United States Court of Appeals,Ninth Circuit.
REZNER v. BAYERISCHE HYPO UND VEREINSBANK AG HVB HVB HVB HVB
John C. REZNER, an individual, Plaintiff-Appellee, v. BAYERISCHE HYPO-UND VEREINSBANK AG, a corporation; HVB U.S. Finance, Inc., Defendants-Appellants, HVB America, Inc.; HVB Capital Market, Inc.; HVB Risk Management Products, Inc., Defendants.
Argued and Submitted Nov. 3, 2010. -- December 28, 2010
Before: ARTHUR L. ALARCÓN and PAMELA ANN RYMER, Circuit Judges, and DAVID G. TRAGER, Senior District Judge.*
Jerome B. Falk, Jr. (argued), Dennis T. Rice and Sara J. Eisenberg, Howard Rice Nemerovski Canady Falk & Rabkin, San Francisco, CA, and William M. Lukens, Jenifer L. Jonak and Louis H. Pugh, Lukens Law Group, San Francisco, CA, for the plaintiff-appellee.Thomas H. Dupree (argued) and Amir C. Tayrani, Gibson Dunn & Crutcher LLP, Washington, D.C., Orin Snyder, Gibson Dunn & Crutcher LLP, New York, NY, and Mark P. Ressler, Ronald R. Rossi and Michael Hanin, Kasowitz Benson Torres & Friedman LLP, New York, NY, for the defendants-appellants.
John C. Rezner filed this action against Bayerische Hypo-Und Vereinsbank AG d/b/a HVB Group and HVB Structured Finance, Inc. (collectively “HVB”) for violation of the Racketeer Influenced and Corrupt Organizations Act of 1970 (“RICO”), codified at 18 U.S.C. §§ 1961 et seq., and the Unfair Business Practices Act of California (“UCL”), codified at Cal. Bus. & Prof.Code §§ 17200 et seq. Rezner alleges that HVB engaged in a scheme to defraud the United States of tax revenue through fraudulent tax shelters that caused injury to purchasers of such shelters.
We must decide whether Rezner has shown under RICO's proximate causation requirement that HVB's fraud against the United States caused injury to his business or property. HVB contends that Rezner's RICO claim was barred by the Private Securities Litigation Reform Act (“PSLRA”), codified in relevant part at 18 U.S.C. § 1964(c). HVB also argues that the district court erred in granting summary judgment on its UCL claim because the circumstantial evidence it presented demonstrates that a reasonable jury could find that Rezner was a co-conspirator in the tax shelter scheme.
We reject HVB's argument that Rezner's RICO claim is barred by the PSLRA. We reverse the district court's order granting summary judgment as to Rezner's RICO and UCL claims, however, because we are persuaded that the district court erred in concluding that Rezner had satisfied the proximate causation requirement for a civil RICO claim.
It is undisputed that John Rezner participated in a financial transaction called Custom Adjustable Rate Debt Structure (“CARDS”), designed to avoid the payment of federal income taxes. CARDS was introduced to him by Marc Harper, a financial advisor with myCFO, Inc. CARDS loan transactions are designed to generate the appearance of large capital losses for high net worth investors to reduce their tax income liability.
In 2001, to carry out this CARDS scheme, HVB incorporated Pinner Financial Trading, LLC (“Pinner”), in the state of Delaware. HVB entered into a credit agreement with Pinner pursuant to which it loaned Pinner Euros 48,000,000 (“the Pinner loan”). Pinner converted the proceeds of the loan into an interest-bearing certificate of deposit for 85% of the loan, and a Euro-denominated promissory note in the amount of Euros 8,000,000 (or approximately ,300,000) for the remaining 15%. These were placed in an account with HVB to serve as collateral for the Pinner loan.
Rezner assumed Pinner's obligation to pay HVB for the loan of Euros 48,000,000 in exchange for Rezner taking ownership of the Euro-denominated promissory note that was part of the collateral for the Pinner loan. To gain the right to use Pinner's promissory note, Rezner pledged, as collateral for the Pinner loan, a security interest in a SolomonSmithBarney account that held approximately 1,000,000 in municipal bonds. Rezner then sold his interest in Pinner's promissory note to a third party at its fair market value.
The legality of the tax consequences of this CARDS facility was supported by a legal opinion letter from Sidley Austin Brown & Wood LLP (“Sidley Austin”). Both Sidley Austin and LeBoeuf Lamb Greene & MacRae LLP (“LeBoeuf”) advised Rezner that the loan on which he was co-obligor with Pinner was a for a 30-year term, but had to be renewed or terminated upon each anniversary by the parties. Upon each renewal, HVB had the sole discretion to increase the interest rate and fees associated with the loan.
Another investment firm called Chenery Associates, who engineered CARDS facilities, was involved in negotiating Rezner's participation in the transactions. Rezner paid a total of over ,000,000 in fees to participate in the CARDS transactions: ,692,829 to HVB; ,320,000 to myCFO; 50,000 to Sidley Austin; 0,000 to LeBoeuf; and 00,000 to Chenery.
On March 18, 2002, the IRS published a notice announcing that they would not allow taxpayers to claim a loss based on transactions structured similarly to CARDS. Rezner subsequently claimed a capital loss of 9,649,866 on his 2001 tax return based upon the fact that he received only ,300,000 for the sale of the Euro-denominated promissory note, while assuming joint and several liability for the full Euros 48,000,000 Pinner loan. Rezner carried most of the loss to the year 2002, when he sold over 0,000,000 in Yahoo! stock. He claimed no tax liability for that year in part because of the alleged carry-over loss resulting from assuming liability for the Pinner loan.
In August 2002, one year after Rezner entered into his agreement to assume liability for the Pinner loan, HVB raised the fees and interest rate on the loan. It was entitled to do so under its agreement with Pinner. Rezner accepted the increase. On August 13, 2003, HVB unilaterally terminated the loan and demanded immediate repayment of the entire outstanding balance.
In 2005, Rezner was audited by the IRS. The audit resulted in the denial of Rezner's claimed capital loss made in connection with the Pinner loan. He was also ordered to pay approximately 1,000,000 in back taxes and interest.
On February 13, 2006, HVB admitted to participating in a number of unlawful tax shelter schemes, including the Pinner loan, that were designed to defraud the United States. HVB entered into a Deferred Prosecution Agreement (“DPA”) with the United States Attorney for the Southern District of New York.1 HVB stated in the DPA that “all parties involved [in the illegal tax shelter transactions], including the clients/'borrowers,' knew that the transactions would be unwound in approximately one year in order to generate the phony tax benefits sought by the client participants.” (DPA, Statement of Undisputed Facts at ¶ 19, Rezner, No. 06-02064 (N.D.Cal. Feb. 3, 2009), ECF No. 160, Ex. B.)
On March 17, 2006, Rezner filed a complaint in the United States District Court for the Northern District of California against HVB, Domenick DeGiorgio, a former HVB employee who orchestrated the illegal tax shelters, Skyline Advisory Services, a financial advisory service which provided ongoing tax audit assistance to former HVB CARDS clients and liaised with the IRS, and Randall Bickham, a founder and director of Skyline.2
In its answer, HVB admitted that it participated in the CARDS transactions. It denied the other allegations. It asserted fifteen affirmative defenses. On May 29, 2007, Rezner filed a second amended complaint. The amended complaint asserted three causes of action against HVB: 1) RICO violations; 2) fraud; and, 3) violations of the California UCL.
On December 19, 2007, HVB filed a motion for summary judgment on the ground that Rezner's action was preempted by section 107 of the PSLRA. HVB argued that because Rezner pledged municipal bonds as part of the substitute collateral for the Pinner loan, Rezner's claim against HVB must be brought as a securities fraud claim under section 10(b) of the Securities Exchange Act, not under RICO. In its August 13, 2008 order, the district court denied HVB's motion. It held that:
[p]aintiff's voluntary and discretionary decision to include bonds in the Substitute Accounts was not “in connection with” the alleged fraud. Therefore, Defendants' alleged conduct is not actionable as securities fraud. Since the alleged conduct is not actionable as securities fraud, it is not barred by the PSLRA and may form the basis of Plaintiff's RICO claim.
Rezner filed a motion for partial summary judgment on February 3, 2009. He argued that HVB's admission that it defrauded the United States in the DPA was sufficient to establish that HVB violated RICO and the UCL. In his motion, Rezner also contended that as to five of HVB's affirmative defenses, “the pleadings, admissions, and discovery in this case establish that there is no evidence to support these defenses and that these defenses are unavailable as a matter of law.” In opposition to Rezner's motion, HVB argued that Rezner had failed to satisfy RICO's proximate causation requirement because Rezner's own actions caused his alleged injury. HVB asserted that this was a dispute regarding a genuine issue of material fact that precluded summary judgment.
The district court granted summary judgment in favor of Rezner on his RICO and UCL claims. It held that the undisputed evidence demonstrated that HVB had violated RICO and the UCL. The court also concluded that HVB's affirmative defenses were “unsupported by evidence.” Rezner v. Bayerische Hypo-Und Vereinsbank AG, No. C 06-02064, 2009 U.S. Dist. LEXIS 129189, at *48 (N.D.Cal. May 1, 2009). The district court rejected HVB's primary reliance on the report of its expert, Alan Dlugash (“the Dlugash Report”), to show that Rezner was aware that the CARDS transactions lacked economic substance. The district court stated that there was “nothing in the Dlugash report that suggest[ed], based on admissible evidence, that [Rezner] was aware that the CARDS facility was an unlawful tax shelter.” Id. at *28. Accordingly, the district court held that HVB had failed to demonstrate that there was a genuine issue of material fact in dispute on Rezner's RICO and UCL claims.
The district court accepted the parties' stipulation to dismiss Rezner's cause of action for fraud. On June 16, 2009, the district court entered a final judgment against HVB. HVB has timely appealed. The district court had jurisdiction pursuant to 28 U.S.C. § 1331 and § 1367. We have jurisdiction pursuant to 28 U.S.C. § 1291.
HVB contends that the district court erred in determining that Rezner's RICO claim was not barred by the PSLRA, and that Rezner had established that HVB's fraud against the United States caused his injury. We review the district court's summary judgment de novo. Te-Moak Tribe of W. Shoshone of Nev. v. United States Dep't of Interior, 608 F.3d 592, 596 n.3, 598 (9th Cir.2010). When reviewing a district court's summary judgment decision, “[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). “Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge