker 05:
And although they don't point it out in their opening brief, the IRS paid interest.

[00:28:58] Speaker 05:
The IRS was required to pay interest and did pay interest.

[00:29:01] Speaker 04:
But it was less than the interest that accrued on the tax liability, right?

[00:29:04] Speaker 04:
Absolutely, Your Honor.

[00:29:05] Speaker 04:
Yes.

[00:29:07] Speaker 05:
It's an unusual situation.

[00:29:08] Speaker 05:
And it's a situation that I frankly can't really understand.

[00:29:11] Speaker 05:
I've been doing tax controversy work at the Department of Justice for over 17 years.

[00:29:14] Speaker 05:
I've never seen someone get a notice of transfer reliability on behalf of one taxpayer and then make a deposit on behalf of another taxpayer and expect that there's going to be an assessment made against the original taxpayer or against taxpayer number one, but then have the deposit applied to me by taxpayer two applied to taxpayer one.

[00:29:33] Speaker 05:
I've never seen that before.

[00:29:34] Speaker 05:
It's really unusual.

[00:29:35] Speaker 05:
I'm not entirely sure what the motivation for doing that was.

[00:29:38] Speaker 05:
But certainly, if I were in the position of brother counsel, I would have called the IRS and asked, hey, I'm going to do something that I've never done before, that there's no guidance about.

[00:29:46] Speaker 04:
You say they chose not to consult with the IRS.

[00:29:48] Speaker 04:
Do we have evidence of that, or is that undisputed?

[00:29:51] Speaker 05:
I don't think there's any dispute.

[00:29:52] Speaker 05:
If they had evidence that they consulted about the impact of making a deposit on behalf of the successors, as opposed to the original trustees, there would certainly be on the record, and there's no evidence of that.

[00:30:02] Speaker 05:
In fact,

[00:30:04] Speaker 05:
They could have, in fact, cured this issue had they just they say page 25 of the reply brief.

[00:30:08] Speaker 05:
They'd say the taxpayer knew that the IRS would ultimately assess successor trust with the original trust tax liabilities.

[00:30:14] Speaker 05:
They could have just left the money with the IRS knowing that would eventually happen.

[00:30:17] Speaker 05:
And then the IRS would have taken that deposit by the successor trust and applied it to the liability of the successor trust would have cured this issue.

[00:30:27] Speaker 05:
We wouldn't be here arguing about this particular issue.

[00:30:30] Speaker 05:
They chose not to do that, and now they're stuck with the consequences of that, regardless of what they may have thought.

[00:30:36] Speaker 05:
And we note, finally, that they say that there was a risk of collection.

[00:30:38] Speaker 05:
They were concerned about collection.

[00:30:39] Speaker 05:
The notices of collection were going and directed at the original trust, which the plaintiffs say had no assets and were defunct.

[00:30:46] Speaker 05:
There should be no concern about the lack of assets or about the collection against defunct assetless original trust, when, in fact, that's what they say was motivating their decision.

[00:30:57] Speaker 05:
I see my time has expired.

[00:30:58] Speaker 02:
Thank you, counsel.

[00:31:00] Speaker 02:
Thank you.

[00:31:02] Speaker 02:
Mr. Hill has some rebuttal time.

[00:31:04] Speaker 02:
Two minutes.

[00:31:07] Speaker 03:
As a matter of fact, the deposits were made by the successor trust because the original trust had been dissolved.

[00:31:13] Speaker 03:
The government was informed of that.

[00:31:15] Speaker 03:
The government under its own guidance should have made the notices of a liability against the successor trust.

[00:31:20] Speaker 03:
There were numerous communications on the record with

[00:31:23] Speaker 03:
The revenue agent involved about this, he was told, he told us originally that they would utilize the deposits.

[00:31:29] Speaker 04:
It's in our record?

[00:31:30] Speaker 03:
Yeah, it's in the record on appeal.

[00:31:33] Speaker 04:
In the appendix?

[00:31:35] Speaker 03:
Not in the appendix, no.

[00:31:36] Speaker 03:
But regardless, the statute says that the deposit may be used by the secretary to pay any tax, and it should have.

[00:31:52] Speaker 03:
And to say that we should have waited or we should have done this with a mandamus, they were hitting us with notices of liability and we had to pay the tax.

[00:32:02] Speaker 03:
So that's why we did it.

[00:32:04] Speaker 03:
They were holding back on us.

[00:32:06] Speaker 03:
They're supposed to give us the money back right away.

[00:32:08] Speaker 03:
We only requested it because they wouldn't apply it.

[00:32:10] Speaker 03:
And they just left it sitting in a general ledger.

[00:32:14] Speaker 03:
Let's talk about the due diligence.

[00:32:17] Speaker 03:
There was nothing publicly available.

[00:32:19] Speaker 03:
The case they cite for the investigation was not on PACER.

[00:32:24] Speaker 03:
It was not publicly available at the time, but also it was after the due diligence was done, in between the due diligence was done and that.

[00:32:32] Speaker 03:
Plus, the case they cite involving diversified, which said nothing, but what it did say was that Haber was suing a law firm to protect his proprietary strategies.

[00:32:45] Speaker 03:
Haber made that public.

[00:32:49] Speaker 03:
Tax professionals, accounting firms, law firms, anybody who had a tax strategy kept it proprietary.

[00:32:56] Speaker 03:
When you merge with another company and if you asked, you know, General Motors, what do you intend to do with this, they'd say it's none of your business.

[00:33:03] Speaker 03:
So to say it's proprietary was not a red flag and he actually had filed suit to protect his proprietary strategies.

[00:33:13] Speaker 02:
Thank you, counsel, both counsel, the case is submitted.