The opinion of the court was delivered by: MCAVOY
This matter comes before the Court on remand from the Second Circuit. The issue on appeal concerned a permanent injunction issued by this Court pursuant to 26 U.S.C. § 7426. See LiButti v. United States, 894 F. Supp. 589, 591 (N.D.N.Y. 1995). The injunction barred defendant Internal Revenue Service ("IRS") from enforcing a tax levy against plaintiff Lion Crest Stables ("Lion Crest") and Devil His Due, a racehorse allegedly owned by plaintiff Edith LiButti ("Edith"), and ordered the release of $ 77,000 in prize money the horse earned through its second-place finish at Saratoga Racetrack's Whitney Handicap in 1994. In light of the guidance recently provided by the Circuit, the Court now reconsiders the merits of the injunction.
In 1977, Robert LiButti ("Robert") was convicted of filing false tax returns. Thereafter, the IRS assessed unpaid income taxes against Robert (whose August 1994 balance totaled $ 4,395,162.06). Unable to locate any assets in his name, the IRS issued a levy against prized thoroughbred Devil His Due, believing Robert to be the effective owner of the horse held in the name of his daughter Edith's Lion Crest Stable. Edith then brought a wrongful levy action against the IRS pursuant to 26 U.S.C. § 7426 to enjoin it from enforcing the levy against Devil His Due and to gain the release of the horse's 1994 Whitney Handicap winnings. See LiButti, 894 F. Supp. at 591.
In determining whether an injunction should be issued, this Court concerned itself with three issues: (1) whether Lion Crest was an operational business; (2) if so, whether the horse was one of Lion Crest's assets; and (3) if so, whether Robert was Lion Crest's effective owner, and in an effort to conceal his ownership made Edith the business' nominee. The Court found that the IRS proved the first two elements for an injunction, but not the third.
First, the IRS showed Lion Crest was an operational business by providing evidence of Lion Crest's financial transactions and showing that Edith filed her claim as "Edith LiButti, doing business as Lion Crest Stables." Second, the IRS proved Lion Crest owned Devil His Due by producing a 1994 foal certificate issued by the Jockey Club at Saratoga that listed Edith LiButti/Lion Crest Stable as the horse's full owner. The Court, however, found that the IRS had not proven the third element, that Robert actually transferred the horse to Edith or provided the money Edith used to purchase Devil His Due. See LiButti, 894 F. Supp. 589, 591. On appeal, the Circuit determined that government did not have the burden of showing a money trail from Robert to Devil His Due. See LiButti v. United States, 107 F.3d 110, 119 (2d Cir. 1997). Rather, the Circuit stated that it would be sufficient for the government to show that Robert effectively owned Lion Crest and controlled its finances. See Id.
The IRS produced evidence indicating that Edith served as Robert's financial conduit by showing: (1) Edith asserted that she and Lion Crest were destitute shortly before Devil His Due was purchased; (2) Edith did not know the source of the funds she used to start Lion Crest; (3) Edith did not know the purpose/use of millions of dollars of loans signed in her name; and (4) Edith did not know so much as whether the business was incorporated or not. Moreover, the IRS showed: (1) Lion Crest carried $ 1,013,572.64 in loans for Robert from 1984-92; (2) Robert was actively involved in the sale and management of the stable's horses; and (3) Robert expended Lion Crest funds for his personal use.
The Court's finding that the IRS could not show whether any of Robert's money went to the purchase of Devil His Due itself, or effectuated Lion Crest's operation, primarily was due to the fact that Robert invoked his Fifth Amendment privilege against self-incrimination to eighty-four questions posed during his deposition. Because Robert refused to answer any questions about his involvement with Lion Crest or Devil His Due, and the Court declined to draw any adverse inferences from Robert's invocation, the IRS could not establish a nexus between him and Lion Crest/Devil His Due. Therefore, the Court granted Edith's request for an injunction.
Since then, the Second Circuit has also determined that adverse inferences drawn from non-party witnesses' refusal to answer questions in civil proceedings are admissible. See Id. at 121. Thus, this Court must decide two issues on remand: (1) to what extent adverse inferences should be drawn with respect to Robert's refusal to answer questions concerning whether he or Edith was the effective owner of Lion Crest and/or Devil His Due; and (2) what weight to give such inferences.
A. Extent to Which Adverse Inferences Should Be Drawn
While the Second Circuit has noted that the "law pertaining to adverse inferences" is "undeveloped," it nevertheless iterated the rationale adopted in Brink's Inc. v. City of New York, 717 F.2d 700 (2d Cir. 1983), that "refusals to testify could appropriately be conceptualized 'as vicarious admissions.'" See LiButti, 107 F.3d at 120-21, quoting Brink's Inc. v. City of New York, 717 F.2d 700 (2d Cir. 1983). Drawing on Brink's instruction that any "bright line rule against drawing inferences from a failure to testify" is undesirable, the Circuit in LiButti fashioned a rule from cases decided in three other Circuits that required a multi-factored case-by-case determination as to "the admissibility of a non-party's invocation of the Fifth Amendment privilege against self-incrimination in the course of civil litigation and the concomitant drawing of adverse inferences." See Brinks, 717 F.2d at 708; LiButti, 107 F.3d at 125. Thus, the Second Circuit instructs that the "circumstances of a given case, rather than the status of a particular non-party witness, is the admissibility determinant." See LiButti, at 121.
The Second Circuit remanded with the instruction to determine the admissibility of adverse inferences drawn from a non-party witness' invocation of the privilege against self-incrimination in a civil proceeding in light of four nonexclusive factors: (1) the nature of the relevant relationships; (2) the degree of control the party vests in the non-party witness with regard to key facts and the subject matter of the litigation; (3) the compatibility of the interests of the party and non-party witnesses in the outcome of the litigation; and (4) the role of the non-party witness in the litigation. See Id. at 123-24. As set forth below, under the circumstances of the instant case, these factors compel the admissibility of adverse inferences drawn from Robert's refusal to answer questions about whether he or Edith was the effective owner of Lion Crest and/or Devil His Due.
i. Nature of the Relevant Relationship
This Court found during its previous consideration of this matter that the government showed a close relationship between Robert and his daughter Edith. See LiButti v. United States, 894 F. Supp. at 598. Therefore, the Court will not revisit this issue.
ii. Degree of Control the Party Vests in the Non-party Witness With Regard to Key Facts and the Subject Matter of the Litigation
A non-party witness' decision to invoke the privilege against self-incrimination can be treated as a vicarious admission if a party has vested a high degree of control in a non-party witness with regard to key facts and subject matter of the litigation. See LiButti, 107 F.3d at 123 citing with approval Robert Heidt, The Conjurer's Circle -- The Fifth Amendment Privilege in Civil Cases, 91 YALE L.J. at 1119-20 n.214. In the instant case, the evidence showed that Robert consistently borrowed money from Urban National Bank in Edith's name to fund Lion Crest's horse purchases. Furthermore, testimony established that Robert held an ownership interest in Devil His Due and that he negotiated its 1990 sale to George Namejian. Moreover, evidence showed that Robert used Lion Crest's bank accounts as his own and that he made all decisions affecting the care, sale, and purchase of Lion Crest's horses.
Based on these findings, the Court concludes that Edith vested in Robert a great degree of control over the subject matter in this litigation, to wit, effective ...