Amended 2255 Motion 22-26

Hemming Morse, Inc.
11160 Spear Streel

Suile 1900
II T'
i
"one 14151 B36-4000
.Iile 14151 m-2062
Sail Francisco, CA 94105 hmi@hemming.com
Celtified Public AccoulTtant5
Utigstion end forensic CDnsultants
Frederick S. Wyle, Esq.

Trustee in Bankruptcy
We have compiled the following financial statements, in accordance with Statements on

Standards for Accounting and Review Services issued by the American Institute of
Certified Public Accountants, for the following Companies substantively consolidated in
bankruptcy including: a) Hamilton Taft & Company (a California corporation in
bankruptcy); b) Knightsbridge Companies, Inc. (aTexas corporation in bankruptcy); c)
Remington Companies, Inc. (a Texas corporation in bankruptcy); and d) Dresdner
Enterprises, Inc. (a Texas corporation in bankruptcy):
Consolidated Statement of Cash Receipts and Disbursements for the Cumulative

Post-Petition Periods ended September 15, 1999;
Consolidated Schedule of Cash Balances and Projected Disbursements as of

September 15, 1999
These financial statements have been prepared on the cash basis of accounting, which
is a comprehensive basis of accounting other than generally accepted accounting
principles.
The accompanying financial statements include both the consolidated Post-Petition

periods and the periods of Trustee adn-.inistration for each debtor. For HarniHon Taft,
both of these periods begin on March 20, 1991 (even though the T(Ustee was not
appointed until March 26, 1991). The term 'Texas Debtors" is used in these financial
statements to refer to Knightsbridge Companies, Inc., Remington Companies, Inc. and
Dresdner Enterprises, Inc. For the Texas Debtors, the Post-Petition period begins on
April 19, 1991 for Knightsbridge and on April 29, 1991 for Remington and Dresdner
Enterprises. For the Texas Debtors, the period of Trustee administration begins on
July 22, 1991, which is when Frederick S. Wyle, Esq. was appointed as interim trustee.
The Trustee's appointment was made permanent on November 4, 1991 and also on
that date the Bankruptcy Court ordered the SUbstantive consolidation of Hamilton Taft
and the Texas Debtors. A Plan Of Reorganization for the bankruptcy estate has been
confirmed by Court Order entered on October 25, 1994.
000133
II San Francisco 1 Los Angeles
Frederick S. Wyle
Trustee in Bankruptcy
Page Two
A compilation is limited to presenting, in the form of financial statements. information

that is available to the Trustee. We have not audited or reviewed the accompanying
financial statements and supplementary information referred to above and. accordingly,
do not express an opinion or any other form of assurance on them.
As required by generally accepted accounting principles, a complete financial statement

includes a statement of assets. liabilities and equity, a statement of cash flows and
substantive disclosures to further describe amounts included on the related financial
statements. These disclosures have not been included with the accompanying
statements. If these disclosures and a statement of cash flows were included in the
financial statements, they might influence the user's conclusions about the Company's
'financial position, results of operations, and cash flows. Accordingly. these financial
statements are not designed for those who are not informed about such matters.
~:299~~#' 9r1L
San Francisco, California
000134
Consolidated Hamilton Taft & Company and Texas Debtors
(A Group of Affiliated Companies In Bankruptcy)
Statement of Cash Receipts and Disbursements
Cumulative Post-Petition Periods Ended September 15, 1999
(See Accompanying Accountant's Compilation Report)
EXHIBIT 1 000128
Cumulative Post-Petition Periods Ended September 15,1999
Cumulative for Post-Petition Periods

Hamilton Taft Texas Debtors Consolidated Consolidated
To 10/31/91 To 10/31/91 Since 11/01/91 Total
Detail of Other Litigation and Claims Recoveries:
Recovered from Connie C. Armstrong, Jr. $25,000 $345,106 $370,106
AI-Ibrahim settlement 475,000 475,000
CIGNA settlement 1,800,000 1,800,000
Dresdner Petroleum, Inc. Bankruptcy distribution 134,429 134,429
Gulftex settlement payment received 38,888 38,888
Godwin, Carlton settlement 30,000 30,000
Grambling settlement 51,500 51,500
Hadid settlement 550.000 550,000
BartletuCosteIIolLitch fi eld settlements 59,500 59,500
Paille settlement 5,000 5,000
Weir Brothers bankruptcy distribution 112,037 112.037
David McCall settlement 325,000 325,000
Meadow Owens settlement 400,000 400,000
?arker Automotive settlement 465,004 465,004
Preference settlement ~ 19,450,527 19,450,527
Rosenberg settlement 400,000 400,000
S & S Credit Corporation settlement 160,091 160,091
Sandia Corporation recovery 932,076 932,076
Total Litigation and Claim Recoveries $0 $25,000 $25,734,158 $25,759,158
EXHIBIT 1-1
000129

To 10/31191 To 10/31/91 Since 11/01/91 Total
Detail of Other Receipts:
Gross sale - real estate projects $711,250 $3,170,250 $3,881,500
Gross sale - ranch 4,300,000 4,300,000
Gross sale -livestock (HTC Ranch) $203,117 158,300 361,417
Gross sale - ranch equipment & vehicles 116,645 116,645
Gross sale - rodeo partnership interest 250,000 250,000
Gross sale - stadium box 210,000 210,000
Gross sale - vehicles 137,575 35,900 173,475
Gross sale - other assets 69,427 167,412 11,007 247,846
Expense reimbursements 42,990 42,990
Monthly service fees $32,109 3,735 35,844
Net customer funds (Tax Agency funds) 24,974 24,974
Returned customer checks (Pre-Petition) 97,455 97,455
Reimbursement-Ranch insurance claim 107,343 107,343
Receivables recovered through distribution offset 42,080 42,080
Recovery of Unclaimed Property 55.008 55,008
Recovery of costs allocated to other affiliates 143,554 143,554
Other receipts (including insurance and other refunds,
rental income, forfeited purchase deposits) 31,842 53,793 265,491 351,126
Total Other Receipts $596,499 $1,076,010 $B.768,749 $10,441,258
Detail of Beginning Cash Balances

Balance as of bankruptcy petition $5,856,509 $74,133 $5,930,642
Ranch cash balance as of August 1, 1991 1,730 1,730
Total Beginning Cash Balances $5,858,239 $74,133 $0 $5,932,372
EXHIBIT 1-2
000130

To 10/31/91 To 10/31/91 Since 11/01/91 Total
Detail of Operating Costs Paid:

Employee costs $445.270 $268,805 $531,802 $1,245.877
Employee costs - Ranch (Since 8/01191) 37,136 196,317 233,453
Subtotal: Employee costs 482,406 268,805 728,119 1,479,330
Cost of sale - livestock 10,943 10,943

Cost of sale - ot.her assets 50,046 50,046
Cost of sale - ranch 260,748 260.748
Cost of sale· real estate projects 158,875 301,765 460,640
Cost of sale - Rodeo 567 567
Equipment leases 9.979 4.947 14,926
Insurance 78,741 193,693 272,434
Litigation costs 0 234 446,338 446,571
Office supplies & expenses 11,873 30,699 23,179 65,752
Other costs of operations 192,096 36,397 4,800 233,293
Outside services 0 5,814 22,470 28,284
Penalty for early withdrawal 37,500 37.500
Portion of distribution returned on behalf of DPI 4,340 4,340
Prepaid expenses & deposits h?_,---
.... t:i?? 5,490 3,161 71,173
Property and equipment 1,814 15,030 16.844
PUblication costs 12,961 12,961
Ranch operating costs 16.114 288,408 304,522
Real Estate holding costs 51.589 51,589
Relocation costs 15,905 15.905
Rent 72,658 35.327 264.888 372,873
Return of reimbursed expenses 2,131 2,131
Taxes: Property & business 233,117 233,117
Telephone 15,573 9,875 13,372 38.820
Travel & auto expenses 17,453 8,954 26,407
Trustee's bond 600 46,925 47,525
Trustee's miscellaneous costs 6,401 12,195 18,596
Work-In-Process: Real Estate 12,647 242,437 255,084
Total operating costs paid $1,040.032 $587,163 $3,205,726 $4.832,921
EXHIBIT 1-3
000131
Consolidated Schedule of Cash Balances
And Projected Disbursements as of September 15, 1999
Cash Balances
Operating Account: Union Bank Account No. 2190000551 $1,114,582
Distribution Account: Union Bank Account No. 2190000004 5,669
Interest Bearing Accounts:

Union Bank Money Market Account No. 1270009308 Closed
Union Bank Time Deposit Account No. 2199001302 Closed
Cash Balance - as of September 15,1999 $1,120,251
Projected Disbursements
Professional Fees: Trustee and Trustee's Professionals
Feldman, Waldman & Kline 24,990
Shaver, Suntag & Feuerstein 6,149
Garfield & Hecht 7,090
Subtotal 38,229
Hemming Morse, Inc. 23,415
Frederick S. Wyle 19,988
Subtotal: Professional Fees 81,632
U.S. Trustee Fees 4,750

Advance payment for future Annstrong collection efforts 75,000
Contingency reserve 4,500
Subtotal: Projecled Disbursements 165,882
Amount available for distribution to Class 4 Creditors $954,369
EXHIBIT 1-4
000132
~
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L:\UnHTAFT\(DISTCUMjCum
.....
HAMILTON TAFT & COMPANY 0
0
Former Clients Included in Class 4 Claims 0
Claims Outstanding After Fifth (Final) Distribution
Class 4 Remaining
Combined Claims Accepted Cumulative Balance Due
Allowed Preference Combinl;d Distributions on Client
Client Claim Claim Claims Through Final Claims
Action Instruments Co., Inc. $96,654 $10,243 $106,898 $67,430 $39,467
4 Advo~System, Inc, 1,796,288 1,796,288 1,220,872 575,416
Affiliated Computer Services, Inc. 49,100 4B,100 8,330 40,769
16,969 \ 7,998
Air Cable, Inc. 24,966 24,966
All American Gourmet Company 509,441 509,441 86,434 423,007
Allen Foam Corporation 3,226 3,226 2,193 1,033
America West Airlines, Inc. 834,725 834}25 567,333 267,393
American Microsystems. Inc, 268,238 268,238 182,311 85,926
American Nukem Corporation 32,799 32,799 22,292 10,507
Analytikem 31.184 3'1,184 21,195 9,989
Argo Partners (Genstar) 518,023 51B,023 352,082 165,942
Argo Partners (Pullman) 686,112 686,112 466.325 219,786
Associated Coin Amusement Co. 10,219 10,219 6.945 3,273
Atlas Hotels Inc, 166,607 122,980 289,587 134,102 155,485
Balcor Payroll Company 12,211 12,211 8,300 3,912
Blue Cross & Blue Shield Of Texas 1,145,074 673,873 1,818,947 892,597 926,349
Brinkmann Instruments 72,034 59,221 13'1,255 59,007 72,249
Brunswick Seat Company 1,097 '\,097 746 351
BW I LP International, Inc. 373,701 373,701 253,991 119,710
C & R Clothiers 324,523 324,523 220,567 103,956
California Pacific Medical Center 11 102,264 549,990 1,652,255 842,483 809,772
Cartex Corporation 24 1663 24,663 16 1 763 7.900
Chase Manhattan Mortgage Corporation 850 850 577 272
Chase Manhattan Mortgage Corporation 156,040 196,986 353,027 139,476 213,550
Claris Corporation 164,333 56,882 22'\ ,215 121,342 99,873
Clevite Bridgestone Co. 2,734 2,734 1,858 876
Coast Fedral Bank 112,144 112,144 19,027 93,118
Coherent, Inc. 335,973 335,973 57,002 278,971
Commerical Credit Corporation 3,454,766 3,454,766 586,149 2,868,617
Cavia Partnership 1,792,402 1,792,402 1,218 1 231 574,171
Customer Company 102,935 102,935 17,464 85,470
Cyar-l'em 49,063 49,063 33,346 1'" - ~ 7
C'r =nergy Services 4,000 114,000 19,342

"'.,
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L:lLlT\HTAFT\(DISTCUMICum .....
Q
Former Clients Included in Class 4 Claims Q
Class 4 Remaining
Allowed Preference Combined Distributions on Client
Degussa Corporation 774,491 774,491. 526,394 248,098
Del Manufacturing Company 22,851 22,851 15,531 7,320
Delaware Seat Company 14,905 14,905 10,131 4,775
Delhi Gas Pipeline Corporation 47,210 47,210 32,087 15,123
Diamond Walnut Growers, Inc. 81,866 81,866 13,890 67,976
Dole Foods (Castle & Cooke) 3,142,907 125,006 3,267,913 2,157,329 1,110,583
Donnelley Receivable Inc. 108 108 74 35
Dublin San Ramon Services Dist. 45,353 45,353 30,825 14,528
Electric Power Research Institute 117,734 232,167 349,901 119,410 230,491
ENSR Corporation Delaware 710,511 710,511 482,908 227,602
• Federal Express Corporation 30,387,795 8,879,948 39,267,744 22,160,093 17,107,650
First Capital Life Insurance Co. 139,054 139,054 94,510 44,544
First Interstate Bank $306,127 $306,127 208,063 98,063
Glendale Adventist Medical Center 625,710 578,154 1,203,864 523,364 680,500
Guckenheimer Enterprises, Inc. 95,403 92,604 188,007 80,554 107,453
Guckenheimer Of Texas, Inc. 9,073 9,073 6,166 2,906
H.D. Hudson Manufacturing Co. 100,147 100,147 68,067 32,OB1
HBO & Company Of Georgia 421,925 421,925 286,767 135,158
Healthquest Ltd. 230,626 230,626 156,748 73,878
JBB Spirits Inc. 894 894 608 287
• Jim Beam Brands Co. 157,863 55,747 213,610 116,752 96,858
Kaytea Rose Inc. 16,422 16,422 11,162 5,261
King Bearing, Inc. 237,832 237,832 40,352 197,481
Lucasarts Entertainment Co. 21 B,066 11,657 229,723 150,189 79,534
Lucasfilm, Ltd. 21,432 21,432 14,567 6,866
Mabon, Nugent & Company 956,799 331,657 1,288,456 706,572 581,884
McCutchen, Doyle Brown & Enersen 100,960 100,960 68,619 32,341
Metromedia Company 61,317 61,317 41,675 19,642
Mills College 83,263 83,263 14,127 69,136
Monroe Systems For Business 660,778 660,778 449,107 211,671
Mt. Diablo Medical Center, Inc. 160,725 61,114 221,839 119,608 102,231
Natir~""l Data Corp. 84,148 84,148 57,192 '2C' ""'C;6
Nc- Union Fire Insurance Co. 10,145,712 10,145,712 6,895,674 3,2
.., _.1 ..
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L:ILlnHTAFnlolsTCUMjCum
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......,.j

0
Former Clients Included in Class 4 Claims 0
Class 4 Remaining
NEC Electronics, Inc. 284,206 235,930 520,136, 233,193 286,943
Neiman-Marcus Group, Inc. 553,251 1,129,769 1,683,020 567,706 1,115,314
Northland Plastics Inc. 7,235 7,235 4,917 2,318
Norwest PUblishing Co. 45,237 45,237 30,746 14,491
Nukem Acquisition Corporation 80 80 54 25
Nukem Technologies Corp. 24,700 24,700 16,788 7,912
Oakland Athletics Baseball Company 90,499 201,359 291,858 95,672 196,185
Payless Shoe Source 270,558 2,584,875 2,855,433 622,449 2,232,985
Polytechnic University 640,705 290,260 930,965 484,711 446,254
4 RR. Donnelley & Sons Co. 4,270,423 21,406 4,291,829 2,906,084 1,385,745
Reckitt & Coleman Inc. 2,263,957 2,263,957 1,538,730 725,227
Richmond Wholesale Meat Co. 45,223 45,223 30,736 14,487
Riverside Seat Company, Inc. 16,829 16,829 11,438 5,391
Rochester Institute Of Technology 103,799 103,799 70,549 33,251
Root-Lowell ManUfacturing Co. 35,745 35,745 24,295 11,450
Ross Stores, Inc. 701,843 701,.943 477,018 224,826
S & S Credit Companies, Inc. 158,930 9,428,449 9,587,378 1,707,686 7,879,692
SCM Chemicals, Inc. 207,834 161,498 369,332 168,658 200,674
SCM Metal, Inc. 49,347 37,661 87,008 39,929 47,079
• Scott Paper Co. 253,807 253,,907 172,504 81,304
Signet Armorlite, Inc. 50,106 108,434 158,540 52,453 106,086
Signetics Company 6,212,016 6,212,016 4,222,083 1,989,933
Sinai Hospital Of Detroit 1,378,310 695,032 2,073,342 1,054,709 1,018,633
Sinai Management Services Co. 17,658 17,658 12,002 5,657
Sitka Corporation 12,588 12,588 8,556 4,032
Sony Corporation Of America 563,774 563,774 383,177 180,597
SOS Environmental Technology 8,363 8,363 5,684 2,679
Southland Corp. Employees Trust 178,993 178,993 121,655 57,338
Springfield Sugar & Products Co. 351,368 175,566 526,'335 268,600 258,335
Springfield Terminal Rail. Co. 279,009 279,009 189,633 89,377
Stanford University Hospital 3,512,722 1,068,095 4,580,0317 2,568,688 2,012,130
Statp qar of California 36,787 185,174 221,961 56,420 16&:: ~41
St; \rkansas 45,465 45,465 30,901 I
a " :\ nf 4 Drpn: 7/'Jnnn

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L:\UT1HTAFT1IDISTCUM}Cum N
~
Former Clients Included in Class 4 Claims ~
0
Class 4 Remaining
Sun Microsystems Federal, Inc. 24,072 24,072. 16,361 7,711
Sun Microsystems Of California 3,071 3,071 2,087 984
Sun Microsystems, Inc. 791,228 791,228 537,769 253,459
Sun Microsytems Europe, Inc. 991 991 674 318
• Sunbelt Beverage Corp. 235,423 235,423 160,008 75,414
Sunsweet Growers, Inc. 13,141 13,141 8,931 4,210
Sybon Transition Corporation 8,803 8,803 5,9S3 2,820
T.D.S. Foods, Inc. 11.306 11,306 7,684 3,622
Tandem Computers, Inc. 2,036,652 5,240,057 7.276,709 2,273,287 5,003,422
Texas Oil & Gas Corporation 34,562 43,717 78,279 30,908 47,371
The Chronicle Publishing Co. 1,088,632 1,088,632 739,904 348,728
The Cooper Companies. Inc. 18,289 18,289 12,431 5,859
The EVB Company 27,318 48,935 76,253 26,870 49,383
• The Kendall Company 1,021,088 170,640 1,191,728 722,948 468,780
The Vintage Club 23,614 25,902 49,516 20,444 29,072
Thermalkem 57,304 57,304 38.947 18.356
Ungermann-Bass, Inc. 1,030,845 210,590 1,241,435 736,358 505,078
United Savings Bank 96,676 89,654 186,330 80,918 105,412
Verbatim Corporation 390,760 390,760 265,586 125,175
Waste Chern Corporation 22.386 22,386 15,215 7,171
WBF Technologies 421 421 286 135
William Marsh Rice University 829 1202 361,364 1,190,565 624,889 565,677
Woodbridge Corp. 88,031 83,090 171,121 73,929 97,192
Woodbridge Foam Fabricating 18.529 18,529 12,593 5,935
Woodbridge Holdings, Inc. 458 458 312 147
Woodbridge INAGC, Inc. 30.779 30.779 20,920 9,860
Woodbridge Sales & Engineering .~--
4286 l1,286 2,913 1,373
Claims of Former Clients $90,0.46,313' $39,717,006- $129.763,319 $67,939,768 $61,823,550
• HemmingMorselnc
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•
•
•
Frederick S. Wyle, Trustee for
• Hamilton Taft & Company
ACCOUNTANrs REPORT
• We have compiled the accompanying consolidated statements of cash receipts and

disbursements of Hamilton Taft & Company (a California corporation in bankruptcy),
Knightsbridge Companies, Inc. (a Texas corporation in bankruptcy), Remington Companies,
Inc. (a Texas corporation in bankruptcy), and Dresdner Enterprises, Inc. (a Texas corporation
in bankruptcy) and the statement of cash receipts and disbursements of Dresdner Petroleum,
Inc. (a Texas corporation in bankruptcy) for the Post-Petition and Trustee periods ended
December 31, 1991 in accordance with standards established by the American Institute of
Cenified Public Accountants.
A compilation is limited to presenting, in the form of financial statements, information that is

the represenllltion of management. We have not audited or reviewed the accompanying
• financial statements and, accordingly, do not express an opinion or any other form of
assurance on them.
1f"'~tt m~-M) Qfl<:.-.

• San Mateo, California
February 19 1992 I
• 1./
• I'
I
A-Ol
•
CONSOLIDATED HAMILTON TAFT & COMPANY AND TEXAS DEBTORS
'.
• Statement of Cash Receipts Bnd Disbursements
For the cumulative Post-Petition periods ended December 31,1991

(See Accountant's Compilation Report)
• Receipts:
Hamilton Taft Texas Debtors Consolidated
To 10/31/91 To 10/31/91 Since 11/01/91
Consolidated
Total
Gross real estate sales 711,250 120,000 831,250

Less sales costs (158,875) (20,937} (179,812)
Net proceeds from sale of real estate 552,375 99,063 651,438
• Net proceeds 1rom sale of livestock - HTC Ranch

Net proceeds 1ram sale of other assets
Interest received
192,174
156,956
169,054
167,412
284
139,449
17,680
14,403
331,623
342,048
183,741
Meadow Owens settlement 400,000 400,000
Other receipts (See Detailed SchedUle) 186,380 78,793 19,490 284,663
Total Receipts 704,564 798,865 690,085 2.193,5T3
'.
• Disbursements:
Employee costs: Ranch (Since 8/01191) 37,136 20,179 57,315
Employee costs: Other 445,270 268,805 21,415 735,490
Subtotal: Employee costs 482,406 268,805 41,594 792,805
Other operating costs (See Detailed Schedule) 489,098 16.829 79,009 564,936
Trustee's Attorney & Accountant 634,404 342,399 976,803
Trustee's Appraiser and Consultants 20,811 7.570 13,664 42,045
Trustee's fees 104,088 104,088-: 'i'm...,ff.(
Professional Fees: Creditors' Committee 14,536 23,394 37,930
Professional Fees: Debtor-in-Possession 13,516 6,435 19,951
• Ranch operating costs

Settlement Bank One furniture lease
Trustee's administrative costs
16,114
188,945
5.835
20,360
452
36,494
188,945
6,287
Trustee's bond 600 600
U.S. Trustee fees 4,500 2,100 6,600
Disbursements for operations 1,940,737 309,420 527,327 2,m,484
Net transfers to Petroleum 60,000 60,000
• Total disbursements
Excess of Disbursements over Receipts

1,940,737
(1,236,173)
369,420
429,445
527,327
162,758
2,837.484
(643,971)
Beginning Cash and Cash Equivalent Balances

Balance as of bankruptcy petition 5,856,509 74,133 5,930.642
• Ranch cash balance as of August 1, 1991

Transfer of Texas Debtors' cash balances
I '1,730
503,Sn (503,Snl
1,730
0
Ending Cash and Cash Equivalent Balances $5,125,643 $0 $162.758 $5,288,401
• A-02
• •
CONSOLlDATED HAMILTON TAFT & COMPANY AND TEXAS DEBTORS
For the cumulative Post-Petition periods ended December 31,1991


Texas Debtors Consolidated Consolidated
•
Hamilton Taft
To 10/31/91 To 10/31/91 Since 11/01/91 Total
D.9t!'.il. of. Ot."'!!~ R!!OOi,~t.!::

Monthly service fees $32,109 $32,109
Net customer funds [fax Agency funds) 24,974 24,974
• Other receipts
1 clal Other Receipts

31,842
$186,380
78,793
$78,793
19,490
$19,490
130,125
$284,663
Detail of Other Operating Costs Paid:

Equipment leases $9,979 $4,947 $14,926
Insurance 78,741 $7,885 86,626
• Utigation costs
Office supplies &. expenses
Other costs of operations
1,411
0
51,006
234
30,699
36,397
10,986
6,375
124
12,632
37,074
87,527
Outside services 0 5,814 15,398 21,212
Postage,freight & shipping 4,283 516 4,601
Publication costs 12,961 12,961
Relocation costs 15,905 15,905
Rent 72,658 35,327 13,699 121,684
Supplies 11,873 11,873
Telephone 15,573 9,875 1,573 27,021
Travel &. auto expenses 17,453 ass 18,30B
• Affiliate expenses paid

Accrued liabilities: Post- Petition
Costs allocated to other affiliates
2,946
127,426
(143.554)
609
2,946
128.035
(143,554)
Prepaid expenses & deposits 62.522 5,490 68,012
Property and equipment 1,814 435 2,249
• Total other operating costs $469,098 $16,829 $79,009 $564,936
• A-03
•
'.
• Statement of Cash Receipts and Disbursements
For the cumulative periods of Trustee Administration ended December 31, 1991
Cumulative Trustee Periods

Hamilton Tett Texas Debtors Consolidated Consolidated
• Receipts:
Gross real estate sales
To 10/31/91 To 10/31/91
$593,750
Since 11/01/91
$120,000
Total
$713,750
Less sales costs (134,192) (20,937) (155,129)
Net proceeds from sale of real estate 459,558 99,063 558.621
• Net proceeds from sale 01livestock-HTC Ranch

Net proceeds from sale 01 other assets
Interest received
192,174
156,956
169,054
167,412
284
139,449
17,680
14.403
331,623
342,048
183,741
Meadow Owens settlement 400.000 400,000
Other receipts (See Detailed Schedule) 186,380 75,197 19,490 281,067
Total Receipts 704.564 702,452 690,085 2,097.101
• Disbursements:
Employee costs: Ranch (Since 8/01/91)
Employee costs: Other
37,136
445,270 195,523
20,179
21,415
57.315
662,208
Subtotal: Employee costs 482,406 195,523 41,594 719,523
Other operating costs (See Detailed SchedUle) 469,098 (58,645) 79,009 489,483
Trustee's Attorney & Accountant 634,404 342,399 976,803
Trustee's Appraiser and Consultants 20,811 7,570 13,664 42,045
Trustee's fees 104,088 104,088
Professional Fees: Creditors' Committee 14,536 23,394 37,930
Professional Fees: Debtor-in-Possession 13.416 6,435 , 9.851
Ranch operating costs 16,114 20,380 36.494
• Settlement Bank One furniture lease
Trustee's administrative costs
Trustee's bond
188,945
5,835
600
452
188,945
6,287
600
U.S. Trustee fees 4,500 2,100 6,600
Disbursements for operations 1,940,737 160,565 527,327 2,628,629
Net trans1ers to Petroleum 70,500 70.500
• Total disbursements
Excess of Disbursements over Receipts

1,94{),137
(1,236,173)
231 ,065
471,387
527,321
162,758
2,699,129
(602,028)
Beginning Cash and Cash EqUivalent Balances

Balance as of appointment of Trustee 5,856,509 32,190 5,B88 ,699
Ranch cash balance as of August 1,1991 1,730
• Transfer 01 Texas Debtors' cash balances
Adjusted beginning balances
503,Sn (503,Sn)
1,730
0
Ending Cash and Cash Equivalent Balances $5.125,643 $0 $162,758 $5,288.401
• A-04
•
•
• Statement of Cash Receipts and Disbursements
For the cumulative periods of Trustee Administration ended December 31, 1991
Cumulative Trustee Periods

Hamilton TaJ! Texas Debtors Consolidated Consolidated
• Di;!t;\i1 01 Other Receipts:

To 10/31/91 To 10131191 Since 11/01/91 Total
Monthly service fees $32,109 $32,109

. Net customer funds (Tax Agency funds)

Other receipts
Total other receipts

24,974
31,842
$186,380
75,197
$75,197
19,490
$19,490
24,974
126,529
$28',067
Detail of Other Operating Costs:

Equipment leases $9,979 $9,979
Insurance 78.741 7,885 86,626
• litigation costs
Office supplies & expenses
Other costs of operations
1,411
51,006° 27,382
261
10,988
6,375
124
12,399
33,757
51,391
Outside services 0 15,398 15,398
Postage,freight & shipping 4.283 518 4,801
Publication costs 12,961 12,961
Relocation costs 15,905 15,905
Rent 72,658 31,994 13,699 118,351
Supplies 11,873 11,873
Telephone 15,573 4,291 1,573 21,437
Travel & auto expenses 5,507 855 6,362
• Affiliate expenses paid

Accrued liabilities: Post - Petition
Costs allocated to other affiliates
2,946
127,426 (143,554) 609
2,946
(15,519)
Prepaid expenses & deposits 62,522 2.740 65,262

Property and equipment 1,814 435 2,249
• Total other operating costs $469,098 ($58,645) $79,009 $489,463
• A-OS
•
DRESDNER PETROLEUM, INC.
•
(A Texas Corporation in Bankruptcy)
• Statement of Cash Receipts Bnd Disbursements
For the cumulative Post-Petition Period and the cumulative

period of Trustee Administration ended December 31,1991
• Post - Petition
Period:
Trustee
Period:
7/22{91
4/29/91
Through Through
12/31[91 12/31/91
Receipts:
• Oil and gas revenues

Less costs of production
Net proceeds from 011 and gas revenues
$667,915
416.422
251,493
$415,613
332,750
82,863
Interest received from Affiliates 151 151
Other receipts 5,341 1,850
Refund of legal fees 7,759 7,759
• Receipts before transfers from Affiliates

Transfers From Affiliates:
Transfers from Knightsbridge
264,742
60,000
92,622
60,000
Repayment of Petroleum transfer to Remington 10,500 10,500
Total receipts 335,242 163,122
Disbursements:
Employee costs 259.421 134,331
Insurance 9,941 9,941
Interest paid to affiliate 78 78
Office expenses 767 746
Property taxes 403 403
Purchase offield equipment 6,633 6,633
• Rent
Telephone
Travel and entertainment
14,887
6,995
182
8,220
597
182
Trustee's bond 300 300
U.S. Trustee fees 3,000 2,250
Disbursements for operations :302,607 163,681
• Transfers To Affiliates:
Transfer to Remington
Total disbursements
10,500
313.107 163,6B1
Excess receipts (disbursements) 22,136 (559)
• Beginning cash balance
Ending cash balance

25,023
$47.'59
47,718
$47,159
• A-06
• o CONSOLIDATED ES~ArE
~.
HAMILTON !rAI"T CUSroMER CLAIMS
MAXIMUM
o SCEiEDULED I ~ I( POTENTIAL
CREDITOR AMOUNT <11~~d "
.] . ~.,11' CLAIM
---------------
ACTION INSTRUMENTS CO., INC. 592,092.84 596,654.31 596,654.31
ADVO-SYSTEM, INC. $1,779,836.08 $1,796,288.32 $1,796,28B.32
AIR CABLE, INC. 524,966.22 $24,966.22
ALLEN FOAM CORPORATION $3,226.23 $3.,226.23
• AMERICA WEST AIRLINES, INC.

AMERICAN MICROSYSTEMS, INC.
AMERICAN NOXEM CORPORATION
S834,725.41
$267,401.62
$32,798.85
$268,237.64
$32,798.85
$834,725.41
$268,237.64
$32,798.85
AMERICAN RESIDENTIAL ESCROW $849.68 S849.68
AMERICAN RESIDENTIAL MORTGAGE $156,040.21 $175,862.00 $175,862.00
ANALYTIKEM $31,184.29 . $31,184.29 $31,184.29
ARRAY TECHNOLOGY CORP. 535,106.01 $35,106.01
AS~OC!~~EP corN AMUSEMENT co S8,407.32 $10,218.74 $10, 21B. 74
ATLAS HOTELS INC. 5167,024.91 $166,607.00 $166,607.00
BALCOR PAYROLt.. COMPANY $12,211.47 $12,211.47
BARCLAY HOLLANDER CORP $3,617.50 $3,617.50
BEEBE ORCHARD CO. $14,489.18 $14,489.18
9~UE CRCZS & BLUE SHIELD OF TX 51,156,576.76 S1,257,~23.47 $1,257,623.47
BLUE GOOSE GROWERS INC. $274,931.33 $274,931.33
• BLUE GOOSE GROWERS, INC.

BOARD OF TRUSTEES, STANFORD
BOSTON & HAINE CORPORTATION
$6,285.72
$845.20
$296,991.4B
$6,285.72
$296,991. 48
$845.20
BosrON & HAINE CORPORTATION $5,572.54 55,572.54 _
BOYLE MIDWAY INC, $4,314.91 $4,314.91
BOYLE-MIDWAY $7,618.24 $7,618.24
BRINKMANN INSTRUMENTS $72,034.16 $72,034.16
BRUNSWICK SEAT COMPANY $1,096.88 $1,096.88
BUD ANTLE, INC. $229,477.87 $229,477.87
BUD ANTLE, INC. $890,046.07 S890,046.07
BW / IP INTERNATIONAL, INC. $370,697.23 $386,932.78 $366,932.78
C & R CLOTHIERS $324,523.13 $324,523.13
CALIFORNIA PACIFIC HED. CTR. $1,106,353.90 $1,102,264.05 $1,102,264.05
CARTEX CORPORATION $24,663.04 $24,663.04
• CASTLE & COOKE
CASTLE & COOKE PROPERTIES
CASTLE & COOKE RESIDENTIAL
$1,BB9.86
$28,848.13
$74,588.42
$1,889.86
$28,848.13
$74,588.42
CASTLE ~ COOKE, INC. 5223,640.91 S223,640.91
CASTLE COOKE RETAIL, INC. $27,522.14 $27,522.14
CITY OF PIEDMONT $3,578.58 53,578.58
CITY OF PINOLE $2,843.17 $1,211. 71
•
$1,221.71
CITY OF PINOLE $3,232.54 $3,232.54
CLA.~:G CORPORATION $164,378.45 $164,332.89 $164,332.89
CLEVITE BRIDGESTONE CO. $2,733.94 $2,733.94
COAST FEDERAL BANK $7,476.29 $7,476.29
caVIA PARTNERSHIP $1,793,303.Bl $1,792,401.81 $1,792,401.81
CYANOKEH $49,063.07 $49,063.07 $49,063.07
CORPORATION
•
D~GUSSA P46,6BO.78 $977,077.10 $977,077.10
DEL MANUFACTURING COMPANY $22,552.14 $22,851.14 $22,851.14
DELAWARE SEAT COMPANY $14,905.38 $14,905.38
DELHI GAS PIPELINE CORPORATION $47,209.72 $50,209.72 $50,209.72
DIAMOND WALNUT GROWERS $5,986.84 $7,421.34 $7,421.34
DOLE FOOD COMPANY, INC. $1,592,062.34 $3,142,906.64 $3,142,906.64
DONNELLEY RECEIVABLE INC. $108.26 5108.26
DUBLIN/SAN RAMON SRVCS DSTRCT
• ELECTRIC POWER RESEARCH INST.
ENSR CORPORATION DELAWARE
545,012.29
5117,950.60
$110,506.19
$45,352.57
SUB, 982.22
$ilO. 506.56
/1/....
$45,352.57
$138,982.22
$710,506.56
•. J .. j .' ..... ,
r - ,---
02/19/92
C-3
•
•
CONSOLIDATED ESTATE
c
HAMILTON TA!"".r CUSTOMER CLAIMS
MAXIMUM
• CREDITOR
SCHEDULED
AMOUNT
PROOF OF CLAIM
AMOUNT
POTENTIAL
CLAIM
FEDERAL EXPRESS CORPORATION 3.J,>-.l\ 530,432,796.91 $28,319,089.05 $26,319,089.05

FIRST CAPITAL LIFE INSRNCE CO. $127,193.73 S139,054.00 5139,054.00
GENSTAR STONE PRODUCTS COMPANY $51B,023.25 $603,765.00 5603,165.00
GLENDALE ADVENTIST HED. CTR. $625,353.80 $625,109.80 $625,709.80
• GUCKE~IKER ENTERPRISES, INC.

GUCKENHElKER OF TEXAS, IHC.
H.D. HUDSON MANUFACTURING CO.
$95,403.19
$9,072.69
$100,556.49
S98,091.81
59,414.00
$101,862.64
$98,091.81
$9,474.00
$101,862.64
HBO & COMPANY OF GEORGIA $420,311.80 $421,924.80 $421,924.80
REALTHQUEST LTD. $203,803.91 $230,626.01 $230,626.01
J.E.G. FOODS, INC. $1,027.79 $1,021.79
JBB SPIRITS INC. S894.46 $894.46 $B94.46
• JIM BEAM BRANDS co.

KAYTEA ROSE, INC.
KEMPER SECURITIES GROUP
$157,862.79
S16,422~4e
51,078.'73
$157,862.79
$16,814.98
$1,078.73
$157,862.79
$16,814.98
$1,078.03
LANAI COMPANY, INC. $114,888.19 $114,888.19
LANAI COMPANY, INC. $3,550.91 $3,550.91
LONG BEACH CONTAINER TERMINAL $9,899.80 $9,786.79 $9,786.79
LUCASARTS ENTERTAINMENT co. $218,065.99 $231,851.32 $231,857.32
• LUCASFILH, LTD.
KASON, NUGENT & COMPANY
KADON, NUGENT & OOHPNAY
$21,432.34
5954,798.68
$2,000.00
$22,175.84
5985,407.53
$22,175.84
$985,407.53
$2,000.00
KAINE CENTRAL AAILROADS CO. $411.01 $411.01
HCCUTCHEN,DOYLE,BROWN& ENERSEN $99,993.14 $100,959.51 $100,959.51
MC! TELECOMUNICATIONS CORP. $102.95 $102.95
HETROMEDIA COMPANY $60,685.10 $51,317.00 $61,317.00
MILLS COLLEGE $2,163.98 $11,508.89 $11, 5D8. 89
MONROE SYSTEMS FOR BUSINESS $660,777.55 5660,777.55 $660,777.55
INC
MT. DIABLO HOSPITAL $146,033 .47 $160,724.60 $160,724.60
NATIONAL DATA CORP. $68,911.30 $84,147.82 $84,147.82
NATIONAL DAT~ PAYMENT SYSTEMS $14,454.42 $14,454.42
NEC ELECTRONICS, INC. $285,282.60 5330,591.69 $330,591.69
• NEIMAN-MARCUS GROUP, INC.

NORTHLAND PLASTICS I~C.
NORWEST PUBLISHING CO.
$2,686,127.26
$7,234.95
$45,237.26
$553,250.70
$1,690.18
$553,250.70
$7,690.18
$45,237.26
NUKEM ACQUISITION CORPORATION $79.62 579.62
NUJ'-EM TECHNOLOGIES COlU'ORATION S24,700.27 $24,700.27 $24,700.27
OAHU TR1\NSPORT CO., LTD. $2,209.85 $2,209.85
OAKLAND ATHLETICS BASEBALL co. $90,365.04 $90,499.4"2 $90,499.42
• OBS FINANCIAL SERVICES

OCEANIC CONSTRUCTION COMPANY
PAYLESS SHOE SOURCE
$4,779.92
$38,607.53
$271,349.37 $1,052,856.30
$4,779.92
$38,607.53
$1,052,856.30
POLYTECHNIC UNIVERSITY 5581,564.39 5640,704.98 $640,104.98
R.R. DONNELLEY & SONS COMPANY $4,243,286.64 $5,143,366.45 $5,143,366.56,
RECKITT & COLEMP.N INC. $1,888,208.34 $2,471,860.77 $2,411,860.77
RECKITT & COLEMAN INC. $246,309.17 $246,309.17
• RICHMOND WHOLESJU.E MEAT CO.

RIVERSIDE SEAT COMPANY I INC.
RKO GENERAL INC.
$43,424.27
$16,828.57
$4,420.63
$45,222.87
$4,643.63
$45,222.87
$16,828.57
$4,643.63
RM MARKETING INC. $5,231.14 $5,231.14
ROCHESTER INSTITUTE OF TECH. S105,673.57 S105, 673.57
ROOT-LOWELL MANUFACTURING CO. $35,745.10 $36,340.00 $36,340.00
ROSS STORES, INC. $701,843.46 5701,843.46 $701,843.46
• 5 & 5 CREDIT COMPANIES, INC.

5.0. WARREN CO.
$158,929.53
53,206,607.68 $3,206,607.68
$158,929.53
$3,206,607.68 'I
02/19/92
C-4
•
•
CONSOLIDATED ESTATE
HAMILTON TAP'T CUSTOMER CLAIMS
MAXIMUM
• CREDITOR
SCHEDULED
AMOUNT
PROOF OF CLAIK
AMOUNT
POTENTIAL
CLAIM
SANDI~ NATIONAL LABORATORIES $300,000.00 $300,000.00

SCM CHEMICALS, INC. $206,809.05 $207,834.04 $207,834.04
SCM METAL PRODUCTS, INC. $49,347.49 $65.785.93 $65,785.93
SCOTT CONTAINER PRODUCTS GROUP $53,553.33 $53/553.33 $53,553.33
• SCOTT PAPER COMPANY

SCOTT PAPER COMPANY
SCOTT POLYMERS
$7,086,801.47
$44,471.87
$6,294.42
$7 .OB6, B01.47
$44,471.87
$6,294.42
$7, OB6, 801. 47
$44,471. B7
$6,294.42
SCOTT WORLDWIDE, INC. $830.33 $830.32 $830.32
SIGNET ARHORLITE, INC. 550,105.99 $50,105.99
SIGNETICS COMPANY $6,212/016.45 $6,212/016.45 $6.212,016.45
SINAI HOSPITAL OF DETROIT $1,377,666.01 $1,567,207.70 $1,567,207.70
• SINAI MANAGEMENT SERVICES co.

SITKA CORPORATION
SONY AVIATION SERVICES
$17,195.19
$12,047.50
$2,539.67
$17,773.73
$12,5B8.32
$2,638.13
$17,773.73
$12,588.32
$2,838.13
SONY CAPITAL CORP. $982.72 $1,572.72 $1,572.72
SONY CHEMICAL CORP. OF AMERICA $967.24 $967.24 $967.24
SONY CLASSICAL $420.24 $1,010.24 $1,010.24
SONY CORPORATION OF AMERICA $414,189.15 $541,129.92
•
$541,129.92
SONY USA INCORPORATED $5,978.17 $10,347.03 $10,347.03
SONY US~, INC. $2,366.56 $2,366.56
SOS CALIFORNIA DIVISION $1,590.29 $1,590.29
50S ENVIRONMENTAL TCHNLG, INc. -5675.53 $8,362.82 $8,362.82
SOSTM $3,836.03 $6/306.52 $6/306.52
SOUTHLAND CORP. EMPLOYEES TRU. $178,993.18 $176,993.14 $17B,993.14
·SPRINGFIELD SUGAR & PRDCTS CO. $351,368.47 $446,261.18 $446,261.18
SPRINGFIELD TERMINAL RAIL. CO. $51,705.83 $51,705.83
SPRINGFIELD TERMINAL RAIL. CO. $188,420.35 $296,014.77 $296,014.77
STANFORD UNIVERSITY HOSPITAL $3,512,722.32 $3/512,722.32 53,512,722.32
STATE OF ARKANSAS $50,011.56 $50,011.56
SUN MICROSYSTEMS FEDERAL, INC. $23/660.37 524,071. 78 $24,071. 78
SUN MICROSYSTEMS OF CALIFORNIA $3,085.14 $3,070.86 $3,070.86
SUN MICROSYSTEMS, INC. S801,887.97
•
$791,227.64 $791,227.64
SUN HICROSYTEHS EUROPE, INC. $528.51 $991.44 $991. 44
SUN-MAID GROWERS OF CALIFORNIA $7,814.25 $9,163.44 $9,163.44
SUNBELT BEVERAGE CORP. $235,422.69 $239,938.37 $239,938.37
SUNSWEET GROWERS, INC. $13,141.02 $14,925.70 $14,925.70
SYBRON TRANSITION CORPORATION $8,671.81 $8,803.44 $8,803.44
T.D.S. FOODS, INC. $11,306.08 $12,235.50 $12,235.50
-TANDEM COMPUTERS, INC. $1,960,838.18 $2,794.142.85 $2,794,142.85
• TANDEM TELECOMMUNICATIONS SYST
TEXAS OIL Iio GAS CORPORATION
THE ALL AMERICAN GOURMET CO.
$40,708.11
$30, S81. 22
$830.74
$53,299.35
$33,974.00
$40,106.11
$53,299.35
$33,974.00
THE CHRONICLE PUBLISHING CO. $1,088,632.47 $1,163,471.01 $1, Hi3.471.01
THE COOPER COMPAlIIES, INC. $IB,316.15 $18,289.24 $18,289.24
THE Eva COMPANY $11,455.66 $32,566.74 532,566.74
THE KENDALL COMPANY $1,018,911.86 $1/320,460.00
• THE
THE
THE
KENDALL COMPANY OF NEVADA
PULLMAN COMPANY
STATE BAR OF CALIFORNIA
$331. 74
$687,920.28
$36,787.19
$736,111. 75
$1,320,460.00
$331. 74
$136,111. 75
$36,787.19
THE VINTAGE CLU8 $20,328.05 $23,613.57 $23,613.57
THERMALKEH $57,303.54 $57,303.54 $57,303.54
TRANS-ADVO SYSTEMS, INC. $11,169.40 $11,169.40
•
UNGERMANN-8ASS, INC. $1,030,844.77 $1/101,703.57 $1,101,703.57
UNITED SAVINGS BANK $95,731.15 $96,675.75 596,675.75
VALLEY FIG GROWERS $5,988.90 $7,227.26 $7,227.26
~. ~ ..
02/19/92
C-5
•
• o COMSOLIDATBD BBTATE
c·
HAMILTON 'rAPT CUSTOMER. CLAIMS
MAXIMUM
• CREDITOR
SCHEDULED
AMOUNT
PROOF OF CLAIM
AMOUNT
POTENTIAL
CLAIM
VERBATIM CORPORATION $391,051.78 $451,398.96 $451,398.96

WAHIAWA WATER CO., INC. $473.90 $473.90
WAIALUA SUGAR CO., !NC. $46,407.38 $46,407.38
WAIALUA SUGAR CO., INC.
• $43,377.27 $43,377.27
WASTE CHEH CORPORATION $22,385.78 $22,385.78 $22,385.78
WBF TECHNOLOGIES $421. 44 $421.44
WILLIAM KARSH RICE UNIVERSITY $34.26 $34.26
WILLIAM HARSH RICE UNIVERSITY $829,167.24 $829,201. 50 $B29,201.50
WINCUP, INC. $980.19 $980.19 $980.19
WOODBRIDGE CORP. $88,031.42 $88,031.42
WOODBRIDGE FOAM FABRICATING
•
$18,528.B1 $18,528.81
WOODBRIDGE HOLDINGS, INC. $458.47 $209,353.81 $209,353.81
WOODBRIDGE INOAC, INC. $30,799.40 $30,799.40
WOODBRIDGE SALES & ENGINEgRING $4,285.96 $4,285.96
==;====.:::::=::;:::=::== ===:::======:::==::====== ==========:======
Total: $91,925,180.61 $90,790,426.62 $95,123,932.26
•
02/19/92
C-6
•
Memorandum
To SAC, San Francisco ({'f(..I1-SF-Q1)'5'5)(P) DlIle 3/8/92
From
S~ f b7C
Subject Connie Chip Armstrong, et al

dba, Hamilton Taft and Company, et al
San Francisco, Ca.
FBW (B); Mail Fraud, Bankruptcy Fraud, (A)j
OO:SF
On the afternoon of March 5, 1992 a meeting was held at

the office of AUSA Michael Yamaguchi to discuss prosec~u~t_~_'o
__n ~ __
strategy in the above referenced matter. Present werel~====~==~=
ESQ. representing the bankruptcy trustee. Also present was Mr.
Ronald -Smetana, Deputy Attorney General, Major Fraud unit of the
california state Attorney General's office. SA's Will Hatcher and
I represented the FBI.
' •• - '
,t:.;..::..'
,J
~ ~--"
,.- ......-
.-1--il" ~
)J.. I.'J .'Y.
I ;::;.,. /.
l' r f' Or.':
'c
2
On February 27, 1992 the accountant for the trustee

finished his second interim report for the bankruptcy which
includes among other thing a tracing of over $4,000,000 directly
into the pockets of Armstrong himself. The report cites payments
by Armstrong using Hamilton Taft funds to a stripper' and the use
of over $225,000 to purchase Dallas Cowboy "skyboxes lt •
The next investigative step is to apply for an ex parte
order for Armstrong's personal tax returns for 1988, 1989, and
1990. Also several interviews of former Armstrong associates will
be conducted in Texas.
Finally due to the continuing effort being expended by
SA will Hatcher and his anticipated involvement in this matter it
is requested that he be designated co-case agent for the
remainder of the investigation of this case.
2
• 1"\\
",,'I
•
• 1 FELDMAN, WALDMAN & KLINE
A Professional Corporation
2 PATRICIA S. MAR
L. J. CHRIS MARTINIAK
• 3
4
2700 Russ Building
235 Montgomery street
San Francisco, CA 94104
Telephone: (415) 981-1300
5
Attorneys for Frederick S. Wyle,
• 6
7
Trustee
8 UNITED STATES· BANKRUPTCY COURT
9 NORTHERN DISTRICT OF CALIFORNIA

• 10
11
In re ) Chapter 11
12 ) SUbstantively Consolidated
) or Jointly Administered
13 )
HAMILTON TAFT & COMPANY ) No. 91-3-1077 LK
14 KNIGHTSBRIDGE COMPANIES, INC. ) No. 91-3-2448 LK
THE REMINGTON COMPANIES, INC. ) No. 91-)-2449 LK
15 DRESDNER PETROLEUM, INC. ) No. 91-3-2450 LK
• 16
17
DRESDNER ENTERPRISES, INC.
Debtors.
---------------)
)
)
)
No. 91-3-2451 LK
18
• 19
20
SECOND INTERIM REPORT OF
FREDERICK S. WYLE, TRUSTEE
21 February 20, 1992
• 22
23
24
• 25
26
•
•
•
• 1 TABLE OF CONTENTS
• 3
4
SECTION
I. INTRODUCTION AND SCOPE OF THIS REPORT 1
5 II. STATUS OF THE BANKRUPTCY CASES . . . . . . . . . . . . . • . . • . . . . . . . 2
6 A. Entry of Order for Relief 2

• 7 B. Appointment of Creditors Committee 3
B C. The Texas Debtors and Substantive
Consolidation 3
9
• 10
III.
D. Appeals by Hamilton Taft, as Debtor 6
STATUS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . • 6
11
A• Hamilton Taft 6
12
B. Texa s Debtors B
13
IV. FINANCIAL CONDITION OF THE ESTATES 10
14
A. Consolidated Estate , 10
15
Dresdner Petro leum
•
B• 12
16
V. RECOVERY AND LIQUIDATION OF ASSETS . . . . . . . . . . . . . . . • . . . 12
17
A. Physical Assets _" 13
18
1. -- Double C Cattle Ranch 13
• 19
20
2. Seventh of Sonterra . . . . . . . . . . . . • . • . . . . . • . . . 16
3. Whispering Meadows and Glade

21 Meadows 18
• 22
23
4.
5.
Oil and Gas Leases
Luxury Automobiles
18
19
24 B. Promissory Notes and Guarantees 20
25 1. Mohamed Hadid 20
• 26 2. Stanley Rosenberg 22
-i-
•
•
•
• 3. Parker Automotive 23
1
2 c. other Claims Against Third Parties .....•........ 26
• 3
4
1.
2.
Criminal Defense Legal Fees . . . . . . . . . . . . . • . . 26
McCall Notes .•.....•.......•....•.......... 27
5 3. Potential Recoveries To Be
Investigated . . . . . . . . . . . . . . . • . . . . . . . . • . . . . . . 29
• 6
7
D. Assets still·in Armstrong's Possession 31
1. Rodeo Interests 31
B
2. Texas Stadium Box . • • . . . . . . . . . . . . . . . . . . . • . . . 32
9
• 10
3.
4.
Coffea International
Plaza Realty Note _

33
33
11
5. Personal Possessions . . . . . . . . . . . . • . . . . . . . . . . 35
VI. LITIGATION AGAINST ARMSTRONG 35

13
A. Analysis of Armstrong's Personal
14 Financial Transactions 35
15 B. status of Litigation and Settlement 40
• 16 c. Injunctions and Contempt Proceedings 41
17 1. TROs and Preliminary Injunctions ..•........ 41
18 2. contempt Proceedings . . . . . . . . . . . . . . • . . . . . . . . 43
• 19
20 VII.
D. criminal Investigation .................•.•.••... 44
OTHER CLAIMS AND LITIGATION •.........•......•........ 45

21 A. Fidelity Bonds . . . . . . . . . . . . . . . . . . . . • . . . . • . . . . . . . . 45
• 22
23
B.
C.
Preference Claims
Sandia Refund
46
47
24 D. Tax Penalties . . . . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . 49
E.
• 25
26
other Potential Claims 50
-ii-
•
• c •
• 1 VIII. CREDITORS CLAIMS ANALySIS 50
:2 A. Claims Against Consolidated Estate . . . . . • . . . . . . . . 51
• 3
4
B.
C.
Claims Against Dresdner Petroleum
steven solodoff Claim

52
52
5 IX. CONCLUSION AND FUTURE ACTIVITIES . . . . . . . . . . . . • . . . . . . . . 54
6
• 7 APPENDICES
8 APPENDIX A: STATEMENTS OF CASH RECEIPTS AND DISBURSEMENTS

FOR THE DEBTORS AS OF DECEMBER 31, 1991
9
• 10
APPENDIX B: ACCOUNTANTIS REPORT ON SOURCE AND APPLICATION
OF FUNDS FOR CONNIE C. ARMSTRONG, JR.
JANUARY 1, 1989 - JULY 15, 1991
11
APPENDIX C: CREDITORS CLAIMS
12
13
24
15
• 16
17
18
• 19
20
21
• 22
23
24
25
• 26
-iii-
•
• •
• 1
2 I. INTRODUCTION AND SCOPE OF THIS REPORT
• 3
4
On May 28, 1991, Frederick S. Wyle, trustee of Hamilton
Taft & company ("Hamilton Taft"), filed a First Interim Report.
S At that time the Hamilton Taft bankruptcy case was two months old.
6 The report focused on the background and business of Hamilton

• 7 Taft, the diversions of Hamilton Taft funds from customers'
8 payroll tax deposits to the Texas enterprises of Hamilton Taftts
9 principal, Connie C. Armstrong, Jr., the reSUlting $90 million in
• 10 unpaid payroll tax liabilities, and the preliminary analysis of
11 the trustee's accountant as to how Armstrong used over $50 million
12 of Hamilton Taft funds for his other business ventures and for
13 personal expenditures.
14 At the time of the filing of the First Interim Report,
15 only Hamilton Taft was under the control of the trustee. This
• 16
17
Second Interim Report is filed by Frederick S. Wyle as trustee not
only of Hamilton Taft, but also of Knightsbridge Companies, Inc.
18 ("Knightsbridge"), The Remington companies, Inc. ("Remington"),
• 19
20
Dresdner Petroleum, Inc.
Inc.
("Petroleum") and Dresdner Enterprises,
(I'Enterprises"), whose bankruptcy cases are now either
21 substantively consolidated or jointly administered with the
• 22
23
Hamilton Taft case. The Second Interim Report will provide
information on the status of the bankruptcy cases, the trustee's
24 efforts to recover and liquidate assets, the multi-faceted
25 litigation that has been undertaken to pursue claims from various

• 26 parties, and the financial status of the estates.
SECOND INTERIM REPORT -1-
•
• •
• 1 This Second Interim Report will also contain an analysis
2 by the trustee's accountant of the personal financial transactions
• 3
4
of Connie c. Armstrong, Jr., from January 1, 1989 to June 15,
1991, which includes the period that he was in control of Hamilton
5 Taft. At the time of the First Interim Report, the trustee did
6 not have access to any of the personal financial records of

• 7 Armstrong, which had been withheld on Fifth Amendment grounds.
8 Certain financial records of Armstrong have now been made
9 available to the trustee, which enables the trustee and his

• 10 accountants to trace the disposition of Hamilton Taft funds
11 through Armstrong personally, as well as through his corporations.
12 During the first few months of the Hamilton Taft
13 bankruptcy case, much of the focus of the trustee's attention was
14 on learning what Armstrong did with Hamilton Taft's money and on

15 recovering assets under Armstrong's control that had been acquired
• 16
17
with Hamilton Taft's money. Although that program has not yet
been completed, by the end of 1991 the focus of the bankruptcy
18 case had expanded to pursuing claims against other parties, and to
• 19
20
realizing on assets that have already been recovered from
Armstrong.
21 II. STATUS OF THE BANKRUPTCY CASES
• 22
23
A. Entry of Order for Relief
On May 31, 1991, the Bankruptcy Court issued an order
24 for relief in the Hamilton Taft bankruptcy case, which was
25 commenced through the filing of an involuntary Chapter 11 petition

• 26 on March 20, 1991. In granting a motion for summary jUdgment
•
•
•
•
1 filed by the petitioning creditors, Federal Express corporation,
2 Stanford University and stanford University Hospital, the
• 3
4
Bankruptcy Court rejected the arguments of Hamilton Taft as Debtor
that a "bona fide" dispute existed as to the petitioning
5 creditors' claims against Hamilton Taft.
• 6
7
B. Appointment of Creditors committee
After the order for relief was entered, the Office of
8 the U. S. Trustee appointed a---Co1llll\ittee of Unsecured Creditors
9 (IiCreditors committee") consisting of the following 11 creditors:
• 10 Federal Express corporation (chair), Scott Paper co., Signetics
11 Company, R.R. Donnelley & Sons, Castle & Cook (now Dole Foods),
12 Stanford University Hospital, Neiman-Marcus Group, Tandem
13 Computers, Advo-System, Inc., Cavia Partnership, and Blue Cross
14 and Blue Shield of Texas. The members of the Creditors Committee
15 collectively hold claims of approximately $67 million against
• 16 Hamilton Taft, or about two-thirds of the total claims. The
17 Creditors Committee has employed Murphy, Weir and Butler of San

18 Francisco as its counsel.
• 19
20
C. The Texas Debtors and Substantive Consolidation
The bankruptcy cases of Knightsbridge, Remington,
21 Enterprises and Petroleum (sometimes collectively referred to as
• 22
23
the "Texas Debtors"), 'were commenced by voluntary Chapter 11
petitions filed in the Bankruptcy Court for the Northern District
24 of Texas, Dallas Division, on April 19 and 29, 1991. On June 7,
• 25
26
1991, on motion of the trustee, the Bankruptcy Court in San
Francisco ordered the bankruptcy cases of the Texas Debtors
•
•
•
1 transferred to the Northern District of California, pursuant to
2 Bankruptcy Rule l014(b), which provides that bankruptcy cases of
• 3
4
affiliated entities may be transferred to a single court.
Following the change of venue of the Texas cases, the
5 trustee on June 26, 1991 filed a motion for substantive
• 6
7
consolidation of the Knightsbridge and Remington cases with the
Hamilton Taft case. This appeared to be the most expeditious
8 means of recovering for the Hamilton Taft estate the assets which
9 had been transferred from, or acquired with funds transferred

• 10 from, Hamilton Taft to the Texas Debtors. The motion was based on
11 a showing that all of the assets of the Texas Debtors were
12 traceable to Hamilton Taft funds, and their liabilities were
13 primarily intercompany payables, which ultimately ended up as
14 payables to Hamilton Taft. Knightsbridge and Remington owned the
15 stock of the other Texas Debtors, Enterprises and Petroleum, as
• 16 well as other sUbsidiary entities. Therefore, substantive
17 consolidation of Knightsbridge and Remington with Hamilton Taft
18 would enable the trustee of Hamilton Taft to control not only the
• 19
20
entities being consolidated, but all of their subsidiaries as
well. Alternatively, the trustee sought appointment of a Chapter
21 11 trustee for all four Texas Debtors.
• 22
23
On July 22/ 1991, the Court, with the consent of the
Texas Debtors, ordered the intermediate step of appointment of

24 Frederick s. Wyle as interim trustee of Knightsbridge, Remington,
• 25
26
Petroleum and Enterprises. The intermediate step was taken at the
request of the Creditors Committee, 50 that a claims bar date
•
•
•
• 1 could be established and claims reviewed before a sUbstantive
2 consolidation decision was made. The Court set September 30, 1991
• 3
4
as a claims bar date for all five Debtors, Hamilton Taft as well
as the Texas Debtors. (See section VIII.)
5 The trustee subsequently am~nded the substantive
6 consolidation motion to include Enterprises in the consolidation.

• 7 Petroleum was not included in the consolidation, because the oil
B and gas operations of Petroleum contain at least some inherent
9 risks of liability such that consolidation of Petroleum's assets

• 10 and liabilities with those-of the other Debtors would not be
11 prudent.
12 On November 4, 1991, the Court ordered substantive
13 consolidation of the Hamilton Taft, Knightsbridge, Remington, and

14 Enterprises estates, effective October 31, 1991. The
15- consolidation was not opposed by any party, inclUding any of the
• 16
17
Debtors. Frederick S. Wyle was appointed trustee of the
consolidated estate, and his appointment as trustee of Petroleum
18 was made permanent.
• 19
20
As a result of substantive consolidation, all assets and
liabilities of the four consolidated Debtors were combined and are
21 now treated as if the Debtors were a single entity. Petroleum's
• 22
23
assets and liabilities remain separate, but its bankruptcy case is
jointly administered with that of the consolidated estate. The
24 trustee believes that substantive consolidation has resulted in
25 significant savings to the consolidated estate in administrative

• 26 costs, as well as substantial savings in litigation costs that
•
•
•
• 1 otherwise would have been required to obtain the assets of the
2 Texas entities.
• 3
4
D. Appeals by Hamilton Taft. as Debtor
Hamilton Taft, as Debtor, filed appeals to the District
5 Court from the order appointing a trustee entered on March 26,
6 1991, from the order approving the appointment of FrederiCk S.

• 7 Wyle as trustee entered on March 26, 1991, from the order for
8 relief entered on May 31, 1991/ and from the order-authorizing the
9 trustee to shut down Hamilton Taft's business entered on June 21,

• 10 1991. The appeals were all assigned to Judge John P. Vukasin of
11 the District court.
12 On February 13, 1992, the District Court dismissed all

I
13 the appeals as moot, on motion of the appellees (Federal Express,
14 Stanford University and Stanford University Hospital as to three
15 of the appeals and the trustee as to the fourth appeal). The
• 16 District court ruled that the Debtor's failure to seek a stay of
17 the orders and the SUbstantial changes of circumstances that had
18 occurred in the bankruptcy case since the orders were entered made
• 19
20
it inequitable to consider the appeals. The Debtor, which claims
to be acting on authority of Armstrong as "Chairman of the Board"
21 of Hamilton Taft, has indicated that it plans to appeal the
• 22
23
dismissals to the Ninth Circuit.
III. STATUS OF OPERATIONS
24 A. Hamilton Taft
• 25 Following a hearing on --_.

May ---"-
16,.. 199~,
...•..
.:"_-:- _- the Bankruptcy
26 court authorized the trustee to close Hamilton Taft's business
•
•
•
• operations. Hamilton Taft had not conducted any significant
1
2 payroll tax processing business since the public disclosure of the
• :1
4
missing funds, the consequent abrupt cessation of funds
transferred to Hamilton Taft by its customers, and the filing of
• ~ " 'f
I', "
S the Chapter 11 petition on March 2O, 1991. The trustee requested

6 authority to close the business after canvassing the Hamilton Taft
• 7 clients and ascertaining that few clients would continue a
. ~,'
8 business relationship with Hamilton Taft even under the

9 supervision of a court-appointed trustee.
• 10 After the Court approval was obtained, the trustee
11 commenced an orderly shutdown of Hamilton Taft's operations which
12 took place over the next several months. The trustee ceased
13 operations and terminated employees progressively, at a rate that
14 would permit the processing of client records, establish what
15 deposits were made and what taxes were paid and not paid, respond
• 16 to inquiries from tax agencies, organize and store records to

17 enable them to be retrieved as needed, secure'computer records,
18 and dispose of tangible assets of the company.
• 19
20
Hamilton Taft closed its 1 Market Plaza, San Francisco
offices on June 30, 1991, and moved its remaining staff to smaller
21 offices. Most of the office equipment, furniture and other
• 22
23
tangible assets of Hamilton Taft were sold at auction on
August 17, 1991. At present Hamilton Taft maintains a small
24 office staff of three full-time employees in San Francisco, for
25 accounting purposes, to perform data stUdies, to monitor
• 26 activities in Texas, and to provide support services for the
•
•
•
•
·1 bankruptcy case and litigation. Four additional employees are
2 maintained in Texas, three of them at the Double C Ranch.
• 3
4
B. Texas Debtors
At the time of the trustee's interim appointment on
5 July 22, 1991, Remington maintained a large suite of offices with
• 6
7
some 16 employees at 3811 Turtle Creek Boulevard in Dallas.
Remington provided administrative, accounting and payroll services
8 for all of the Armstrong entities in Texas. Without the continued
• 9
10
infusion of Hamilton Taft money to pay its operating costs,
Remington was running out of money and unable to pay even its
11 Chapter 11 trade debts.
12 Remington had not paid its rent or insurance premiums
13 since the filing of its Chapter 11 petition in April, 1991, and
14 was under a Bankruptcy Court order, obtained by the landlord, to
15 vacate its offices by July 31, 1991. No plans had been made for
• 16 relocating the offices. Within one week after the trustee's
17 appointment, new offices had to be found and a move of Remington's
lB offices arranged and completed.
• 19 The trustee within days of his appointment reduced the
20 Remington payroll from 16 to 10, and further staff reductions took
21 place over the next three months. It was apparent that Remington
• 22 and the other Texas Debtors did not have, and had not had,
operations requiring the level of staff and administrative

23
24 expenses that Remington had maintained. The only ongoing activity
• 25
26
conducted by the Texas Debtors was Enterprises' efforts to sell

•
------------- ----------
•
•
•
1 townhouses in San Antonio (See section V.A.2) and Petroleum's
2 unprofitable oil and gas operations (See Section V.A.4).
• 3
4
The trustee determined that Petroleum's operations could
be more economically managed by an. outside management company;
5 that Enterprises required' only one employee on site in San
• 6
7
Antonio; and that the rest of Remington's administrative and
accounting services could be combined with that of Hamilton Taft
B in San Francisco, thereby eliminating the need for a Dallas office
• 9
10
and achieving substantial savings. On october 31, 1991,
Remington's offices in Dallas were closed.
11 Remington's office equipment, furniture and furnishings
12 have been sold or moved to the Double C Ranch, which was taken
13 over by the trustee on August 1, 1991. Remington's records and
14 files have been, or will be, moved to San Francisco. Sorting out
15 the VOluminous files and records located at Remington's offices
• 16 and at a storage facility has taken and continues to take
17 substantial effort. It also required negotiations with Armstrong
18 over which records belonged to Armstrong personally or Armstrong
• 19 entities not under the control of the trustee.

20 Records retained by Armstrong have been made available
21 to the trustee for copying, except for documents which have been
• 22
23
withheld by Armstrong1s criminal defense counsel as SUbject to a
Fifth Amendreent or attorney-client privilege. The trustee is
24 seeking to work out with Armstrong's counsel any remaining
• 25
26
disputes over documents claimed to be privileged. Any unresolved

•
•
•
•
1 disputes will be submitted to the Bankruptcy court for resolution
2 pursuant to an order previously obtained by the truste~.
• 3
4
IV. FINANCIAL CONDITION OF THE ESTATES
A. Consolidated Estate
5 Appendix A contains schedules of the postpetition
receipts and disbursements of the Debtors in the
• 6
7
consolidat~d
estate, i.e., Hamilton Taft, Knightsbridge, Remington and

8 Enterprises, as of December 31, 1991. Separate schedules have
9 also been prepared for receipts and disbursements during the
• 10 period of the trustee's administration, which commenced on
11 July 22, 1991 for the Texas Debtors.
12 The postpetition revenue of the Debtors comprising the
13 consolidated estate totalled $2,193,513, as of December 31, 1991.

14 For the period of the trustee's administration, total revenues
15 were $2,097,101. (The difference is due primarily to the sale of
• 16 a townhouse by Enterprises prior to the trustee's appointment.)

17 The major sources of postpetition receipts have been sales of
18 townhouses ($651,438), livestock at the Double C Ranch ($331,623),
• 19 and luxury automobiles, office equipment, furniture and

20 furnishings ($342,048); a settlement with Armstrong's criminal
21 defense counsel for recovery of legal fees ($400,000); and bank
• 22
23
account interest ($183,141). Details of these receipts and the
activities producing them are provided in other sections of this
24 report.
• 25
26
Postpetition disbursements by the Debtors comprising the
consolidated estate totalled $2,837,484, as of December 31, 1991.
•
• &
•
• 1 Disbursements during the period of the trustee's administrai
2 totalled $2,699,129. (The difference is due primarily to
• 3
4
operating expenses paid by Remington prior to the trustee's
appointment.) Of the total postpetition disbursements, $1,357,741
5 were for operating expenses, including substantial employee
6 salaries, primarily for Hamilton Taft operations in the early

• 7 stages of the bankruptcy case before the trustee closed the
B Hamilton Taft business. The operating expenses include the
9 substantial continuing costs of the Double C Ranch since August 1,

• 10 1991, when the trustee took over the ranch.
11 Professional fees of the trustee and his attorneys and
12 accountants account for $1,080,891 of the post-petition 4q~)
13 disbursements. Additional professional fees were paid to
14 appraisers and consultants employed by the trustee, and attorneys
15- employed by the Creditors Committee and the Texas Debtors. The
• 16
17
professional fees do not include fees accrued but not paid as of
December 31, 1991.
18 The beginning cash balances for the Debtors in the
• 19
20
consolidated estate, at the commencement of their respective
bankruptcy cases, totalled $5,930,642, of which $5,856,509 was for
21 Hamilton Taft and $74,133 for Knightsbridge/ Remington and
with total disbursements exceeding receipts ~

• 22
23
Enterprises combined.
by $643/971, the consolidated estate had a cash balance of
24 $5,288,401 as of December 31/ 1991.
The trustee's goal is maintain a level of operating

• 25
26 expenses (i.e., rent, employee salaries and other office expenses)
•
----- -~---_._----------------
• & .'
•
1 for the consolidated estate, if possible, on a level which could
2 be funded from current interest income. Such expenses would not,
• 3
4
however, include the professional fees and expenses, which will be
the primary Chapter 11 costs in the future, and which will in time
5 diminish the existing funds of the estate unless substantial new
recoveries are had, and sales are reade.
• 6
7 B. Dresdner Petroleum
B A summary of Petroleum's postpetition cash receipts and

9 disbursements through December 31, 1991, is also contained in
• 10 Appendix A. The postpetition revenue from oil and gas production
11 totalled $667,915 through December 31, 1991. While Petroleum's
12 total cash receipts exceeded total disbursements by $22,136 for
13 the postpetition period, the cash receipts i~clude $60,000
14 advanced from Remington. Without the interc_~.!flQ...~11Y.-a~.~ance..,h'''':'' 1:>J)~'/LJ,J<i. ,:

15 Petroleum had a negative cash flD~ from operations during the
• 16 postpetition period, through December 31, 1991. (However, see

17 Section V.A.4 below for current situation.) Petroleum's cash
18 balance, as of December 31, 1991, was $47,159.
• 19
20
V. RECOVERY AND LIOUIDATION OF ASSETS
Through substantive consolidation, most of the assets
21 acquired by Armstrong and his companies with Hamilton Taft funds
• 22
23
have been recovered, to the extent that they are available to be
recovered. As discussed in the First Interim Report, a
24 SUbstantial portion of the funds diverted from Hamilton Taft were
• 25
26
spent for investments which became defunct within months of the
investments or for other reason have no realizable value, for
•
•
•
•
1 unrecoverable operating costs of Armstrong's Texas operations, and
2 for personal expenditures of Armstrong. In addition to the assets
• 3
4
held by the Texas Debtors or their subsidiaries, the trustee has
also recovered the major asset that had been held by Armstrong
5 personally, the Texas ranch. (The assets remaining in Armstrong's
• 6
7
control are discussed in section V.D below.)
The assets that have been recovered are a collection of
8 physical assets which Armstrong bought with Hamilton Taft funds as
9 "investments," and promissory notes and other contract rights

• 10 against third parties. All of the assets other than physical
11 assets are expected to require litigation to collect. At this
12 time, the trustee cannot provide any estimate of the amount that
13 will be realized from the assets which have been turned over by
14 Armstrong or through the takeover of the Texas companies. Much
15 will depend on the outcome of litigation against third parties to
• 16 whom Armstrong and the Armstrong entities transferred funds
17 through "investments," loans and other advances, and on the
18 financial ability of these third parties to respond to judgments.
• 19
20
Most of the necessary litigation has been commenced and the
remainder will be commenced shortly. Investigation into potential
21 third party liability continues.
• 22
23
A. Physical Assets
1. Double C Cattle Ranch
24 The single most expensive acquisition by Armstrong was a
• 25
26
1,700 acre ranch, Which he called the "Double C Ranch."
purchased by Armstrong in February, 1990 as a "hobby ranch," by

It was
•
•
•
• 1 Armstrong's own description, meaning a combination cattle and
2 horse operation and personal residence. The residence is over
• 3
4
13,000 square feet in size, with indoor swimming pool, sauna, and
exercise facilities. Armstrong spent over $9.3 million of
5 Hamilton Taft's funds on the ranch, including $6.5 million for the
6 purchase price, $1.1 million for capital improvements, $600,000

• 7 for livestock and equipment, and $1 million to fund operating
8 deficits of the cattle operation.
9 To acquire the ranch, Armstrong had Hamilton Taft

• 10 advance $9.8 million to Winthrop Realty Company ("Winthrop"), one
11 of his Texas companies. Winthrop, in turn, simultaneously loaned
12 the $9.8 million to Armstrong, who acquired the ranch in his own
13 name. Armstrong gave Winthrop a note for $9.8 million, secured by

14 the ranch. Winthrop, in turn, executed a $9.8 million note to
15 Hamilton Taft, secured by a lien on Armstrong's note to Winthrop.
• 16
17
In June, 1991, the trustee declared a default on
Winthrop's note 'to Hamilton Taft and foreclosed on the collateral,
18 namely Armstrong's note to Winthrop. As holder of the Armstrong
• 19
20
note to Winthrop, the trustee then commenced foreclosure
proceedings on the ranch, which secured the note. Facing
21 foreclosure, Armstrong offered to transfer the ranch to the
• 22
23
trustee through a deed in lieu of foreclosure. He also
transferred the livestock on the ranch, consisting of
24 approximately 600 head of cattle and 2S horses collateralized to
25 Hamilton Taft, ranch equipment and vehicles and other personal

• 26 property associated with the ranch, and the ranch bank accounts.
•
•
•
•
1 The trustee took possession of the ranch effective August 1, 1991,
2 although title was not recorded until September.
• J
4
The cattle operations on the ranch operated at a
substantial deficit, which was funded by Hamilton Taft money
5 funnelled through Winthrop. During the lB-month period that
• 6
7
Armstrong owned the ranch, the operating deficit of the ranch, not
counting the household expenses for Armstrong's residence,
8 totalled over $1 million.
9 After acquiring the ranch, the trustee sold the cattle

• 10 and horses over a several month period, obtaining net proceeds,
11 after direct costs of sale, of $331,623. The trustee also intends
12 to sell ranch equipment and vehicles not needed for full
13 maintenance. Furniture and furnishings in the main residence and
14 other structures will not be sold until the ranch is sold.
15 In December, 1991, the trustee signed an exclusive one
• 16 year listing agreement with Town and country Estates of Center,
17 Texas, to serve as broker for the sale of the ranch. Because of
18 the nature of the property, and the economic conditions and
• 19
20
depressed real estate market in Texas, the trustee cannot predict
when, or for what price, the ranch will be sold.
21 The carrying costs of the ranch are estimated at
• 22
23
approximately $300,000 per year, of which half is for insurance
and property taxes and half for maintenance costs. Proper
24 maintenance of the ranch grounds and improvements 1S costly, but
• 25
26
essential for the sale of the ranch. In addition to the main
residence of more than 13,000 square feet, the ranch improvements
•
• •
• 1 include a guest house with 3,400 square feet, three foremen's
2 residences each with three bedrooms, and a large "state of the
• 3
4
art lt show horse arena, which also contains large offices and a
saloon replica. Approximately 75,000 square feet of improvements,
5 as well as several miles of fencing and other ranching facilities,
6 require maintenance. While the ranch staff has been reduced

• 7 considerably, three employees remain at the ranch for maintenance
& and security purposes. The trustee is negotiating to exchange
9 grazing rights for consulting services currently paid by the

• 10 estate.
11 Armstrong also owned a 121 acre adjoining parcel, known
12 as the stiefer property, which he purchased from Julius D. Stiefer
13 in December, 1989 for $72,429 cash (from Hamilton Taft funds) and
14 a $181,912 note, secured by the property. The trustee determined
15 that the probable value of the stiefer property was less than the
• 16 balance owing on the note, and ownership of the small parcel would
17 not enhance the sale value of the larger ranch. The trustee
18 therefore declined to take title to the stiefer property and
• 19
20
consented to Armstrong executing a deed in lieu of foreclosure to
return the property to stiefer.
21 2. Seventh of Sonterra
• 22
23
The Seventh of Sonterra project consists of 23 single-
family townhouses and 2B developed single family pad sites near
24 the seventh hole of the Sonterra Country Club in San Antonio,
25 Texas. The project was purchased by Enterprises from the

• 26 Resolution Trust Corporation for $1.9 million in January, 1991.
•
•
• •
• 1 The acquisition was financed with Hamilton Taft funds, funnelled
2 through Knightsbridge. At the time of the Trustee's appointment
• J
4
on July 22, 1991, only two townhouses had been sold.
The trustee has continued to sell the single family
5 townhouses individually to retail buyers, having determined that
• 6
7
the net revenue to the estate would probably be greater than from
a bulk sale, although a bulk offer for the entire project would
8 also be considered. The townhouses have been individually
9 appraised at $118,000 to $142,00 each, after repair and buildout

• 10 work (at $8,000 to $15,000 per townhouse) are completed. Of the
11 23 townhouses, eight have been sold, seven of them post petition.
12 Several more townhouses are under contracts for sale. In
13 November, 1991, the tr~stee obtained a Bankruptcy Court order for
14 general authority to sell the townhouses, without the necessity of
15 a court order for each sale, provided that the gross sales price
• 16 is for an amount not less than 90 percent of the appraised value
17 of the particular townhouse.
18 During the post petition period, net proceeds from
• 19 townhouses sales, after deduction of direct selling costs, total
20 $651,438 through December, 1991, representing proceeds of six
21 townhouses. Selling costs include the $8,000 to $15,000 of finish
• 22
23
out work and repairs required for each townhouse, which work is
performed by subcontractors of Enterprises at the time of sale.
24 The townhouse sales program and construction work are supervised
• 25
26
by one remaining Enterprises employee on site in San Antonio.
•
• • •
• 1 3. Whispering Meadows and Glade Meadows
2 Whispering Meadows and Glade Meadows are undeveloped
• 3
4
residential tracts located in Arlington and Grapevine,
respectively, near Dallas. The properfies were both purchased by
5 Enterprises from the Resolution Trust Corporation, Whispering
6 Meadows in April, 1990, and Glade Meadows in May, 1990. A total
• 7 of $1.1 million was spent on the projects.
B Both properties are for sale. There has been
9 considerable interest in the properties, and several offers have
• 10 been made and accepted, sUbject to court approval after
11 contingencies are removed. However, all the offers have included
12 feasibility or financing contingencies which have not been met.
13 Thus, the two projects, while again under contract, remain unsold.
14 4. oil and Gas Leases
15 Dresdner Petroleum owns oil and gas leasehold interests
• 16
17
on a 560 acre tract in Howard County, and on a 1,000 acre tract in
Fisher County, in Texas. The Fisher County interest is primarily
18 an exploration project, with minor producti?n to date on one
• 19
20
producing well. continuing the exploration program would require
sUbstantial new investment. The trustee intends to sell the
21 Fisher county property if a reasonable price can be obtained.
• 22
23
The Howard County property is a leasehold which has had
its primary recovery. The profit potential of the field is
24 dependent on the results of an ambitious "secondary recovery"
25 program to be accomplished by water injection into the underlying
• 26 area. MeanWhile, there is some production at this time, which
•
• • •
• 1 provides gross revenue of $75,000 to $100,000 per month.
:2 Petroleum had operated at a loss since its inception; the
• 3
4
continuing operational 1055, the trustee believes, was due largely
to excessive overhead and salary costs (including a salary of
5 $200,000 per year for the president of Petroleum).

Effective November 1, 1991, when the Remington offices
• 6
7 were closed, the trustee turned over management of Petroleum's oil
8 and gas operations to an outside contractor, KCM Management, Inc.,
9 of Dallas. KCM is providing production, accounting, contract

• 10 administration, reporting, tax and other services at a
11 substantially lesser cost than Petroleum was incurring in
12 performing these services with in-house employees. with the
13 savings in administrative costs, the trustee expects Petroleum to
14 show a small operating profit, except for professional fees. The
15 delinquent post-petition trade debts have now been retired out of
• 16 the savings of administrative costs, except for professional fees.

Petroleum also has not yet repaid Remington for $60,000 in
17
18 postpetition advances.
• 19
20
The "secondary recovery" water injection program is
expected to be completed in six months to a year. After the
21 completion of that program, when the flow of oil resulting from it
• 22
23
can be properly evaluated, the trustee intends to sell the Howard
County property.
24 5. Luxury Automobiles
25 At the time Armstrong deeded the ranch to the trustee,

• 26 he also transferred two automobiles, a 1990 Rolls Royce Silver
•
•
• •
• 1 spur I I and a 1990 Jaguar "XJS, both of which were purchased at
2 charity auctions with Hamilton Taft funds and used by Armstrong as
• 3
4
personal vehicles. The trustee also took possession of a 1989
Lincoln stretch limousine owned by Remington. The three vehicles
5 were sold by the trustee for a total of $139,000.
6 B. Promissory Notes and Guarantees

• 7 1. Mohamed Hadid
8 The trustee has filed an adversary proceeding in the
9 Bankruptcy Court against Mohamed Hadid, a Washington, D.C. real
• 10 estate developer, and other persons and entities, arising out of
11 loans totalling approximately $8.8 million by Hamilton Taft and
12 Remington to Hadid.
13 In March, 1988, when Hamilton Taft was owned by
14 MaxPharma, Inc., Hamilton Taft loaned $3 million to Hadid, which
15 was to be repaid in 30 days, but was never repaid. Armstrong, in
• 16
17
the same lawsuit against MaxPharma through which he acquired
ownership of Ha~ilton Taft in 1989, also sued Hadid, claiming that
18 Hadid had "conspired with other defendants to convert funds from
• 19
20
Hamilton Taft by, among other things, borrowing the $3 million
from Hamilton Taft.
21 In September, 1990 Armstrong settled the litigation
• 22
23
against Hadid for cash of $50,000 and a new $1.75 million note,_
with principal payable in two installments in September, 1991 and
24 September, 1992. Armstrong also agreed in September, 1990 to lend
25 Hadid an additional $6.5 million, notwithstanding his failure to

• 26 repay the earlier $3 million loan.
•
•
• •
• 1 Hadid executed a promissory note dated September 11,
2 1990 to Remington for $6.5 million, which was guaranteed by his
• 3
4
wife, Mary Butler Hadid. To secure the $6.5 million note, Hadid
and his wife executed a security agreement pledging all of their
5 interests in numerous corporations and partnerships which
6 purportedly owned, among other real property, four Ritz Carlton

• 7 hotels located or under construction in washington, D.C., New York
8 City, Houston and Aspen, Colorado. However, Hadid never executed
9 UCC-l financing statements for the security interests, despite his

• 10 representation that he would do so.
11 Despite Hadid's refusal to execute and deliver financing
12 statements, Armstrong authorized the funding of the $6.5 million
13 promissory note. In a series of transfers, the last of which
14 occurred on March 13, 1991, Remington advanced a total of
15 $5,796,300 to Hadid. No repayment has been made by Hadid of
• 16 either these advances or the $1.75 million note.
The trustee has filed suit against Hadid, Mary Butler

l?
18 Hadid and certain Hadid entities to collect on the $6.5 million
• 19
20
note, the $1.75 million and the orig~nal $3 million and to enforce
Remington's lien rights under the security agreement. The trustee
21 has learned that in June, 1991, Hadid may have transferred his
• 22
23
interest in the collateral to a business associate, Abdulaziz bin
Ibrahim AI-Ibrahim of Saudi Arabia, commonly referred to as the
24 "the Sheik". The trustee has joined the Sheik as a defendant and
25 seeks a determination that any rights of the Sheik in the property

• 26 transferred by Hadid are subject to Remington's security interest.
•
•
•
1 Media reports as well as reports of the trustee's
2 investigators indicate that Hadid is being pursued by numerous
• 3
4
creditors, his Washington, D.C. office has been closed, certain of
his real property interests (including his Washington, D.C. home)
5 have been foreclosed, and he may no longer be residing in the
6 United states. Mary Butler Hadid appears to be residing in the

• 7 united states, but the trustee does not have any information as to
B whether she has independent assets to satisfy a jUdgment.
9 The trustee is seeking to effectuate service on all of

• 10 the defendants through various means. None of the defendants have
11 yet responded to the lawsuit. The trustee also intends to seek
12 discovery from third parties to obtain information on the assets
13 in which Hadid purportedly held an ownership interest and granted
14 Remington a security interest. At present, the trustee cannot
15 estimate what recovery, if any, will be obtained on the Hadid
• 16
17
notes.
2. Stanley Rosenberg
18 The trustee has filed an adversary proceeding against
• 19
20
Stanley Rosenberg, a San Antonio attorney and businessman, on a $1
million guarantee he executed in favor of Remington on
21 September 19, 1989. Rosenberg was involved in promoting and
• 22
23
developing a combined restaurant and gambling facility known as
River city Fair in San Antonio. Through Remington, Armstrong
24 invested $2 million in the project, of which $1 million was for
25 purchase of a 49% interest in the stock of River City Fair, Inc.

• 26 ("RFCI") and $1 million for a loan to RFCI, guaranteed by
•
. - - - -- - - - - - - - - .. - - - --
•
• •
•
1 Rosenberg. The restaurant failed and RFCI filed a Chapter 7
:2 petition.
• 3
4
In response to the trustee's lawsuit, Rosenberg has
denied liability on his guarantee. He claims that Armstrong
5 agreed to release him from the guarantee, that Armstrong agreed to
• 6
7
and failed to subsidize all necessary expenses to keep the project
operational, and that Rosenberg advanced additional money to the
8 project in reliance on Armstrong's representations, all of Which,

Rosenberg contends, discharges his obligations under the
• 9
10 guarantee. Rosenberg has also filed a motion requesting that the
11 Bankruptcy Court abstain from jurisdiction over the claim on the
12 ground that it should be filed as a state court action in Texas.
13 The trustee cannot predict at this time the likely
14 outcome of the Rosenberg adversary proceeding. In addition to the
15 defenses he has asserted, Rosenberg has communicated to the
• 16 trustee that there are other claims and jUdgments against
17 Rosenberg and that he will not be able to satisfy any judgment
18 obtained by the trustee. However, despite a request by the
• 19 trustee, Rosenberg has not provided any documentation of his
20 financial condition.
21 3. Parker Automotive
• 22
23
In February, 1991, Armstrong invested $3 million,
through Remington, in Parker Automotive Corporation, a publicly
24 traded company in Costa Mesa, California, Which manufactured and
• 25
26
distributed a machine and chemical compound designed to clean
automobile engines, and which was in serious financial
•
--.- - - - - - - - ---------
•
• •
•
1 difficulties. Remington received a convertible note, secured by a
2 lien on all assets of Parker, junior to a lien for approximately
• 3
4
$700,000 owed to Home Bank. Remington was also granted certain
stock options and voting rights which gave it immediate control of
5 Parker and the right to acquire up to 66 percent of the stock of
• 6
7
the company. Upon the closing on February 14, 1991, Armstrong
became chairman of the board and chief executive officer of
8 Parker.
9 Despite Remington's infusion of $3 million in cash,

• 10 Parker remained in financial difficulty. In June, 1991, Armstrong
11 resigned as CEO, and he and other Remington nominated
12 representatives resigned from the Parker board. On JUly 26, 1991,
13 facing numerous lawsuits by unpaid vendors, Parker filed a Chapter
14 11 petition in the Bankruptcy Court for the Central District of
15 California. A Chapter 11 trustee was appointed in September, and
• 16 closed Parker's business shortly thereafter.
17 The Parker trustee has contracted for sale of most of
18 Parker's assets, including its manUfacturing equipment, domestic
• 19 inventory located in the United states and patent and trademark
20 rights, for $1.5 million, payable $500,000 at closing and the rest
21 over a one-year period, secured by the assets to be sold.
• 22
23
Inventory located in Europe and accounts receivable are not
included in the sale and may bring additional revenue.
24 If the pending sale is completed, and the maximum amount
• 25
26
is collected under the sale, Remington could realize up to
$700,000 from the sale proceeds, based on its second priority lien
•
•
• •
• 1 on Parker assets. Additional amounts may be realized from the
2 sale of the foreign inventory. Furthermore, Remington may be in
first position with respect to the Parker patent, without which
• 3
4 Parker's tangible assets have substantially reduced value, as Home

5 did not perfect a security interest in the patent.
6 However, Remington's secured position is being
• 7 challenged by the Parker trustee, who seeks equitable
B subordination of Remington's interest on the ground of inequitable
9 conduct by Armstrong in acquiring Remington's interest and/or in
• 10 managing the company. The Parker trustee also claims that
11 Remington may not be secured as to part of its debt (which is of

12 little importance as Remington's debt exceeds the likely value of
13 Parker's assets), and may not have perfected a security interest
14 in the inventory located in Europe.
15 The parties have agreed to expedited discovery and
• 16
17
resolution of Remington's claim in the Parker bankruptcy case
through relief from stay proceedings that have been filed on
18 behalf of both Remington- and Home--Bank. Remington and Home Bank
• 19
20
have reached a tentative agreement, Which has not been finalized
or approved by the Bankruptcy Court, on allocation between them of
21 any proceeds received by either of them from the Parker assets.
22 An agreement between Remington and Horne Bank would eliminate any
• 23 disputes between them on lien priorities or the allocation of sale
24 proceeds to the patent, and enable Remington and Home to cooperate
25 in pursuing their mutual interest as secured creditors.
• 26
•
•
• •
• 1 The trustee cannot estimate at this time what, if
2 anything, the estate will recover from the Parker investment.
• 3
4
Protectinq the estate's interest in Parker has consumed
substantial time and legal expense, and has been one of the most
5 costly activities of the estate in relation to the potential
6 recovery. Nevertheless, because the Parker asset does have the

• 7 potential for significant recovery for the estate, the trustee
8 believes that the time and resources devoted to Parker is
9 necessary and justified.

• 10 C. Other Claims Against Third Parties
11 1. Criminal Defense Legal Fees
12 On September 4, 1991, the trustee filed an adversary
13 proceeding against Armstrong's criminal defense attorneys, the

14 Dallas firm of Meadows, Owens, Collier, Reed and Coggins, for
15 recovery of $735,000 in legal fees paid to the firm, of which
• 16
17
$700,000 was paid on March 27, 1991, the day after the trustee was
appointed. The trustee traced the $700,000 payment to the
18 proceeds of a sale of a helicopter by Winthrop, an Armstrong owned
• 19
20
company, on March 25, 1991. Winthrop had purchased the helicopter
less than a month before, with funds advanced by Knightsbridge,
21 which in turn obtained the funds from Hamilton Taft.
• 22
23
The trustee sought recovery of the payments to the
Meadows firm on the ground that the payments came from fraudUlent
24 conveyances from Hamilton Taft and Knightsbridge and were
25 recoverable from the law firm as a subsequent transferee of an

• 26 avoidable transfer under Section 550 of the Bankruptcy Code.
•
• • •
• 1 Under section 550, the trustee may recover fraudulently
2 transferred property not only from the initial transferee, but
• J
4
also from a sUbsequent transferee who received the property
without consideration and with knowledge of the fraudulent
5 transfer.
6 After the adversary proceeding was filed, the trustee

• 7 agreed to a settlement of the claim for $400,000 cash, which was
8 paid by the Meadows firm in December, 1991.
9 2. McCall Notes
• 10 On January 25, 1991, Rnightsbridge transferred a total
11 of $600,000 to three members of the McCall family, David McCall,
12 Jr., and his sons, David McCall, III and Brian McCall. Each of
13 the McCalls executed a $200,000 note to Armstrong personally, with

14 a maturity date of January 25, 1992. David MCCall, Jr. also
15 guaranteed the notes of his sons. All three notes are secured by
• 16
17
certain real estate interests in Plano, Texas, as well as stock in
an insurance agency owned by David McCall, Jr. The McCalls are
18 personal friends of Armstrong and his family.
• 19
20
The trustee recently learned that on November 27, 1991,
in violation of a preliminary injunction then in effect (See
21 Section VI.C.l), Armstrong executed an agreement to transfer the
• 22
23
$600,000 McCall notes to David McCall, III in return for payment
to Armstrong of $275,000, Which Armstrong received and retained
24 for his own benefit. The $275,000 was paid as follows: $120,000
25 in July, 1991 to Chenal Corporation, a new company under which

• 26 Armstrong now conducts business, $55,000 in October, 1991 to
•
•
• •
• 1 Armstrong, and $100,000 in November, 1991 to Armstrong. (The form
2 of the transaction was that Armstrong and Chenal gave David
• 3
4
McCall, III notes for the $175,000 transfers in July and October
1991. In November, 1991, Armstrong obtained another $100,000 from
5 MCCall, and the $175,000 in notes were cancelled.)
6 A letter agreement of November 27, 1991, signed by
• 7 Armstrong and David McCall, III memorializing the transaction,
S conditioned the transfer of the $600,000 notes on Armstrong
9 reaching a settlement with the trustee. That settlement did not
• 10 occur. (See Section VI.B.) Armstrong nevertheless received the
11 cash and returned the notes to David MCCall, III at the time the
12 letter agreement was signed, when obviously no settlement with the
13 trustee had been reached. Armstrong also signed documents
14 purporting to extend the maturity date of the McCall notes from
15 January 1992 to January 1994.
• 16
17
Upon learning of the transactions between Armstrong and
David McCall, III, the trustee commenced contempt proceedings on
18 February 10, 1992 against Armstrong for violation of the
• 19
20
preliminary injunction and obtained a temporary restraining order
prohibiting any further transfers of funds or assets by Armstrong
21 and Chenal, except for certain limited expenditures, pending the
• 22
23
contempt hearing. (See Section VI.C.l.) The trustee has
SUbpoenaed the financial records of Armstrong and Chenal to
24 determine what Armstrong did with the $275,000 obtained from
25 McCall in return for the McCall notes.
• 26
•
• • •
• 1 The trustee also filed an adversary proceeding against
2 the McCalls on February 7, 1992, seeking recovery of the $600,000
• 3
4
they received from Knightsbridge as fraudulent conveyances from
Knightsbridge, imposition of a constructive trust on the notes,
5 security interests, guarantees and other contract rights Armstrong
6 received from the McCalls, and for declaratory relief that
• 7 Armstrong's November 27, 1991, agreement with David McCall, III is
8 invalid because 'it violates the preliminary injunction and the
9 automatic stay.
• 10 3. Potential Recoveries To Be Investigated
11 The trustee is continuing to investigate other potential
12 claims that the estate may have against third parties for recovery
13 of funds or other assets transferred to them by Armstrong or the
14 Armstrong entities, or for other reasons. The trustee will pursue
15 such recoveries to the extent it would be cost effective to do so.
• 16
17
Among the transfers that will be reviewed are retainers
paid to attorneys by Hamilton Taft and Remington in March and
18 April, 1991, after the Hamilton Taft involuntary petition was
• 19
20
filed. In addition to the $735,000 paid by Armstrong to his
criminal defense attorneys, he caused $480,000 in retainers to be

21 paid by Hamilton Taft or Remington to four other law firms, for a
total of $1,215,000 in advance payments to lawyers representing
• 22
23 Armstrong's interests. The $1,215,000 total does not include

24 $145,000 in retainers paid to Creel and Atwood of Dallas,
25 bankruptcy counsel for the Texas Debtors, which retainers were

• 26
•
•
• •
1 sUbsequently returned to the Debtors' estates or credited against
2 earned fees approved by the Bankruptcy Court.
• 3
4
The trustee has already settled with Armstrong's
criminal defense attorneys for return of a portion of their fees
5 to the estate. (See Section V.C.1.) The four law firms receiving
6 the remaining $480,000 were Johnson & Gibbs of Dallas, attorneys
• 7 for Hamilton Taft as Debtor ($200~UOO), Long & Levit of San
a Francisco, attorneys for both Hamilton Taft as Debtor and
9 Armstrong personally ($175,000), Eppright and Golembeck of Dallas,
• 10 attorneys for Armstrong, Remington and other Armstrong entities
11 ($80,000), and Hance and Gamble of Dallas, who have identified
12 themselves as attorneys for Knightsbridge and Remington ($25,000).

13 None of these attorneys have been approved as counsel for a Debtor
14 in the bankruptcy cases, nor have they filed disclosures of their
15 fee arrangements as required by Section 329 of the Bankruptcy Code
• 16 and Bankruptcy Rule 2016, nor have their retainers been reviewed
17 or approved by the Court, although all or a portion of their
18 services were performed postpetition.
• 19
20
The trustee has not yet sought return of the retainers,
or any portion of them, to the estate, or made any decision to do
21 so. However, the trustee believes that, at a minimum, the
• 22
23
retainers paid to the attorneys should be reviewed by the Court,
and an accounting required of the services performed and applied
24 against the retainers. The trustee intends to request such an
25 accounting and review by the Court under Section 329 of the
• 26 Bankruptcy Code and Bankruptcy Rule 2017, regardless of Whether
•
• • •
• 1 the trustee decides to seek recovery of the retainers, or any
2 portion thereof. The trustee has been advised that some of the
• 3
4
attorneys involved may seek additional fees from the estate,
beyond their retainers.
5 Hance and Gamble received a $25,000 retainer not only in
6 April, 1991, but also for each of the months of January, February
• 7 and March, 1991, for a total of $100,000. In response to the
8 trustee's inquiry, Hance and Gamble has stated that the firm was
9 retained to perform legislative lobbying services for a flat fee
• 10 of $25,000 per month. One of the principals of the firm is Kent
11 Hance, a former Congressman who received substantial political
12 contributions from Armstrong in his unsuccessful campaign for
13 governor of Texas. The trustee has asked Hance and Gamble for
14 supporting information to show that it performed services
15 commensurate with the $100,000 fees it received, and has advised
• 16 the firm of his intention to seek recovery of the fees if such
backup is not provided.

17
18 -D. Assets still in Armstrong's Possession
• 19
20
Armstrong still has possession of a number of assets
Which were purchased with Hamilton Taft funds and which are held
21 in his name or in the name of Armstrong companies not under the
• 22
23
control of the trustee. In addition to the McCall promissory
notes, such assets include the following:
2~ 2, Rodeo Interests
25 Armstrong owns a 49% stock interest in Pro Rodeo, Inc"

• 26 and either Armstrong or Winthrop owns a 33% limited partnership
•
•
• •
•
1 interest in Rodeo Partners. Both entities are located in
2 Mesquite, Texas, near Dallas.
• 3
4
Pro Rodeo is controlled by a rodeo performer, Don Gay,
and its primary business is supplying livestock for rodeos,
5 principally at the Mesquite Arena, a rodeo arena serving the
• 6
7
Dallas area. Armstrong invested $350,000 of Hamilton Taft's money
to acquire a 49% percent interest in Pro Rodeo in January, 1991.
8 Rodeo Partners is a closely held limited partnership which owns
9 the Mesquite Arena. Armstrong invested $1.5 million, also

• 10 obtained from Hamilton Taft, in Mesquite Partners in September,
11 ~990.
12 The trustee has obtained financial and operating
13 information on Pro Rodeo and Rodeo Partners through the sUbpoena
14 process available under Bankruptcy Rule 2004. Both entities have
15 operating businesses, but their current profitability and value
• 16 are uncertain.
17 2. Texas stadium Box
18 In March, 1990, Remington purchased three stadium boxes
• 19 at Texas Stadium, home of the Dallas Cowboys football team, from a
20 bankruptcy estate for a total of $390,000. Armstrong took title
21 to the stadium boxes personally, and the purchase price was booked
• 22
23
as a loan from Remington to Armstrong. After the acquisition,
Remington also paid for improvements for the stadium boxes.
24 In March and April, 1991, Armstrong sold two of the
• 25
26
stadium boxes for a total of $265,000, which was paid to
Remington. Armstrong retained the third box, which, according to
•
•
• •
•
1 deposition testimony of his assistant, Teri Robins l he treated as
2 his "personal" box. Based on information from a broker who sells
• 3 Texas Stadium boxes, the trustee understands that the remaining
4 box has a resale value of at least $150,000.
5 3. Coffea International
• 6
7
In 1989 and 1990 Remington loaned a total of $89,000 to
Armstrong's brother, Robert Chad Armstrong, and to Coffea
a International, Inc., a distributor of imported coffee beans
• 9
10
controlled by Robert Chad Armstrong. On February, 11, 1991,
Knightsbridge advanced an additional $250,000 to Chad Armstrong or
11 Coffea International. The $250,000 advance, plus the prior
12 advances of $89,000 with interest, were then booked as a $341,225
13 investment by Remington in the stock of Coffea International. The

14 stock appears on the books of Remington as an asset of Remington,
15 but the trustee has been advised that Armstrong also claims the
• 16 stock as his personal asset. The trustee is in the process of
17 obtaining information on the financial status and operations of
18 Coffea International through the subpoena process, and does not at
• 19 this time have information on the value of Remington or
20 Armstrong's interest in Coffea International.
21 4. Plaza Realty Note
• 22 CCAJ Corporation, an Armstrong company still under the
23 control of Armstrong, holds a $5 million note of Plaza Realty
24 Company ("Plaza Realty"), an affiliate of Gulftex Financial
• 25 corporation and its principals, Jimmy E. Nix and Richard F.
26 Watkins. Armstrong (through CCAJ) and MaxPharma, prior owner of
• SECOND INTERIM REPORT -33-

----------
• • •
• 1 Hamilton Taft, invested a total of $6 million of Hamilton Taft
2 funds in 1989 in a joint venture with Gulftex, called Professional
• 3
4
Investment Fund ("PIF"), which owned shopping center interests.
In February, 1990, CCAJ sold its interest in PIF to Plaza Realty
5 for $1 million in cash and a $5 million note executed by Plaza
6 Realty and .secured by certain stock and partnership interests

• 7 owned by Nix and watkins. Plaza Realty defaulted on the note
8 after making one $400,000 payment.
9 In 1990, CCAJ corporation filed suit in Texas state

• 10 court against Plaza Realty on the note and against Gulftex, Nix
11 and Watkins and related entities for fraud arising cut of the
12 original investment in PIF. After filing the suitt CCAJ
13 Corporation did little to prosecute the action. In December,
14 1991, with a trial date imminent but no capacity or intention in
15 CCAJ corporation to prosecute the action, and no standing by the
• 16
17
trustee to take over the litigation, CCAJ Corporation, with the
trustee's consent, filed a dismissal without prejudice of the
18 Plaza Realty lawsuit. Under Texas law, the lawsuit can be refiled
• 19
20
within the statute of limitations period.
The trustee has been advised that the prospects of
21 recovering from Plaza Realty or the collateral securing the Plaza
• 22
23
Realty note are not promising. However, the trustee has not yet
independently investigated the financial condition of Plaza Realty
24 or the value of the collateral. Nor has the trustee yet
25 investigated the background or merits of the fraud claim against

• 26 Gulftex, Nix and Watkins.
•
• • •
• 1 5. Personal Possessions
2 Although Armstrong has turned over to the trustee most
• 3
4
of his luxury automobiles, he still retains two personal
automobiles purchased by Remington and booked to Armstrong as
5 "advances". They are a 1989 Jaguar (not to be confused with a
6 1990 Jaguar returned to the trustee) and a 1990 Ford Lariat pickup
• 7 truck, which were appraised in mid-1991 at $37,000.
B Armstrong also has furniture and home furnishings which
9 Knightsbridge purchased for $35,000 for a four bedroom Aspen,

• 10 Colorado condominium which Armstrong had contracted to purchase
11 jointly with Mohamed Hadid (See section V.B.l.) The condominium
12 purchase was not completed, Armstrong forfeited $300,000 in down
13 payments (paid by Remington), and shipped the furniture and
14 furnishings to Dallas.
15- VI. LITIGATION AGAINST ARMSTRONG
• 16 A. Analysis of Armstrong's Personal Financial

Transactions
17
At the time of the First Interim Report, the trustee did
18
not have access to any of Armstrong's personal financial records,
• 19
20
as compared to those of corporate entities controlled by him.
Armstrong had refused to produce any personal records on Fifth

21
Amendment grounds.
• 22
23
In late July and August, 1991, Armstrong produced his
personal bank account records and certain supporting documentation

24
for the period of January 1, 1989 through June 15, 1991.
• 25
26
(Armstrong acquired Hamilton Taft in March, 1989.) With the
•
I --~-----
_ _ _ _ _ _ _ _ _ _ _ 0 _
I.
• •
• 1 personal financial records, together with the records of the
2 Armstrong entities which show transfers of funds to or on behalf
• 3
4
of Armstrong, the trustee's accountants have prepared an analysis
of Armstrong's personal receipts and e~penditures for January 1,
05 1989 through June 15, 1991. The analysis is contained in
• 6
7
Appendix B.
During the two and a half year period, which covers the
S period of Armstrong's ownership of Hamilton Taft, over $16.5
9 million of Hamilton Taft funds, mostly routed through

• 10 Knightsbridge, Remington or Winthrop, was paid to Armstrong or by
11 the Armstrong entities to third parties for Armstrong's benefit.
12 Of the $16.5 million, about $4.7 million was cash paid to
13 Armstrong. The remaining $11.9 million was paid by the Armstrong
14 entities for assets, investments and other expenditures which
15 Armstrong held in his own name, including over $9 million related
• 16 to the Double C Ranch.
17 Of the $4.7 million in cash transferred to Armstrong,
18 $1.2 million was booked as compensation or directors' fees
• 19
20
($852,385 net of withholding taxes) or reimbursement of expenses
($396,703). Most of the rooney, over $3 million, was recorded as
21 cash "advances" froIn Remington, Knightsbridge or Winthrop, Which
• 22
23
Armstrong has never repaid, or as repayments to Armstrong of a
$1.5 million "loan tl he purportedly made to Remington in February,
24 1990. Armstrong made the "loan" to Remington with funds he
25 obtained from Winthrop, Which in turn obtained the funds from

• 26 Hamilton Taft. In the first three months of 1991 alone, just
•
•
• •
• 1 before the pUblic disclosure of Armstrong's diversions of Hamilton
2 Taft money, over $1 million in cash was transferred from
• 3
4
Knightsbridge to Armstrong's personal accounts.
Armstrong's personal financial records verify that he
5 had no significant source of income or receipts, other than
Hamilton Taft money, during the two and half year period. Of
• 6
7 $4.8 million in total cash flow through his personal bank accounts
8 over the two and a half year period, all but $127,606 can be
9 definitely traced to Hamilton Taft and the Armstrong entities who,
• 10 in turn, received their funds from Hamilton Taft. Even the money
11 he received in the first quarter of 1989, before he acquired
12 Hamilton Taft, can be traced to Hamilton Taft funds. As discussed
13 in the Accountant's Report, during the first quarter of 1989, as
14 well as earlier, Remington, which was the primary source of
15 Armstrong's funds, obtained its money from loans which were repaid
• 16 with Hamilton Taft money after Armstrong's acquisition of Hamilton

17 Taft.
18 Likewise, all but an estimated $78,000 of the
• 19
20
approximately $4.7 million that Armstrong received in cash from
Hamilton Taft and the Armstrong entities appears to have been
21 deposited into and can be traced through his personal accounts.
• 22
23
On January 1, 1989, he had $52B in his accounts. On June 15,
1991, the last date for which the trustee has bank account
24 information for Armstrong, he had an estimated $85,000 in his

25 account. Between those dates, nearly $4.7 million of Hamilton
• 26
•
• • •
• 1 Taft funds ~ent into and out of his accounts for personal
2 expenditures.
3 The withdrawals from Armstrong's personal accounts

• 4 include substantial cash withdrawals ($175,138) and credit card
5 payments ($465,398) for which supporting documentation has not
6 been provided and the trustee's accountants therefore cannot

• 7 provide further analysis. However, most of the transfers and
8 expenditures from Armstrong's personal accounts were by check
9 transactions or wire transfers, for Which the payee is identified.
• 10 Among Armstrong's significant personal expenditures,
11 paid from his personal accounts during the January I, 1989 through
12 June 15, 1991 period out of funds traceable to Hamilton Taft,
13 were:
14 1. Political and charitable contributions totalling
15 $964,701. Of this amount, $603,701 was for charitable
• 16
17
contributions and $361,000 was for political contributions.
Payments characterized as charitable contributions in Armstrong's
18 records include $200,000 paid at-a charity auction for a 1990
• 19
20
Rolls Royce and $100,000 paid to the Dallas Opera Ball.
largest political contribution was to Texas gubernatorial

The
21 candidate Clayton Williams, who received $100,000.
22 2. Professional fees of $742,735, of which $735,000

• 23 was paid in March and April, 1991, to Meadows, Owens, Collier,
24 Reed and Coggins, Armstrong's criminal defense attorneys. (See
25 section V.C.1.)
• 26
•
--~ - - -- - - - - - -
• • •
• 1 3. Investments totalling $494,017, of which $350,000
2 was for purchase of a 49% interest in Pro-Rodeo, Inc., a company
• 3
4
which supplies livestock for rodeos. (See Section V.D.l.)
classified as an "investment expense" was a payment for a $105,000

Also
5 cashier's check dated November 5, 1990, the recipient of which was
6 not identified in the Armstrong records made available to the

• 7 trustee.
8 4. Gifts, loans and other transfers to friends,
9 relatives and employees totalling $295,571, including $70,301 to

• 10 his ex-wife (exclusive of payments identified as child support or
11 child care), $46,575 for an automobile loan and other payments to

12 his personal assistant at Remington, $42,500 to his fiance, and
13 $37,186 for his mother1s medical expenses.
14 5. Household expenses totalling $274,089 for
15 Armstrong's personal residence, inclUding $79,352 for repairs and
• 16 maintenance, $56,121 for domestic payroll, $40,734 for utilities,
17 $15,354 for interior decorating, $22,883 for groceries and
18 beverages and $10,329 for flowers.
• 19
20
6. Purchases from jewelers, clothiers, furriers,
boutiques and other retailers totalling over $183,000, not
21 counting purchases which may have been made with credit cards.
• 22
23
Acquisitions, investments or expenditures financed by
the $11.9 million which Armstrong entities paid for Armstrong's
24 benefit with Hamilton Taft funds inclUded, in addition to the
25 ranch, $847,738 for costs associated with his acquisition of

• 26 Hamilton Taft (consisting primarily of $615,000 paid to Stanley
•
• •
• 1 Rosenberg, a former MaxPharma shareholder, as part of the
2 MaxPharma settlement, and $232,730 for legal fees), $390,000 for
• 3
4
the Texas Stadium skyboxes, $600,000 for loans to the McCalls,
$335,000 for the down payment and furniture for a condominium in
5 Aspen, Colorado (which Armstrong did not ultimately purchase),
6 $295,000 for investments in Coffea International, Armstrong's

• 7 brother's company, and $132,767 for automobiles.
8 B. status of Litigation and Settlement
9 commencing in June, 1991, the trustee has had

• 10 substantial and ongoing discussions with Armstrong regarding
11 settlement of the Hamilton Taft estate's claims against Armstrong.
12 Such settlement discussions have generally involved a frame~ork
13 under which most assets still remaining in the possession of
14 Armstrong and entities under his control would be returned to the
15 Hamilton Taft estate, and Armstrong would stipulate to a
• 16 nondischargeable jUdgment for a specified amount, with forbearance
17 on execution if Armstrong paid an agreed upon portion of his
18 future income and receipts to the estate for a specified period of
• 19
20
years.
While the parties appeared close to reaching a
21 settlement from time to time, the settlement discussions were
• 22
23
terminated in late January, 1992. The trustee and Armstrong were
unable to reach agreement on several aspects of the settlement
24 that were of importance to one party or the other.
25 No further settlement discussions are planned. The

• 26 trustee intends to proceed with the pending adversary proceeding
•
-'- - ----~-----
• • •
• 1 against Armstrong to seek recovery of all remaining assets in
2 Armstrong's possession traceable to Hamilton Taft funds, or to
• 3
4
transfers from any of the other Debtors. In addition, the trustee
will seek a money jUdgment against Armstrong for the full amount
5 of Hamilton Taft's loss, after adjustment for any amounts realized
from recovered assets.
• 6
7 Armstrong sought to remove the adversary proceeding from

8 the Bankruptcy Court to the District Court on the ground that he
9 had demanded a jury and the Bankruptcy Court could not conduct
• 10 jury trials. The District Court, on Armstrong's motion for
11 withdrawal of reference, ruled that the Bankruptcy Court could
12 conduct jury trials in "core" proceedings, Which included the
13 trustee's main claims for fraudulent conveyance, constructive
14 trust, turnover orders and injunctive relief. However, the non-
15- core claims inclUded in the trustee's complaint, namely the breach
• 16 of fiduciary duty, conversion and breach of contract causes of

17 action, were removed to the District Court.
18 C. Injunctions and Contempt Proceedings
• 19
20
1. TROs and Preliminary Injunctions
On April 4/ 1991, after the adversary proceeding against
21 Armstrong and related entities was filed, the Bankruptcy Court
• 22
23
issued a temporary restraining order ("TROII) prohibiting any
transfers, encumbrances or other dispositions of assets by
24 Armstrong or any Armstrong companies "except to meet day to day
25 ordinary operating expenses". The TRO was extended by agreement
• 26 several times.
•
• • •
• 1 On July 22, 1991, when the trustee was appointed interim
2 trustee of the Texas Debtors, Armstrong agreed to entry of a
• 3
4
preliminary injunction against him, with the TRO continued as to
the remaining Armstrong entities not under the control of the
5 trustee. The preliminary injunction differentiated between assets
• 6
7
existing as of July 22, 1991, and any proceeds and products
thereof (called the "pre-existing assets"), and future earnings or
8 income of Armstrong, and assets acquired from future earnings
9 (called the "new assets"). The preliminary injunction provided an

• 10 absolute prohibition against any transfers, encumbrances and
11 dispositions of pre-existing assets, except that Armstrong was
12 allowed to use his remaining cash, up to $100,000, for "ordinary
13 day to day operating expenses and reasonable living expenses".
14 Armstrong's future earnings and income, and assets acquired with
15 future earnings and income, were released from the TRO and not
• 16 sUbject to the preliminary injunction.
17 On November 4, 1991, the TRO against the remaining
18 Armstrong entities (which for practical purposes consisted of
• 19
20
Winthrop), was converted to a preliminary injunction. The
preliminary injunction against the entities was SUbstantially the
21 same as the TRO, i.e., it prohibited all transfers of assets
• 22
23
except for "ordinary day to day operating expenses." The two
preliminary injunctions, the July 22, 1991 injunction against
24 I Armstrong personally and the November 4, 1991 injunction against
• 25
26
the remaining Armstrong entities, are currently in effect.
•
• • •
• 1 sought recovery of $11,000 from proceeds of cattle sales which
:2 Armstrong transferred from the ranch operating account to his
• 3
4
personal account.
After a hearing on January 24, 1992, the Bankruptcy
5 Court ruled that Armstrong had violated the TRO and ordered him to
6 pay $37,725 to the trustee over a 90 day period. The order
• 7 provides that if payment is not made, the Bankruptcy Court will
8 recommend that the District Court issue an order of contempt.
9 The second contempt proceeding Was filed by the trustee
• 10 on February 10, 1992 arising out of Armstrong's transactions with
11 respect to the McCall promissory notes. (Section V.C.2.) The
12 trustee contends that Armstrong violated the preliminary
13 injunction by (i) spending or otherwise disposing of $275,000
14 received fron David McCall, III, (ii) executing an agreement to
15 sell the notes, which total $600,000, to David McCall, III in
• 16
17
exchange for the $275,000 he received from McCall, and (iii)
executing an agreement to extend the maturity date on the notes by
18 two yea~s. On February 11, 1992, the Bankruptcy Court issued an
• 19
20
order requiring Armstrong to show cause on March 13, 1992 why he
should not be held in contempt for violating the preliEinary
21 injunction.
• 22
23
D. Criminal Investigation
The trustee has been advised that the u.s. Department of
24 Justice is conducting an investigation to determine whether
25 criminal charges should be filed against Armstrong or other

• 26 persons on account of the transfers of Hamilton Taft funds. The
•
• • •
• 1 trustee has cooperated with law enforcement officials in their
2 investigation, by providing information and documents in his
3 possession or under his control, when and as requested by such
• 4 officials. The trustee has no control or influence over the
5 results or timing of the criminal investigation.
6 VIi. OTHER CLAIMS AND LITIGATION
• 7 A. Fidelity Bonds
B The estate's largest potential recovery is on fidelity
9 bonds issued by Underwriters of Lloyd's covering loss to Hamilton
• 10 Taft from theft by employees. The policies contain $20 million
11 primary coverage and $30 million umbrella coverage, for a total of
12 $50 million, SUbject to certain deductibles. The fidelity bonds
13 were a requirement of most of Hamilton Taft's contracts with its
14 customers.
15 The trustee gave written notice of a claim to the
• 16
17
underwriters on April 25, 1991. Discussions with the underwriters
commenced, through their San Francisco attorneys, in November,
18 1991. The underwriters have neither admitted nor denied coverage.
• 19
20
They have requested access to voluminous records of Hamilton Taft
and the Texas Debtors to investigate the claim, and the trustee is
21 in the process of responding to these requests. If coverage is
22 denied or not acknowledged after the underwriters have had a
• 23 reasonable opportunity to investigate, the trustee intends to file
24 suit on the bonds.
25 The trustee cannot predict at this time the likely
• 26 outcome of the claim on the fidelity bond. Substantial legal
•
• • •
• 1 issues are likely to be raised relating to coverage or the amount
2 of recovery under the bonds.
• 3
4
Reflecting the importance of the fidelity bond claim to
the estate, both the trustee and the Creditors Committee have
5 retained special insurance counsel. The trustee has retained the
6 law firm of Mound, Cotton and Wolan of New York city to assist in
• 7 pursuing the claim. The Creditors Committee has retained Bronson,
8 Bronson and McKinnon of San Francisco.
9 B. Preference Claims
• 10 The trustee has commenced an analysis of potential
11 preference actions against customers of Hamilton Taft for whom
12 payroll tax deposits were made under circumstances that the
13 payments would constitute preferential transfers under Section 547
14 of the Bankruptcy Code. Because of the exclusion for transfers in
15 the "ordinary course of business", the trustee is analyzing only
• 16
17
delinquent payments made by Hamilton Taft during the 90 days pr.ior
to the filing of the involuntary petition on March 20, 1991. Such
18 delinquent payments were generally made in two time periods, on or
• 19
20
about January 31, 1991, when Hamilton Taft paid over $50 million
in tax liabilities which were due in the first part of October,
21 1990, and on or about March 8, 1991, when customers learned that
• 22
23
Hamilton Taft had diverted tax deposits to the Armstrong entities
and made demands on Hamilton Taft for confirmation that their
24 taxes had been paid. While the trustee's analysis is not
25 complete, the trustee estimates that transfers meeting the

• 26
•
• • •
1 preference criteria may exceed $40 million, after deduction of
2 "new value" payments.
• 3
4
The trustee has thus far made demands for return of
payments from, and has filed adversary proceedings against, two
5 parties, Volume Shoe corporation (aka Payless ShoeSource) for $3.4
• 6
7
million and S&S credit co., Inc.
million.
(aka Shop and Save) for $12.5
Delinquent taxes were paid on behalf of these customers
a in both January and March, 1991. They were among the first
9 customers to confront Hamilton Taft on March 8, 1991, as a result

• 10 of which Hamilton Taft covered the shortfall on their delinquent
11 taxes, and they have relatively small claims against Hamilton Taft
12 for unpaid taxes.
~3 Additional preference actions are expected to be filed
14 by the trustee on a case by case basis. No adversary proceedings
15 will be filed against any customer ~ithout the trustee first
• 16 communicating a written demand.
17 Because of the circumstances under which Hamilton Taft's
18 bankruptcy ~as filed, the trustee does not expect any significant
• 19
20
preference claims to be asserted on account of payment of vendor
debts during the 90 day preference period. Hamilton Taft was
21 generally paying its trade debts as they became due, and the
• 22
23
"ordinary course of business" exception will likely apply to most
payments to vendors.
24. Sa~a.i= Refund
• 25
26
The trustee has settled a dispute with a former Hamilton
Taft client, Sandia Corporation, also known as Sandia National

II
._----- - - - - - - - -
• • •
-
'.. .'
1 Laboratories, over a $938,007 IRS refund for payroll taxes paid by
2 Hamilton Taft on Sandia's behalf. Under the settlement, the
• 3
4
trustee received $744 J 198 from Sandia on February 6, 1992, and is
expected to receive an additional sum of approximately $187,000 on
5 or about March S, 1992, for a total of approximately $931,200,
6 including interest. (The $744,198 payment already received is not

• 7 reflected in the cash receipts and disbursements schedules shown
B in Appendix A, which covers only transactions as of December 31,
9 1991.)
• 10 The dispute arose out of a $917,876 payment which
11 Hamilton Taft paid to the IRS on Sandia's behalf on March 8, 1991.
12 On that day, pursuant to its contract with Sandia, Hamilton Taft
13 initiated an electronics funds transfer from Sandia's bank account
14 to cover the payment. Sandia, however, reversed the payment on
15 the same day, and made its own deposit with the IRS, which
• 16
17
resulted in duplicate payments for Sandia's account.
Sandia applied for and obtained a refund from the IRS of
18 $938,.007, which included $20,131 in interest. While Sandia did
• 19
20
not dispute that the refund belonged to Hamilton Taft, Sandia
claimed the right to offset against the refund any amounts
21 Hamilton Taft owed to Sandia for unpaid taxes, interest and
~anted
• 22
23
penalties. Sandia to retain the IRS refund until it had
completed an internal audit and received confirmation, direct from
24 the taxing agencies~ of all payroll taxes which it had remitted to
25 Hamilton Taft during the life of Sandia's contract with Hamilton

• 26 Taft. The trustee was unwilling to wait indefinitely until Sandia
II
•
• 1 received confirmation from each taxing agency, which may never

2 occur. Hamilton Taft's own records show that the only unpaid
• 3
4
taxes for which Hamilton Taft was responsible were $22,051 in
state taxes which Were not due at the time Sandia terminated its
I
5 contract, but for which Sandia had advanced funds to Hamilton

Taft.
•
6
7 The trustee and Sandia reached a settlement, under which

8 Sandia agreed to pay to the trustee all of the IRS refund,
9 including any interest accrued thereon since Sandia's receipt,
• 10 except for $22,051 for the unpaid taxes, which Sandia will retain,
11 and $180,106, representing the yet unconfirmed state tax payments,
12 which will be kept in an interest bearing account until March 8,
13 1992. If Sandia is able to find any additional unpaid taxes
14 and/or interest and penalties, it will be allowed to pay such
15 liabilities from the IRS refund. On March 8, 1992, all remaining
• 16
17
funds from the IRS refund, and accrued interest, which is expected
to total approximately $187,000, will be released to the trustee,
18 regardless of whether sandia has received confirmation of Hamilton
• 19
20
Taft's payment of its taxes.
D. Tax Penalties
21 During the period of December, 1989 to the filing of the
• 22
23
bankruptcy petition in March, 1991, Hamilton Taft paid over $7
million in penalties to the IRS on account of late payment of
24 customers' payroll taxes, which resulted from Armstrong's program
I
25 of diverting tax deposits to his Texas entities. R~he trustee is

• 26
/
analyzing whether such penalties may be recoverable by the trustee
•
•
• 1 or the customers under the Internal Revenue Code, which provides
2 that penalties may be excused if the failure to make timely
• 3
4
payment was due to reasonable cause and not willful neglect.
trustee believes that the unusual circumstances surrounding the
The
5 late payment of taxes gives rise to a reasonable argument that

6 penalties already paid should be recoverable, as well as unpaid
• 7 penalties abated.
8 The trustee also believes that any penalties paid within
9 90 days of the filing of the involuntary petition against Hamilton
• 10 Taft may be recoverable by the estate as preferences.
11 Approximately $1.5 million of the tax penalties were paid during
12 the 90 day preference period.
13 E. Other Potential Claims
14 The trustee and his attorneys are continuing to analyze
15 potential claims against persons and entities which may be liable
• 16 to the estate for participating in, contributing to, or failing to

disclose information relating to the improper transfers o~ money
17
18 from Hamilton Taft. The trustee has not reached any conclusions
• 19
20
about such clains.
VIII. CREDITORS CLAIMS ANALYSIS
21 On July 22, 1991, the Bankruptcy Court set a deadline of
• 22
23
September 30, 1991 for filing proofs of claim against the five
Debtors. Notice of the bar date was sent to all known creditors
24 of the Debtors and was pUblished in the Wall street Journal

(National Edition), the San Francisco Chronicle and the Dallas
• 25
26 Morning News.
•
•
•
• 1 A. Claims Against Consolidated Estate
2 Proofs of claim totalling $205.3 million, unduplicated,
• 3
4
were filed against the Debtors constituting the consolidated
estate, i.e., Hamilton Taft, Knightsbridge, Remington and
5 Enterprises. When non-duplicative scheduled claims (i.e., claims
6 the Debtors acknowledge are liquidated, non-contingent and not
• 7 sUbject to dispute) are added, the maximum potential claims
8 against the consolidated estate total $210.2 million. A list of
9 all claims against the consolidated estate is contained in

• 10 Appendix C.
11 However, the claims total is distorted, because one
12 claim, filed by steven Solodoff, Hamilton Taft's former
13 controller, accounts for $110 million of the total. The trustee
14 believes that Solodoff's claim is not meritorious. (See section
15 VIII.C below.) If Solodoff's claim is disregarded, the maximum
• 16
17
potential claims against the consolidated estate total $100.2
million. This compares to scheduled claims for the four Debtors of
18 $94.4 million, or a difference of only 6 percent.
• 19
20
Claims of Hamilton Taft customers for unpaid taxes
account for $95.1 million of the $100.2 million total claims
21 (compared to $91.9 million acknowledged in Hamilton Taftts
• 22
23
schedules). Total potential claims of Hamilton Taft trade vendors
and employees total $1.7 million.
24 For the Texas Debtors, claims against Remington total
25 $970,665, including both proofs of claims and scheduled claims,
• 26 unduplicated, as compared to $505,932 in scheduled debts. Claims
•
•
•
• 1 against Enterprises total $47,332. No claims were filed against
2 Knightsbridge, other than duplicates of claims filed against other
• 3
4
Debtors. All claims totals exclude intercompany claims, including
claims of affiliated entities which are not included in the
5 consolidated estate.
6 B. Claims Against Dresdner Petroleum

• 7 Proofs of claim filed against Petroleum total $651,060.
B Scheduled claims total $371,376. The maximum potential claims
9 against Petroleum, with duplications deleted, total $731,286. The

• 10 claims against Petroleum consist almost entirely of vendor claims
11 for goods and services provided to Petroleum's oil and gas
12 operations. A list of all claims against Petroleum is contained
13 in Appendix c.
14 C. steven Solodo!f Claim
15 steven Solodoff, the Hamilton Taft controller whose
• 16
17
public disclosure to customers and the news media of the diversion
of Hamilton Taft funds led to the filing of the bankruptcy, has
18 filed a $110 million proof of claim against Hamilton Taft and the
• 19
20
other Debtors based on the federal False Claims Act. The False
Claims Act allows a private citizen to bring actions on behalf of
21 the united States for fraud committed against the government, with
• 22
23
the private citizen retaining up to 30% of any recovery.
claims that Hamilton Taft violated the False Claims Act by

Solodoff
24 knowingly using false records or statements to conceal or avoid an
25 obligation to transmit money to the United States and fraUdUlently

• 26 converting government trust funds. Solodoff also alleges that he
•
•
•
1 was wrongfully terminated by Hamilton Taft because he notified the
2 FBI about Hamilton Taft's diversion of tax deposits.
• 4
3 Prior to the commencement of the Hamilton Taft
bankruptcy case, Solodoff filed a False Claims Act complaint in
5 the U.S. District Court. The United States government not only
• 6
7
declined to take over the lawsuit, as it is entitled to do, but
the u.s. Attorney filed a brief recommending that Solodoff's
8 complaint be dismissed because any claims stated would be income

9 tax claims, which are expressly excluded from the False Claims
• 10 Act.
11 In November, 1991, Solodoff filed a motion for relief
12 from stay in the Bankruptcy Court seeking a determination that his
13 District Court lawsuit was exempt tram the automatic stay as an
14 exercise of the IIpolice power". The Bankruptcy Court denied
15 Solodoff's motion, ruling that Solodoff was not a "governmental
• 16 unit ll entitled to assert the "police power" exception under

17 Section 362 of the Bankruptcy Code.
18 The denial of relief from stay to pursue a District
• 19 Court action does not affect Solodoff's proof of claim in the

20 Bankruptcy Court. However, the trustee does not believe that
21 Solodoff's claim, purporting to assert relief on behalf of the
• 22
23
United States, Which has suffered no loss, has any significant
likelihood of success. The trustee believes that Solodoff's
24 personal claim for wrongful termination is barred by a release he
• 25
26
executed at the time of his termination, for Which he received
four months of severance pay.
•
- - - - - - _ . - - _._.- - - - --._-----------
• •
• 1 IX. CONCLUSION AND FUTURE ACTIVITIES
2 Identification of the main problems, Claims, potential
• 3
4
assets and litigation requirements of the estate is now
substantially complete. The next six months to a year will see
5 heavy litigation activity, as the claims brought by the estate are
pursued, and presumably also resisted. Additional claims will

•
6
7 also be brought by the estate.
8 The trustee expects that a liquidating Chapter 11 plan
9 will Ultimately be filed and confirmed for the consolidated
• 10 estate, there being no possibility of a rehabilitation of the
11 business. (Whether a plan will also be filed for Petroleum will
12 depend upon the prospects of the disposition of its assets.) From
13 the point of view of creditors, the questions are, obviously, how
14 much of their claims they will receive, and when they will receive
15 any funds.
• 16
17
From this report, creditors and other parties in
interest will understand that the trustee cannot now provide very
18 specific answers to these questions. Some comments may be made,
• 19
20
however, on the determinants of the amount of potential recovery.
Based on the proofs of claim filed against the estate,
21 it does not appear that resolution of claims against the estate
• 22
23
will be a major concern. Except for the Solodo!f claim, the
proofs of claim filed and the estate records do not appear to
24 differ SUfficiently so as to make any major difference in the
25 potential percentage of payment to creditors on their claims. The

• 26 trustee will in due time review the claims in greater detail, and
•
• •
1 file objections as appropriate, but on the basis of a first review
2 and current information, there does not appear to be any
• 3
4
likelihood of a major impact on percentage of recovery from any
potential correction and disallowance of claims (except for the
5 Saladoff claim).
. 6
7
The physical assets of the Hamilton Taft estate together
with the cash on hand, while substantial, would in themselves be
8 unlikely under the best of assumptions to yield any more than 10
9 cents on the dollar for prepetition unsecured creditors, perhaps
• 10 sUbstantially less. The key to what creditors will receive will
11 be the recovery on the estate1s claims, primarily the claims on
12 the fidelity bonds and for return of preferences, and to a
13 substantially lesser extent, on the success and collectibility of
14 various claims against transferees of Hamilton Taft funds and
15 possibly other third parties. It is not possible to predict the
• 16 outcome or degree of success on the claims at this time. What is

17 certain is that litigation and pursuit of claims will be expensive
18 and time consuming, The claims will be vigorously pursued by the
• 19
20
trustee. This is the major task for the estate in the future.
21 Dated: February 20, 1992

Freder~e~-e-e----
• 22
23
:.14
• 25
.,.:
......
•
.1 MICHAEL J. YAMAGUCHI
United states Attorney
2
JOEL R. LEVIN
3 Chief, Criminal Division
4 RONALD D. SMETANA
special Assistant u.s. Attorney
5 GEORGE D. HARDY
Assistant u.s. Attorney
450 Golden Gate Avenue
7 San Francisco, CA 94102
Telephone: (415) 436-6851
8
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA

10
OHITBD STATES OF AKBRICA. ) Mo. CR 94-0276 CAL
.11 )
Plail1tirt, ) AJ'I"XDAVIT 01" ULLJUUJ L.
12 ) BATCBD., J11.. IN SUPPORT
v. ) OF GOVBRRKBHT1S BX-PARTE
13 ) Smuo::SSIOIf
comrIE C. AlUlS'l'RORG, JR. I and )
1,( RXCHUD A. POWLES, )
)
15 Defalltlanta. )
-~---~---~---------)
16
17 I, Willard L~ Hatcher, Jr., state that:
18 1. I have been a Special Agent with the Federal Bureau of

19 Investigation ("FBI") for 6 years, and am currently the case
20 agent for the prosecution in United states v. Connie c.

21 Armstrong, Jr., et ale I have been involved with the
22 investigation of Hamilton Taft and Company since March of 1991.

23 Prior to his retirement on January 1, 1997, FBI Special Agent
24 'Patrick K. Murphy was the case agent.
25 2. I first learned of the government's possession of
26 recorded conversations of Connie C. Armstrong, Jr. , on the night
AFPlDAVITOP WlI...LARD L HATCHER, JR

,IN SUPPORT OF OOVBRNMP.NT"S EX-PARTE
SUBMISSION
1 of January 12, 1997, after witness Terri Robins informed
2 Assistant United states Attorney George Hardy of their existence.
3 3. I telephoned Patrick K. Murphy on January ~3, 1997, and
4 asked his knowledge of such recordings. Mr. Murphy stated that

5 he understood that Ms. Robins had made some recordings for the
6 government on an unrelated investigation. Mr. Murphy stated he

7 did not know that Ms. Robins had ever recorded conversations with
8 Armstrong.
4. Mr. Murphy and I knew of the existence of the Dallas

FBlis investigation of Armstrong's activity at Comp-U-Check. We
understood that this investigation related to conduct that
occurred well after the bankruptcy of Hamilton Taft. To our
13 knowledge this investigation was unrelated to Hamilton Taft
14 except for the common involvement of Armstrong.
1S 5. Since January 12, 1997, I have contacted Special Agent
16 Peter A. Galbraith, the Dallas FBI case agent for the Comp-U-
17 Check investigation, and requested all taped conversations with
18 Armstrong. I have received thirty-six (36) audio tapes and
19 special Agent Galbraith has assured me that these constitute all
20 of the tape recordings of Armstrong in the possession of the
21 Dallas FBI.
22 6. In addition, Special Agent Galbraith provided to me
23 copies of 302 reports prepared relating to the tapes and
24 documents provided to the Dallas FBI by Terri Robins. He assured

25 me that all of the reports and documents have also been forwarded
26 to San Francisco.
AFFIDAvrr OF WlLl.JJW L HATCHER. JR

IN SUPPORT OF GOVERNMENT'S EX~PAJrrE
SUBMISSION 2
1 7. Agent Galbraith expressed concern about the disclosure
2 the tapes, reports and documents to Armstrong because the Comp-U-
3 Check investigation and other related investigations are on-going
4 and he is concerned that disclosure of the materials may
5 jeopardize these investigations. He understood that certain of
6 the tapes, written materials and reports may have to be turned

7 over to Armstrong, but requested that the materials be
8 scrutinized carefully and that those ultimately turned over be
9 limited to those necessary to protect Armstrong's rights without

10 harming the investigations.
1.1 8. Agent Galbraith said that all of the conversations were
12 recorded and documents were received in late 1993 and early 1994,
13 subsequent to the Hamilton Taft bankruptcy and before the
14 indictment of Armstrong.
15 9. After review of the tapes and documents by myself,
16 Special Agent Laura Nielson, Assistant United States Attorney
17 George Hardy and Special Assistant united states Attorney Ronald

18 Smetana, we determined that Hamilton Taft is mentioned in five
19 (5) tapes; copies of the relevant portions of those tapes have
20 been reproduced for review by the court for a determination of
21 whether they should be turned Over to Armstrong. In addition,
22 there is one document, a "novella" about Hamilton Taft, that has

23 statements attributed to Armstrong; since I do not know its
24 ,authorship, that document has been copied for the Court's review.
25 10. All of the reports, tapes and documents received from

26 the Dallas FBI are being made available for the Court's in camera
AFFlDAvrr OF WllLAR.D L HATCHER, JIl.

IN SUPPOR.T OF OOVF.llNMEHI"S EX-PARTE
SUBMISSION 3
1 review.
2
3 I declare under penalty of perjury that the foregoing is
• true and correct. Executed on January 24, 1997, in San

5 Francisco, California.
~ ,>~-/~~2/ /
6 (///I;?p'~'.,-;$@:/
LLARD L. HATCHER,/Jr.
7 /"
9
COUNTY OF SAN FRANCISCO )
9 ) 55.
STATE OF CALIFORNIA )
10
11 Sworn to and sUbscribed in my presence on January 24, 1997,
12
.c.ec .. e... el
in San Francisco, California.
~ fj-'- CC:=~W2873
13
.-, 4 -------.
oJ , .- ~ t/(~,.T ,(~
14
15
:! -a
z,
i .
Notcrv Pl&:IfIc - CoIbmIo
Son lftlnCiIco~
Mv Comm. &pfrw 5ep ~. I9'R
.
i i5
~ $1"\\" \ \. "- \
. Notary PUblic /~
16 -(;...ol~....:.,..._iJ.-~'~·----.:.:·....\·_·:_\...)1....
My Commission Expires On '.... ::.:...._._-<-J:_-\~lr(ll
17
18
19
20
21
22
23
2S
26
AFFlDAvrr OF WIl.UJU) L HATCHER.. JR.

IN SUPPORT OF GOVERNMENT'S EX"-PARTE
SUBMISSION 4
FD-J6 (Rev II-11-K8)
FBI
TRANST\fiT VIA: PRECEDENCE: CLASSIFI(

o Teletype o Immedinte o TOP S
o Facsimlle o Priority o SECR'
!KJ AIRTEL o Routine o CONI
o UNCI
o UNCLA~
Date 8/4/93
TO DALLAS, SAC
FROM SAC, SAN FRANCISCO (196A-SF-9J255) (P)
SUBJECT CONNIE CHIP ARMSTRONG J JR;

ET AL;
WIRE FRAUD (A}j
MAIL FRAUD;
00: SAN FRANCISCO
Reference airtel dated February 22,
SA HATCHER has obtained verbal/abth?ri:atio 4 from

United states AttorneYJ MICHAEL YAMAGUCHr~ f o r L _ J
I Iconfidential source to record conver-s-a~-l-o-n-s~with
sub;~cts of this case. I 1 rJ:~
2 - DALLAS
SAN FRANCISCO
·-"7
'1) -
WLH/wlh
1
"11" -. "~
fIr .-
App£ovod: ~~ Transmitted
{Nmnher} (TIme)
Per
;"759 ;Rey 5-31-91)
o. DIrector, FBI ( Date J/J3/93
Attn CID,$I",c: rolla' ('rime Section
SAC, OJ .iJL.t ~.:J Lt96B-D.L- 66524) ( p)
"{tie C01-.ll.,j.L.~
k
(~. I.~HllS'.L1R01\lG Notification of SAC Authority Granted
E:.;.' i~L for E g2116) Use
P~I"J; L11"
UO: 01 ~L1JJ·l..s .
of Consensual MonitOring Equipment (NontelephonJc)
Form must be submItted wlthm 5 workmg days 01 the date

authorrzat/on was granted
I. Reason for Proposed Use (Check) 2 Type of EqUipment (Check)

£2S Corroborate 0 Protect o Protect ~ T ransmltterl o
Mlcrophone/ ~Concealed
Testimony Consentmg Government ReceIver AmplifIer Recorder
Party Property
o Other (Speedy) o Other (Specrfy)
3 ConsentIng Party (Check one) 4 Interceptee(s) (Include Title If PublIC OHiclal)
o Nonconllden11al Pa~ l-b2 - cuvnL.tr: c. :lRI.I;£' TROIJG, I
o Confldenttal Source (Name)
Ci Cooperative Witness b"'7~
' ~ I rano ochers t'/C
--
5 DuratIon of proposed use 90 ciays 6 InstallatIon of EqUipment (Check) 7 LocatIon where equipment
(tdll : d 90 dSj c) t:& Concealed on Person o
In Vehicle Will be utIlized (City and State)
Date Authonzed 9/r3/93 o In Motel Room o
Other (SpeCIfy)
ExpIration Date ]1/J1/93 Di1112.s, IJ'e}:ab
3 The follOWing reqUirements have been fulfilled 9 Government attorney In JudiCial district where mterceptlon
8a Consenting party has agreed to testIfy. Wlil take place foresees no entrapment and concurs In 1he use of
~b Consentlng party has executed consent form thiS techmque being appropnale
~c Recording/transmitting deVice WIll only be actIvated ~ Yes 0 No Date '"7/1/93
, I bOlE Identity of Gov't Arty 1,U[, Pc I ).1.,
! e Dr iiJa-REa
10 Vlolatlon(s) TI1Ie(s) J8 Sec(s) 1343 USC JudiCial District IJor" he. I )) D'&" ,c~ of ']'eoos
11 DOJ notIficatIon required 0 Yes ~ No [f "Yes" check reason below

o Interception relates to an Invest/gallon of a member ot Congress, a Federal Judge, member of the Executtve Branch at ExecutIve
Level IV or above, or a person who has served In such capacity Within the prevIous 2 years
o
o
extortion relating to the periormance of hIs/her offICial duties
Interceptron relates to an InvestIgatIon of a Federal law enforcement offiCial
I
~
J j6 (i
Interception reiates to an InvestigatIon of any publiC offICIal and the offense investIgated IS one involVing bnbery, conflict of Interest, or
~/1~
- ~j)t..:.-~7""&f£7t
Li
-j----
[J Consentmg/nonc:onsentlng person 15 a member 01 the diplomatiC corps of a foreign oun ry
o Consenllng/nonconsentlng person IS or has been a member 01 the WItness SeCUrity Program and that fact IS known to the agency
Involved or rts oHleers
o ConsentJng/nonconsentlng person IS In the custody of the Bureau of Prisons or the U S Marshals ServIce
o Attorney General, Deputy Attorney General, ASSOCiate Attorney General, ASSIstant Attorney General for the Criminal DIVISIon, or the
U S ANorney m the dlstnct where an rnvestlgatlon IS bemg conducted has requested the Irwestlgatrng agency to obtaIn prror wnt1en
consent for makIng a consensual interceptIon m a speCIfic Investlgatton
12 SynopsIS of Case (Attach additional page It necessary) A CoopeJ.a.L_ 1ng NLu1e5s has advJsed LhaL. .
i.:-<.tiJ'J.'HuHG I ~
[ ] lu:li1S rl'RONG ':'5 Lhe suJ 'JCC I: oi a.ll ~nveSL.lgaLJ.on / _
......llE:. ~a n F .canC.L5l~O 01 Vls~on w11-=J.-e he nUSLea out h.t-.J'!...l.L'l'ON- l.dP'L'. 4~
t
-....,
~
( ~Jjtd.-
'3 JUsllflcatlOn statement necessitating emergency authOrization
~~~~---+=-",--------..'--
b :::e j!/i;ft;
are f/zt/f3
---~~""""""'~~~,e) /. J/A
SIgnature ". ate 1f?:1l2~
'GjBureau (SubstanlJve Deskl
o 17 To be executed at FBIHQ (LCD)
_C- (Complete only If DOJ noill,callon IS necessary)
... ; Z-- SIgnature Date
:J-759 (Rev 5-31·91)
12/1/93
c DIrector, FBI (
At1Il. CIO. White Collar Crime
)
Section
Date
--
SAC, DAr.r.(j (196B-DL-66524) { P}
111e CONI~.l.E C. AID1S'l'RONG; Notification of SAC Authority Granted

/: Err' p.. L; for -PfzlP'ijf~se
'..'_ .. COMPO-CHECJ(-Vl.CT .LM;
FEW
00: DALLAS
.
of Consensual Monltonng Equipment (Nonteiephonlc
Form must be submlned wIthin 5 working days of the da1e

authorlzatron was granted
Reason for Proposed Use (Check) 2 Type of EqUIpment (Check)

~ Corroborate 0 Protect o Protect ~ Transmltterl o
Mlcrophone/ ~ Concealed
Testimony Consentmg Government Receiver Amplifier Recorder
Party Property
o Other (SpecIfy) o Other (Speerfy) CCTV w/Audio -
Consenting Party (Check one) 4 Interceptee(s) (Include Title If PubliC OffiCial)
o Nonconfldenhal Party J Lb)
-
o Confidential Source (Name)
b7:~
CONNiE CHJ.P ARHSTRONG and others
iit CooperatIVe Witness
1.
DuratJon~.
(90 days DB InstallatIon of Equipment (Check) 7 LocatIon where equipment
(rut~ tz Concealed on Person oIn Vehicle wIll be utilized (City and State)
Date Authonzad" 12/2/93 o In Motel Room oOther (Specify)
ExpiratIOn Date' 3/2/94 Dallas, ~eexas
The following reqUIrements have been fulfilled 9 Government attorney In Judicial d/stnct where interceptIon
K a Consenbng party has agreed to testify wIll take place foresees no entrapment and concurs In the use of
~ b Consenting party has executed consent form. thiS techmque being appropriate ,
file Recordlngltransmlttln9 device will only be actlvatp.n t&. Yes o No Dale 12/2/93
I I b7E
-
Identity of Gov't Atty T.INDA GROVES
JudICIal Dlstnct Northern DJSLrlct of rt1 exa 5
Ls oJlolatlon{s). Trtle(s} 18 Sects) I 3J1 3 usc
DOJ notlflca.bon required DYes 5C. No If "Yes" check reason below
o InterceptIon relates to an investIgatIOn 01 a member of Congress, a Federal Judge, member of the Executive Branch at ExecutIve
Level IV or above, or a person who has served In such capacIty WIthin the prevIous 2 years
o Interception relates to an investigation of any public offICIal and the oHense investIgated IS one involVing bribery. conflict of Interest, or
eXlortlon relallng to the performance of hIS/her offiCial duties
o Inlerception relates to an investlgat/on of a Federal law enforcement offiCial
o Consenllnglnonconsentlng person IS a member of the diplomatIC corps of a foreIgn country
o Consenbnglnonconsentlng person IS or has been a member of the Witness Secunty Program and that fact IS known to the agency
Invo~ved or Its officers
o Consentmglnonconsentmg person IS In the custody of the Bureau of Pnsons or the U S Marshals Service
o Attorney General, Deputy Attorney General. ASSOCIate Attorney General. ASSISlant At10rney General for the Criminal DIVISion. or the
U S Attorney In the district where an Investigation IS being conducted has requested the Investtgatlng agency tD obtaIn prior wnt1en
consent for making a consensual interception In a specrflc InvesttgatlOn
2 SynopsIs of Case (Attach addItional page If necessary)

ARMSTRONG has prevlously busted-out a company ~hrough an lntr2cate scheme
to slphon off fiduc~ary funds and uti12ze them for h~s own benefit.
lJU1STRONG is continuing to ut~llze ~h~s scheme wlth anO~ler ent' y,
COllPU-CHECK, Dallas, Texas.
,
Cfllt-6L-t,t;,. 3
~~,useap
al .
~ 14 (SAC)
Signatur
o 15 To be executed at FBIHQ (Umt ChIef)
SJgnature Dale~ _
o 16. To .be executed at FBIHQ (Section Chief)
S'gnature Dale ~__
o 17_ To be executed at FBIHO (LCD)

Vureau r~anIlve Deskl (Complete only sf DOJ notificatIOn IS necessary)
!lI\lY SIgnature _ Dare
0·759 (Rev 5-31-91)
To Dlrector,FBI (19.:iB-DL-66524) Date 12/3/93

Attn CID, Wb j1' c; Co) Jar en me Section
SAC, D1iLL6J (196B-DL-66524) (p
Title CONNIE C. ARMSTRONG Notrtlcatlon of SAC Authority Granted

ET AL fq, Ems 'Ise
FBw; MF
of Consensual Monitoring EquIpment (Nonlelephomc)
00: DALLAS
Fonn must be submrtted wltt"n 5 workmg days of the date
au1honzatJon was granted
1 Reason lar Proposed Use (Ched<) 2 Type of EqUipment (Check)

~ Corroborate 0 Protecl o Protect ~ Transmltterl o
Mlcrophonel o Concealed
Testimony Consenttng Government ReceIVer Amphfler Recorder
Party Property
o Other (Specify) o Other (Specrly) ....
..;.
I~
3 Consenlmg Party (Che~ OOAl 4 Interceptee(s) (Include Title If Public OfficIal) .--'
o Nonconhdenllal Party Lb2 - CONNiE C. ARNS'l'RONG, I
o Confldenttal Source (Name)
~ Cooperabve Witness b":iD I land others bie
5. DuratIOn of proposed use 90 days 6. Installation of EqUipment (Check) 7 Location where eqUIpment
-
P' , t 'S? ;a-, l&t Concealed on Person 0 In VehIcle Will be utIlized (Cily and Slale)
Date Authonzed 12/11/93 o In Motel Room o
Other (SpeCIfy)
EXpiratIon Date 3/10/93 Dallas, Texas
8 The follOWing reqUirements have been fulfilled 9 Government attorney In JudiCial dlstnct where mterceptlon
':8l a Consenting party has agreed to testify WIll take place loresees no entrapment and concurs 10 the use ot
tzg b Consenting party has executed consent form thiS techmque beIng appropnate
g c RecorrhOQ/lragsmttllQp deylCe WI!! POll be activated ~Yes o No Date 12/.2./93
I b7E Identity of Gov'! Atty AOSA LINDA GROVES
JudiCial Dlstrrct Non.:hern Dlstrlct of '.rexas
11.1 vlolahon{s) Tltle(s) ) 8 Sec(s) 1 3 4 ~ USC
11 DOJ notlflcallon reqUired 0 Yes ~ No If "Yes' check reason below

o Interceplion relates to an investIgation of a member of Congress, a Federal Judge, member of the Executive Branch at Executive
Level IV or above, or a person who has served 10 such capaclly within the prevIous 2 years
o Interception relates to an Investigation of any pUblic offiCial and the oHense Investigated IS one InvolVing bflbery, conflict of Interest. or
extortion relatrng to the pertormance of hlsJher oH1clal dulles
o Interception relates to an investigatIon of a Federal law enforcement oHlclal- -- - - - - - - -- - ,- - - -
o Coosentrng/nonconsenhng person IS a member of the diplomatIC corps of a foreign country
o Consentlng/nonconsentmg person IS or has baen a member of the Witness Secunty Program and that fact IS known to the agency
Involved or Its oHlcers
o ConsentlOg/nonconsent,ng person IS In the custody of the Bureau at Prisons or the U S Marshals Service
o Attorney General, Deputy Attorney General, ASSOCiate Attorney General. AssIstant Attorney General for the Crlmmal DIVISion, or the
U S Attorney en the district where an Investigation IS being conducted has requested the IOveshgatmg agency to obtain pnor written
consent for making a consensuallnterceplton In a specilic tnveshgatlon
12 SynopsIs of Case (Attachaddlltonal page Ifnecessaryj Coopera-r.ing Witness has adV1sed "Chat
il..RNS'l'RONG
ARMSTRONG lS ~ e suoJec1:.
lnvestigat~on 1n the San FranC1SCO lVlsion where he busted out
Hl~·1l,LTON-TAFT •
"
196£- '
'1 I
, . "01 Gnn .'Ll II II 'iF'! 05jQiPqr 2,d'waTilf:ar
~~E:::::::Z:~===i:~ Date~
s
16 "bUOes QT
l ).'':,-
'- et) Date Iv/i~3
~~~:1""!!!'1''''!''''t''r ......._~,."..",._ af) /;7
Signature Date 103/0/3
t"reau (SubSlanllve De!'>kl
o 17 To be executed at FBIHQ (LCD)
(Complele only If DOJ nO/llicallOn 15 necessary)
_"n,-~ ... ('\ _
SlgnalUre Dale
F"O·759 (Rev 5-3'-91) \
To Olrector. FBI ( ) Date 3-7-94 \

Attn CIO, WHITE COT J AR CR TMf Section
SAC, DAT 7 AS 196B-DL-66524 ) (p )
o
CONNIE C. ARMSTRONG;
I
Notlflcahon of SAC Authority Granted

ET AL;·
FBW; HF
00: DALLAS
/ tor Emergency Use
of Consensual Monitoring EqUipment (Nontelephonlc)
Form must be submitted withIn 5 workIng days of the date

authorizatIon was granted
, Reason lor Proposed Use (Check) 2 Type of EqUIpment (Check)
iXI
Corroborate 0 Protect o Protect (]: Transmltter/ o
Mlcrophone/ o Concealed
Testimony Consenting Government ReceIver Amplifier Recorder
Party Property
o Other (Speedy) o Other (SpeCIfy)
3 Consenhng Party (Check one) 4 Interceptee(s} (Include TItle If PublIc OffICIal)
o Nonconhdenhal Party l lb:? - CONNIE C. ARMSTRONG,C
o Conflden1lal Source
-
(i,allie) J
[] CooperatIve Witness b 7 ~~ r I and others bie
5 6 Installalton of EqUIpment (Check) 7 LocatIon where equIpment
-
~ ex
~ Concealed on Person o
In Vehicle WIll be utilized {City and Stater
Date Authorized 3-7-94 o In Motel Room o
Other (SpecIfy)
~ tP • 7· Gtj- Dallas, Texas
B The followmg requirements have been fulfilled 9 Government anorney 10 JudICial district where mterceptlon
[](a Consenting party has agreed to testify Will take place foresees no entrapment and concurs In the use of
~ b ConsentIng party has executed consent form thiS techmque being appropriate
c ReGordlQg/trapsm!UlDQ deVIce wI!! polv be activated g: Yes o No Date 12-2-93
l Jb7E Identtty of Gov't Atty AUSA LINDA GROVES
1u VJOlatlon{s) Trtle(s) 18 Sec(s) 1343 USC
JudlCtal District Northern District of Texas
11 DOJ notIfIcatIon reqUired 0 Yes ex No If ·Yes· check reason below

o Interception relates to an investigation of a member of Congress, a Federal JUdge, member of the ExecutIve Branch a1 Executive
Level IV or above, or a person who has served In such capacIty Within the prevIous 2 years
o InterceptIon relates to an investIgatIon of any public offICIal and the oHense investigated IS one InvolVing bnbery, con filet of Interest, or
extortIon relatmg to the performance of hIs/her offiCIal duties
o Interception relates to an investigation of a Federal taw enforcement offiCIal - -- - - - - - - - - -. - - - - ----
o ConseotlOg/nonconsentlng person IS a member of the diplomatiC corps of a foreign country
o Consentlng/nonconsentlng person IS or has been a member of the Witness SecuTlty Program and that jact IS known to the agency
Involved or ItS oHlcers
o ConsentlngJnonconsentlng person IS In the custody of the Bureau of Pnsons or the U S Marshals ServIce
o Attorney General. Deputy Attorney General. ASSOCIate At10rney General, ASSIstant Attorney General tor the Cnmtnal DIVISIon, or the
U S Attorney In the dlstnct where an InvestigatIon 15 bemg conducted has requested the Investigating agency to obtaIn prtor wnrten
consent for making a consensual mterceptloo In a speCifIc investigation
12 SynopSIS of Case (Attach additional page If necessary) I...,'"""""......._~;.;;;_ ....-.....-~ ............__....~ .....
Cooperating Witness has advised that ARMSTRONG
an investigation in the San Francisco Division where he busted out
SlQnatu
~
0 17 To be executed at FBIHO (LC
2 Bureau (SubstantIve DesKl
D (Complete only II DOJ nord/cat/on IS necessary)
• Signature Date
L rl.. L-.~~=======::;=;========-'=::':=========-
\
)-/5q (Rev 5·31·91)
j. Director. FBI ( 196B-DL-66524 Date 3/2/94

Attn C/O, ~itQ Colln Crime Section
SAC. n~l I;:l~ (196B-DL-66524 )( P)
Ille CONNIE C .~TRONG NotIfication of SAC Authorrty Granted

ET AL: fo~rf1PfJF?EK'Use
FBW; ~1F
of Consensual Monitoring Equipment (Non1elephonlc)
00: DALLAS
Form must be submitted within 5 working days 01 the date
authonzatron was granted
Reason for Proposed Use (Check) 2 Type of EqUipment (Check)

a Corroborate 0 Protect o Prolect ~ Transmltterl o
Microphonel ~ Concealed
Tesllmony Consenting Government ReceIver Amplilier Recorder
Party Property
o Other (Specdy) o Other (SpeCIfy)
ConsentIng Party (Check on
o Nonconhdentlal Party I 4 tnterceptee(s) (Include T,tle If Public Official) b7c
o t') -
Conhdentlal Source
[][ Cooperative Witness
(Name) ~
CONNIE C. ARMSTRONCJ I
bOD I I ;:mc .\.
Duration of proposed use X~~~~ 6 Installat :qulpment (Check) 7 Location where eqUIpment
:IMlIUD rllW rn Concealed on Person o In Vehicle will be utilized (City and State)"
Date Authorrzed
3~lZ94 o In Motel Room o
Other (Specify) Dallas, Texas
Q II IIIIUIl":'" v/t7f
-. The followmg requirements have been fulfilled 9 Government attorney In Judicial district where mtercepllon
q
[la Consenllng party has agreed 10 testify
b Consenting party has executed consent form
c Recording/transmitting deVice Wilt only be a~tl~ated
will take place foresees no entrapment and concurs In the use of
this technique bemg appropnate
rn Yes 0 No Date 12/2/93
J L b t1~, Identity of GOII't Atty AlISA T,INDA GROVES
JudIcial District Northern District of Texas
\.. "lolatlOn( s) Tllle(s) 18 Sec(s) 134j USC
1. DOJ notrflcatlon reqUIred 0 Yes rn No If ~Yes' check reason below
o Interceplion relates to an investigation of a member of Congress. a Federal Judge. member 01 the Executive Branch at ExecutIve
Level IV or above. or a person who has served to such capaCity Within the prevIous 2 years
o Intercephon relates to an Invesllgatlon of any public offiCial and the offense Investigated IS one involVing bnbery, conflict of Interes\, or
extorllon relating to the performance of his/her offiCIal duties
o trrterceptlon relates to an Investlgallon of a Federal faw enforcement oHlclal- -
o Consentlng/nonconsentlng person IS a member of the dIplomatiC corps of a foreign country
o Consentmg/nonconsentlng person IS or has been a member of the Witness Securl1y Program and thaI fact IS known to the agency
Involved or Its officers
o Consentmglncnconsenhng person IS In the custody of the Bureau ot Pnsons or the U S Marshals Service
o Attorney General, Deputy Anorney General, AsSOCIate Anorney General, Asslslant Attorney General for the Cnmmal DIVISion, or the
U S Anorney In the dls1nct where an investIgatIOn IS being conducted has requested the investigating agency 10 obtain pnor wrrn n
consent lor making a consensual Intercephon In a speclftc rnvesltgatlon / , _ , /; _ /" j7 ,rJ a'- /";
2 SynopsIS of Case (Attach addItional page If necessary) Cooperatin g a vised that
ARMSTRONG I
I""'"-'- ~~-~~~
investigation in the San Francisco
b7:~:
J
2 Bureau 'SubstantIve Desk\
COpy-
FD-36 (Rev 8-29-B5)
FBI
TRANSMIT VIA: PRECEDENCE: CLASSIFICATION:

!Xl Teletype o Immediate o TOP SECRET
o Facsimile IZJ Priority o SECRET
D AIRTEL o R()Utine o CONFIDENTIAL
o UNCLAS EFT 0
[Xl UNCLAS
Date 6/~6/93
FM FBI SAN FRANCISCO (196A-SF-93255) (P) (SQUAD 5)

TO FBI DALLAS/PRIORITY/
BT
UNCLAS
CITE: 1/3790//
PASS: SSA 1~---------I(WCC-5). 1::/7(:
SUBJECT: CONNIE c~ ARMSTRONG, JR.; AKA CHIP ARMSTRONG, JR.,
DBA HAMILTON TAFT AND COMPANY, 1 MARKET PLAZA, 32ND FLOOR,

SPEAR STREET TOWER, SAN FRANCISCO, CALIFORNIA 94105, FRAUD BY
WIRE (A); MAIL FRAUD; 00: SAN FRANCISCO.
REFERENCE SAN FRANCISCO TELETYPE TO DALLAS, DATED MARCH

23, 1991. ALSO REFERENCED SAN FRANCISCO TELEPHONE CALLS TO
THE DALLAS DIVISION, JUNE 15, 1993~
FOR THE INFORMATION OF THE DALLAS DIVISION, THIS MATTER
IS CURRENTLY BEING INVESTIGATED AT SAN FRANCISCO WITH A VIEW
TOWARD INDICTING CAPTIONED SUBJECT ARMSTRONG AND THREE OTHER
==iiJ~-=-
INDEX.ED~
fffi
~~ rI
,ILED \
Original filename: )Y\ l\- e CD\ W I b 7
FOX DATE & TIME OF ACCEPTANCE

~PAGE 2 196A-SF-93255 UNCLAS
INDIVIDUALS. TWO OF THE INDIVIDUALS I IANDI ___

______~IARE CURRENTLY EMPLOYEES OF ARMSTRONG1S LATEST BUSINESS
ENDEAVOR, COMP-U-CHECK, WHICH IS DOMICILED IN DALLAS, TEXAS.

b7C
ARMSTRONG RECENTLY MOVED THIS PUBLICLY TRADED COMPANY AFTER
HAVING PURCHASED IT; THE DETROIT, MICHIGAN AREA TO DALLAS. AT
THE DIRECTION OF ASSISTANT UNITED STATES ATTORNEY, MICHAEL
YAMAGUCHI, A SERIES OF SUBPOENAS HAVE RECENTLY BEEN SERVED IN

THE DALLAS AREA BY DALLAS DIVISION PERSONNEL. THESE PERSONS
SUBPOENAED HAVE ADVISED THAT THEY WILL SUBMIT TO INTERVIEW BY
THE FBI IN LIEU OF APPEARANCE AT SAN FRANCISCO.

SAN FRANCISCO HAS OBTAINED LOCAL APPROVAL FOR TRAVEL BY
CO-CASE AGENT, S~ ~O THE DALLAS DIVISION ON

JUNE 21, 1993. THE PURPOSE OF THIS VISIT IS TO CONDUCT SEVEN
TO NINE INTERVIEWS OF FORMER ARMSTRONG EMPLOYEES. IT IS
ANTICIPATED THAT SAN FRANCISCO WILL NOT REQUIRE ASSISTANCE

FROM THE DALLAS DIVISION OTHER THAN AN INTERVIEW ROOM AT THE
DALLAS OFFICE. NONE OF THESE INTERVIEWS ARE SUBJECT
INTERVIEWS.
THE SAN FRANCISCO DIVISION FEELS THAT SOMETIME DURING THE
WEEK OF JUNE 21ST THROUGH THE 25TH OF A BRIEF MEETING SHOULD

APAGE 3 196A-SF-93255 UNCLAS
TAKE PLACE BETWEEN SAN FRANCISCO CASE AGENT AND SSAI IOF
DALLAS IN ORDER TO BRIEF DALLAS AS TO POTENTIAL FRAUD BY WIRE
VIOLATIONS ON GOING IN THE DALLAS. TERRITORY.

UNLESS ADVISED TO THE CONTRARY BY DALLAS SAI ~IWILL
t7C
ARRIVE IN DALLAS ON THE AFTERNOON. OF JULY 21, 1993.
RESERVATIONS ARE CURRENTLY BEING MADE BY DALLAS SECRETARY,)

~ ~_I(PH). SAl ICAN BE CONTACTED AT (415) ;
553-7608.
BT
FD-36 (Rev 11-17-88)
FBI

o Teletype D Immediat~ o TOP SECRET
-
o Facsimile o Priority o SECRET "!
[X] AIRTEL o Routine o CONFIDENTIAL :>
( ,
o UNCLAS EFT 0 '~
o UNCLAS .J
..I
......
0':. \~
"
~ ....'"'
Date 8 '.\
~ ,-'1
TO SAC, SAN FRANCISCO (196A-SF-93255) (SQ 5)
D· ~iJ'-FROM SAC, DALLAS (196A-SF-93255) (WCC-S) (RUC)
SUBJECT CONNIE C. ARMSTRONG,

ET ALi dba
HAMILTON TAFT AND COMPANY, ET AL,
San Francisco, California
FBW (B); MFi SF (A)
OO:SF
Re Dallas airtel to San Francisco, dated 7/30/93.
Enclosed for the San Francisco Division are the b~

following:
Two copies of an FD-302 reflecting the results of

an interview with Dallas sourcel .qD~;~tJ;J pn 7/27/93.
Dallas sourcel ladvised that he plans
to meet with CONNIE C. ARMSTRONG sometime during the week of
August 2, 1993 and has agreed to the meeting being recorded.
He anticipates the conversations will include comments
concerning the failure of COMP-U-CHECK, INC. (CUC) to meet its
payroll and their issuance of non-sufficient fund checks on
COMERICA BANK, Southfield, Michigan as well as the source of
funds being received by EQUITABLE BANK, Dallas, Texas which
are being utilized to make good on the non-sufficient fund
2 - San Francisco (2 encs.)

1 - Dallas (196A-SF-93255) (1 enc.)
LeG/
f.
--,
-- - ------.
r,. ("\
------1--'
t" iQO'·!
.... -
~
''rl
(3 )
Approved: _ Transmitted Per

(Number) (Time)
---------
checks issued on the COMERICA BANK.
In view af ARMSTRONG's activities involving cue and

CC ENTERTAINMENT AND PROMOTIONS, INC., Dallas, Texas which
have the appearance of a "bust out" operation and the masking
of income to ARMSTRONG to avoid restrictions allegedly imposed
by the US Bankruptcy Court, ND CA~Oakland Division, DALLAS is
oj;)ening a new 196A-DL- "file. SAN FRAN'cjsc'o--wl.ll-be'advlSed-·of
:'.
aP.NQEi!_a..~_~_~.ey~m_ent.s .- __ .m_ ._- - .--------
DALLAS
AT DALLAS, TEXAS
Will coordinate and monitor Dallas source's meeting with

CONNIE C. ARMSTRONG during the week of August 2, 1993.
2
PD-36 (Rev .\-29-85)
FBI

!Xl Teletype o Immediate o TOP SECRET
o Facsimile IX] Priority o SECRET
o AIRTEL o Routine o CONFIDENTIAL
o UNCLAS EFT 0
!Xl UNCLAS
Date 4/14/92
FM FBI SAN FRANCISCO (196A-SF-93255) (P) (SQ 5)
TO FBI DALLAS/PRIORITY/
FBI SAN ANTONIO/PRIORITY/
BT
UNCLAS
CITE: 1/3790/1
PASS: ssAl , AND SA 1
... _ SQ 10 - DALLAS;
ss~ , SQ. 7 - SAN ANTONIO.
SUBJECr: CONNIE C. ARMSTRONG, JR., AKA CHIP ARMSTRONG, DBA

,Ie HAMILTON TAFT, 1 MARKET PLAZA, SUITE 3200, SAN FRANCISCO,
CALIFORNIA 94105, FRAUD BY WIRE (A) MAIL FRAUD, TAX F~UD,
BANKRUPTCY FRAU~\ (A); 00: SAN FRANCISCO.

RE: SAN FRANCISCO TELEPHONE CALLS TO SSA~ I(DALLAS)
AND' '(SAN ANTONIO) ON 4/13/92.
CAPTIONED CASE INVOLVES A CONVERSION OF HAMILTON TAFT

FUNDS BY SUBJECT ARMSTRONG TO HIS PERSONAL USE IN AN AMOUNT
ti H((·-1: -/
~~ :~P:~- -:- rl> -- I
.(12 '.. - - -
r ~ ,1#
(
AP.k,U:
,--,'
)?. ~lffi-~---
f'--'
Original filename:
6/0t !)~)
\1" .. \ !
):' l/'~
" r''''-
Time Received:
---------- Telprep filename' ::J~,J ~ ,() - I SO. \05
~~~~-~~---~::...-:.....--=---
~fRI/JULIAN DATE: ISN: ov?

------'---:=;.----~-~~
-,... .., n" '1"'~ R~ rrTU~ OF ACCEPTANCE.

""PAGE 2 196A-SF~9-3-255- - UNCLAS
APPROACHING($~5 MILLIO~)DUE TO THE

'-.... ~~
EFFORTS OF THE TRUSTEE
APPOINTED BY THE U.S. BANKRUPTCY COURT IN SAN FRANCISCO,
MILLIONS OF DOLLARS IN ASSETS HAVE BEEN RECOVERED.
ADDITIONALLY, THE ACCOUNTANT FOR THE TRUSTEE HAS TRACED OVER
$16 MILLION IN HAMILTON TAFT FUNDS GOING DIRECTLY TO CONNIE C.
ARMSTRONG, JR AND/OR TO ONE OF HIS NUMEROUS DALLAS BASED
CORPORATE ALTER EGOS. INVESTIGATION HAS ESTABLISHED THAT FROM
1/1/89 THROUGH 6/15/91, $4,787,950.84 HAS BEEN TRACED TO
ARMSTRONG'S PERSONAL ACCOUNTS.

IN MARCH OF 1992, JUDGE LLOYD KING, U.S. BANKRUPTCY COURT
SAN FRANCISCO GRANTED A MOTION OF THE TRUSTEE FOR HAMILTON
TAFT FOR A FORMAL ORDER TO ASK THE UNITED STATES ATTORNEY'S
OFFICE IN SAN FRANCISCO TO INITIATE THE CONTEMPT OF COURT
INVESTIGATION AGAINST SUBJECT ARMSTRONG GIVEN HIS SEVERAL
VIOLATIONS OF THE BANKRUPTCY COURT'S ORDERS TO NOT DISSIPATE
THE ASSETS OF THE HAMILTON TAFT ESTATE.
SAN FRANCISCQ-· CASE AGENTS l-- --.JI AND WILLARD

I
j
I
L. HATCHER, WITH THE CONCURRENCE OF DALLAS AND SAN ANTONIO .~~
~~ISIONS~LL CONDUCT INTERVIEWS OF SEVERAL FORMER EMPLOYEESAI :

~OR ASSOCIATE~)OF ARMSTRONG. SAN FRANCISCO CONTEMPLATES THE ;
" ~I
------.--
FD-36 (Rev 11-17-48)
FBI

o Teletype o Immediate o TOP SECRET
o Facsimile o Priority o SECRET
IX] AIRTEL o Routine o CONFIDENTIAL
o UNCLAS EFT 0
o UNCLAS
,Date 5 1/92
TO SAC, SAN FRANCISCO
FROM SAC, -93255) (SQD 15) (P)
SUBJECT NG, ET AL;

DBA HAMILTON T T AND COMPANY, ET AL;
SAN FRANCISC , CALIFORNIA;
FBW (B); MA FRAUD; BANKRUPTCY FRAUD (A);
00: SAN CISCO
ARMED AND DANGEROUS
RE: Teletype from San Francisco to Dallas dated

April 3, 1992.
Enclosed for San Francisco are two copies of insert
regarding witness I I original and one copy of
FD-302 regarding meeting between[
with original interview notes. --------------------------------
b7C
For informa~·an~~~~~~~~~~~agents observed
b7D the meet{ing between and debriefed
Jimmediately a
San Francisco (encl 5)~

Dallas
Approved: _ Transmitted
LEADS:
D.ALLAS AT DA.LLAS: Will obtain co ies of
and forward them to San
b7D
2
FD-36 (Rev 11-17--88)
FBI

o Teletype o Immediate o TOP SECRET
o Facsimile o Priority o SECRET
[[] AIRTEL: o Routine D CONFIDENTIAL
o UNCLAS EFT 0
o UNCLAS
Date 5/5/92
TO : SAC, SAN FRANCISCO (l96A-SF-93255)
FROM : SAC, DALLAS (196A-SF-93255) (SDQ 15) (RUC)
SUBJECT : CONNIE C. ARMSTRONG, ET AL;

DBA HAMILTON TAFT AND COMPANY, ET AL;
SAN FRANCISCO, CALIFORNIA;
FBW (B) i MAIL FRAUD; BANKRUPTCY FRAUD (A) i
00: SAN FRANCISCO
ARMED AND DANGEROUS
RE: Teletype from San Francisco to Dallas dated April

3, 1992 and Airtel from Dallas to San Francisco dated 5/1/92.
Enclosed for San Francisco are nine documents

enclosed in a envelope.
For information! San Francisco! I

sent copies of documentsl~ : ~
I
I These documents are as follows·
b7C
b .,'\
1,-,
IS per-cal.n 1:.°1L.... - . . 1.
IL.... ...
Inasmuch as all investigation has been conducted by
the Dallas Division in this matter, this case is being consid-
ered RUC.
(2)- San Francisco (encl l)~

Y - Dallas
JM/jm
A I I /1/- ",./
J ['1:T _ lJIHI. L.
Approved: Transmitted
--
& ,_
(Number) (Time)
WILLARD L. HATCHER, JR. AND SA 1"'--- 1WERE IN
DALLAS LAST WEEK (4/22/92-4/24/92) INTERVIEWING WITNESSES IN

THE DALLAS AREA. I IWAS ONE OF THE WITNESSES
INTERVIEWED. I
b7C:
b7D
OR~FLUENCED BY THE?SAN FRANCISCO OFFIC~ BE AWARE THAT
I t ISAl I DALLAS
DIVISION.
LEAD:
DALLAS DIVISION
BY THE MEETING PLACE I 'TO b7D
WITNESS THE MEETING AND/OR OVER HEAR THE CONVERSATION.

BT
SAC, DALLAS (196-0)
PrDm SSAI..... I?
SullJect CONNIE "CHIP" ARMSTRONG;
raw; b7C
00: DALLAS
[ 1 ~---:-----::""='-----:--..,...,...,.....----11
telephonically advised as follows:
-------r====::::::!.....--=----..:......-------.
I I
I b7C
I---------"""T.,......~~~~~=~~~~~.JI __ AA6 - ,I I
I ~ is a check quaranty cOlllpany headquarterea 1.n bID
~oe~t-r-o~it-A-~C~O~M~PU~-CHE~ CK does business in Texas and other states.
I~~';;;P=~ [" October 1992, CONNIE "CHIP" ARMSTRONG bought o,?
~For' information, ARMSTRONG's father, CONNIE C.

ARMSTRONG, has previously been convicted in the Northern District
of Texas of money laundering in an IRS sting and s~rved time.
Approximately 1 1/2 years ago, articles appeared in The Dallas
MQrning News and Ihe Wall street JOUrnal concerning a San
Francisco company called HAMILTON-TAFT HT. CHIP ARMSTRONG
purchased this company from ?n r ;r>.A.,,.~ ~J,I<J OM"'-'
~ Iwho was convicted in a THRIFT N case and is serving
time. ARMSTRONG went from being a fireman in Plano to having
millions of dollars and living a high profile, extravagant
lifestyle. The newspaper articles concerned HT which handled
millions of dollars ,of-·payroll._tal'es for a number of large
companies including NIEMAN MARCUS 'and affiliated stores.
Basically, HT was incurring extravagant expenses and making loans
from the large amounts of monies passing through ET. Writer
recalls the scheme whereby HT delayed making payroll tax payments
to the IRS by several months, eventually falling further and
further behind on the payments. The loss was in the millions.
The San Francisco Division investigated this case and there were
leads to the Tyler RA. ARMSTRONG had a ranch near Tyler.
2-196-0
WGE/dr
(2 )
.(~
196-0
1~--.poI that CHIP ARMSTRONG is perpetrating

the same scheme CHECK. So fter takin over COMPO
esident
1.5 honest
and should be contacted by e accor 1ng o~ ~__~
I ]
ARMSTRONG alao ~jrftd All the directors with the excep ~on ofl
whomL Ibelieves bought into this scheme.
~11eged that COMPO CHECK is running up extravagant
~
expenses. Like BT, ARMSTRONG is using this month's checks to pay

last month's expenditures, and therefore he believes COMPU CHECK
is falling further and further behind. He believes that
merchants in a number of states will eventually Buffer b7c.:
significant losses as a result of these activities. The company biD
has accounts with a number of auto chain stores. ARMSTRONG was
able to obtain about 60% of the stock pf c o : IHECK
with a loan
from an investment company in Denver. L b e l i e v e s this
loan transaction was also suspicious. ARMS N has offices in
Dallas where he runs COMPU CHECK from.
b7C
1~~~T't='~~~~~~~~~~asno conclusive evidence O~f ~1 b7D
frond DS described above, but if is his professional opinion I
I I that ARMSTRONG is operating COMPU CHEC~K~--
as he did HT.
2
Memorandum
To SAC, DALLAS (196-0) Dale 3/16/93
From
SA 1'--- ---' b/::::
SublCCI CONNIE "CHIP" ARMSTRONG i

FBW;
00: DALLAS
On February 23, 1993 I I~~-:-"""":,,, contacted wr iter__.. .I

regarding captioned matter and attached m 0 um dated January
26, 1993. writer attempted to contact on two (2) prior b7C
occasions and was informed that as out of the C1ty.
writer andl Idiscussed the activities of

ARMSTRONG as detailed in the January 26, 1993 memorandum.
I Ihad nothing more to add but clarified a statement in the
~ referenced memorandum I ~
Ireiterated the of the

informatio-n---p-r-o-v~i-d~ed to SSA his
professional. opinion He suggested
that any investigati ct finding b7C
process commence- with ·a telephone call to __
I lalso stated that he prefers to remaln detached from this b1u
matter unless and/or until his assistance is needed.
2-196-0
PRW/pw
r------~--.---. --- -- ..........
~#-/i{ f!~~
L....-}1:&----:"r,
'S;-v, -~
, .
@'[W -" C
Ilt "k
._--.- ----
I
; I
FD-I(l <IILV I J -l7t~X)
FB1
TRANSMIT VIA PRECEDENCE: CLASSIFl

o Teletyp~ o Immt:dmte o TOP~
o Fnc~m1tle o Pnurlty o SEeR
o AIRTEL D RllUtine o CONI
o UNCI
o UNCI
Date 4 / 19/93
TO DETROIT
FROM SAC j SAN FRANCISCO (196A-SF-93255) (P) (Squad 5)
SUBJECT connie C. Armstrong; aka

Chip Arstrong Jr.;
former cha1rman of Hamilton Taft Company
San FrancIsco, now dba as Cornp-U- Check Inc.
24901 Northwestern Hlghway, Seventh Floor
southfleld, Michlqan 48075
I lOf Hamllton
Taft. currently employee at Camp-U-Check;
I~__~~__~~ ~, former presldent of
Hamilton Taft;
FBW (A); Mail Fraud; Securitles Fraud
b7C OO:SF
Enclosed for the Detrolt divislon is one copy of the

drafts of numerous financIal documents and a draft of the 13-D
flling for the Securities Exchange Commlssion which were
provided to San Francisco eocase agent by captioned subject
I Ion 4/15/93.
For the InformatIon of the Detrolt dlv1sion captioned

subJect Armstrong is one of several-subJects 10 an ongolng
1nvestlgatlon WhlCh commenced in San Francisco in January of
1991. San FrancIsco'S case ~s centered around the fact that
Armstrong with the asslstance of other Harnllton Taft officers
transferred approximately $55,000,000 in Hamilton Taft client
funds to hlS personal use and or to hIS corporate alter egos
durIng the perIod of March 1989 thru March 1991.
PKM/dbc
2- Detrolt (enc-l) ~ ~
~ SAN Franc~sco (196A-SF-93255)
TrdlNllltt~d
(Numht:r) (TInH~)
HamIlton Taft was a service company located in San
Francisco whose business was the payment of tax obligations
due various taxlng authorIties. It provided its tax payment
services for many of the Fortune 500 companies in the Unlted
states. It had been in bus~ness performing this serVlce Slnce
roughly 1980. Historically, the company had derived its lncome
from a nominal service fee it charged its clients and from the
use of the cllent funds for a short perlod of time usually
no more than one to three days. Durlng this short period of
time, HamIl ton -Taft wou ld invest the clIent funds in very
short term, very secure and very liquId instruments.
Succinctly stated, Hamllton Taft made lts money on the Itfloat"
or the perlod of time it actually was in receipt of client
funds and the time those funds had to be paid to the varlOUS
taxlng authorltles.
When Armstrong took oyer the]

company in March of 1989
froml .he lmmedlately began
uSlng cllent funds to flnance an elaborate lifestyle and for
b7C the acquISItion of personal assets lncludlng the purchase of a
$10,000,000 ranch near Tyler Texas WhlCh he used as a personal
headquarters. In essence Armstrong operated a Il"'Ponzi lt scheme.
ThIS scheme reqUIred that Armstrong replace those client funds
that he converted to his own use by using other client funds
were continually arrlving at Hamilton Taft to pay the tax
oblIgatIons of other HamIlton Taft clIents which were going to
become due and oWlng in the very near future. Armstrong
wlthheld clIent checks Intended to pay for tax bills. He used
other clientls funds to pay the preVIOUS cllent funds and
penaltles WhlCh were accrued for beIng late.
It should be noted that captIoned SUbject I I

has
been interviewed at San Francisco on 4/2/92 at which tlme he
made some admISSIons regardIng haVIng asslsted In the lllegal
wire transfer of large sums of client funds to Armstrong
directly and or to hlS corporate alter egos·r I
adv~sed
San FranCISCO case agents that he ~s currently employed at b7C
Comp-U-Check and 15 worklng on lnstalllng a new computer
system for thls company. Armstrong andl I are in the
process of belng lndicted In San franCISCO for FBW Vlolation~
1
A cursory review of the documents provided to San
FranCISCO case agents lndlcates that Armstrong IS continuing
to commIt fraudulent acts possibly Includlng varlOUS
securIties laws violatIons and fraud by Wlre transactions.
More speclflcally, Armstrong appears to be "creating" assets
and then leveraglng these non ex~stent assets to fund at least
one of his companIes, CC Entertainment and Promotions, Inc
(CCEP) (see notes to flnancial statement, F-13).
2
Further reVlew lndicates that Armstrong 15 In the process of
convertlng posslble acquired assets to hlS own use, through
the issuance of fraudulent debentures .
. San FranC1SCO belleves that the SecurIties Exchange
Commlssion may be investigatlng the recent acquisition of
Camp-V-Check by Armstrong.
The Hamilton Taft case has been the sUbject of
wldespread medIa coverage includIng a front page story In the
western edltlon of the Wall street Journal. Comp-U-Check has
also been the sUbJect of media coverage locally ~n DetrOIt
includIng an article In a lndustry news magazine called tiThe
Collection Agency Report rt • The publlsher of this report,a1,.---
] I has contacted the San Francisco dIvision re~arding
Armstrong and his recent acquisltlon of Comp-U-Check. I I
himself IS a former Camp-U-Check employee who published a
"7 .-,
t .) I f...." March 1993 artIcle concernlng Armstrong and Comp-U-Check .
San FranC1SCO suggests that Detroit have any case
aqent assigned thIs matter contact San Francisco case agent,
I I prior to contactingI 'again regarding
thlS matter. Addltlonal lnformatlon is avallable thru Lex~s
NeXlS and "Craln's DetrOIt Business"
LEAD: Conslder open~ng a fraud by wire and or a
securItIes fraud InvestIgatIon.
J*
D'\ RE 1{A..'rlILTON TAFT & CO. 28:5
Cl' .... ~3 FJu l!~ I~i.h Clr. 1'l'l~1
United Stales Wlder~. . ../..;unu,:lt U,E depor-.:ltion order created sue :lII appeal of the Lleporw.tion o:cier or :l
1'-<-'.-
t<l Justice .Act (wEA.IA.- ~ & 1·./.ICh-~ dilt!mrna becau:ie 5urrendenng deniaJ of his :lpplication for a \\'ar:e:- oi
.dHIH.All. LV.-\. is not azl . .~ ••",j,! h:a\'t! tn~~rerl tllei.r immedi::ll.e deptH-· depor-~tiQn.
,nlflin~ St.:llUle In fa,.-or of !iti~
.~~ll\. Jl\IJ..Hin~ u,t!ir meritonous att.Jck Iln In light of that presti¢ous l:Qur:.',; pronOl:~cE'
\d.i.l :l,(f.llnst the b'1JVe~'~ ~ "ni,-,r·.- \·:ilidity. But ieder:U couns regu-
men~ and the simibr circumst.:lnces oi this
2-lU(dH [HAl say" that ~# ...~. I-"\.lnt emergency relief :.tg-ainst ubi-
Jan.y is not entitled to an a~'~
case. it C:lIl sC:lrcely be :iiJid Lha~ the l" rUted
.~. r.Jlin~~ in immigration procedures
~nd.:5 thal the position of ~ : ~.:cn. juul,'1ng by the r€ported c:J.Ses anci by
SUtes was not "suDsunUa.lJy ju.srIDee·" in
opposing Zapons' elTort.5 t..o Qbtair, ::l s~y oi
""as :iubsuntially just.i.fied ~.J§. ~-..:J l'-xpenence. do seem tD proriucE i:lI'
depor..:ltJon.
-:.n:urns~ces make an ~ ~ =:>~. :.I::lf1 lht'1r :ih:u-e uf JrDILr:tri.n~:i';), and
:t '·subst.:l!ltially justified" ~~' .~,n.- dill :hll immerli:lleJy :.tlcempt to ;J.\'::Ul We thereiore ..\FFlR)v1.
~ned out in Pierce u. Un.deo.'1fi ·;rm."<.,j\,e,; ui tll:lt uppol"tU.!1.iry r:Itller than
iii"-- 51}5 • lOS ..... 'X;7,~
C; CL .,,, 'I -.......,
~, "P, l'~.;: iUI-"luye . ;
9{j 119&11. followed in Ccrm~"~'
,~ !: I I1nly in the rarest of situ:ltlons do
"" l "S 1-...1.
..'ILC - 158 n. 6, 110"'''''-
n., 6 110 L - . ) . 1"
..t.c..:.c 3-l (l~ ~ ,:e ',,),-r;l.1 t'Our_, counten:lIlce a pan:,",; disre·
,;:Ionl "i exi:<ting roun order because it
;l.l\
:'f~:,
I1S he underl:;.ing subs~~ n .. m~-I~lkenJy issued-a clearly innJid pri-
\ .e magistrate judge ua'~ ~ ,.,·~tr.unt in tlle First .-\mendment context.
" were corre::t in cOl\clucfui('~ .., ~.t·n' the injunction was tr.lnsparently in-
··~~d "r h:lCi In re H.-L'lILTON TAFT & CO.. Debtor.
u-d of Immignuon Appesla Yo rmly a frinllous pretense to
'~-et.ion in refusing to ~.~ ·uh:\'." i,; the unly e.umple th;Jt comes to
Frederick S. WYLE, Trustee in
depor-...1tion: li nder a then: ~ 7=<1. Il"tdkrr r. City of Bir71l;71ghnm. ~
Bankruptcy of Hamilton Taft
~ .: .. ~. ::0'7. :1l5. ~j S.. CL 152-1. 1829. ]8 L.Ed~d
amendmenL to the lm~'~ & Co~ Plaintiff-Appellant,
ltJ,- .Iity ACl (8 U.s.c:·~ ::lflll!!li~. In:ill other situations obediem:e
filing oi a motion' tQ ~ ~ r'\,.n :lI1 a..~!'ertedly yoid I not merely void a- v,

.. :.ft,
,.roceedings where the -, ~ I "rtler is required unless and until it has
S & S CREDIT CO., Defencbnt-Appellee.
'eer: gi.... en notice of .such ~i ~ ';:lC;Jtcrl or reversed, Walker, id.. at
- -' cally stays deportation. r£ ~l :::n-.:l, :"i S.CL at 1832: Ullited Stlltl!.~ l'. No. 93-15455.
mmigTation Judge had ClJ%)o~ ,".:lr,( .Hille Iv"orkC'T'S. 330 u.S. 258. :290-9-1.
united StateS Coun of Appeili,
, :.acion healing in :t.bseDttl~' <:7 :,.. r.l. li77. fi94-96, 91 L.Ed. 88-1 (1947);
Ninth Circu.iL
: ~ :..ha~ Zapons had Dot ~, H:.r~h r:u:t, The t·oid Order and the UlLty To
It hearing (something tMt:!!::

'Y.,,-.,. Iii C.Chi.L.Rev. 86 (19.:j81, Argued and Submitted ,~ug. 12, 19~.
"<c':.
i their failure to ap~~ II ..rv 7..:lpons ens;aged in seli'help rather DecJded :'I'l:!y :;. 1995.
:'I e denc... of a motion tll:::: .~ ,"'ml111:-inJ,! v,;th an ouc.st.anding order to
: _.!On a~thorities a.cti... ~~ ~'nrh:r for clepor..:ltion. and the immigra-
it}, a \iew toward deport-_~ ....."!1 :I:Jt..hllnties responded by denying a suy Bankruptcy trustee for debtor ~..ho con-
-:~~ .;{ ,i"pllrLiUOn, As Bar-LI!l"Y 1:. United t:';Jcted \l.;th clienc.s to pay client.5' ierie..-al,
:·~t::.:n D"p', Ilf ./u.sticr. 990 F.Zd :n ~ (2-d
. of,;"a.
s~te :lJJd loc.aJ payroll l.a..."(es and prepare all
: ""culty in recoverin b ~~
t-..... ~~rli Iciutions omitted) h::l.S put it: relevant reports filed action to reCQ\'er as
th~ir having ~one fugi~
.\..:ll: lI l1ch :111 ilien who fail3 to surrender to preference ta..x payments made by debtor to
_ stilJ-oum,anmng (tl1o~
~:-.,. I \"S despite a lawful order of nepona- Internal Revenue Service (IRS) on behalf of
1b~r~.
:i) deoo • ...:loon order. I
~n i..~ nUL soiruy speakinR, ::!. fu~ti\'e in a client. The Bankruptcy Court dismissed
r!"".rn.iru.! matter, we think thal he i.s none- complaint and denied trus~'s motion for
lhrll":V\ :I fugitive from justice. Like the partial summary judgment that U!..xes were
f~uve in ;J criminal matter, the alien who est.:.lte property. Trustee appealed. The
.. ~ rUl{luve from a deportation order United States Distnct Court far the North-
~ltl Ilnlinarily ~ barred by hi5 fugitive ern Distrit:t of California. Charles l'_ Legge •
...:1Itu.~ from c:alling upon tl1e resources of J . , afftrrned. Trustee appeale<!. The Cour..
lk cuun to det.ennine his clai.on,s. AI: of Appeals, \VUliarn ;_ Norris. Circuit Judge..
~n .....ho i.s a fugitiVE from a deportation held tl1at debtor did not hold tax funds trans-
~kr ,'ihllUJd thus not be permitted to pur.. ferred to it by client in trust because client
1. I.nck.:,j. II wtU .heir l:uer.. filtd habe:u pcrilion lh:u sp:>r~d z..:,pans from deporulion.
000130
286 5J FEDERAL REPORTER :kI SERIES
ciid not re!]Wre debtor to ;;egngate ~"(es, 5.. Bankruptcy <:::=>:}76&.1

and thus. t:L'I; funcis L"':lIls.ferreci to decLOr Court of .-\ppeaJ~ haC jtL-i5ri.iccion to ~
were pro~n:y of dt'btor's esute. and ux \iev" deni.:U of bankruptcy t:ru5~':; motion
paymem.s made by ciebtoi to IRS on behalf ior partial 5umm,ary jud!;TT1enc in preieren~
of cliem were subje-:t to ;l\'oidance as prefer- 3 ... oidan~ proc~g on issue th2.l L"'U5t fund
ence, taxes ~d by debtor to IRS on behalf DC
nebtor';; client. with whom nector be! can-
L-:LCtei:l to par payroll t;l.:teS mo prep~ :ill
reie',-:l1lt reports, were propert:; IJf deblO:- ior
1. Bankruptt:' (;::l~ ~61O prefer-!?nce :l\'oidance purplJses ai'te:- :.'i.2l on
Aj&.oug-n iund~ \\;tilneld from emplo~' meri!.5. where Coun of A,ppeals T'e\'e:=eo cis-
ees of client oi debtor. WilO cont;-:lcted \\,tn met court';; dismissaJ of trUstee';; complaint,
client to P3Y iede::l!. H:lt,e and loc:tl p:lyrolJ ruling that :lS matter of law trustee couJd
t.:Lxes and prepa..re :ill :-ele,'ant reportS, were teCo\'erfTom debtor's client funds p::J.id CD
impressed' in "t:1turory crust when collected. IRS on client's behalf during preference ~ri
after O"'.lst fund ~,e5 ~'ere tr:m.sierred (Q u-d ii client tT':I.nSferred taxes to debt.or v.ith-
debtor. n",btor held t:L'\es frl'e of tr1l5t and our requiring debtor t.ll hold funds in LTUSt;
t.:J,..'\e~ were proper.:,· of neDtor's ESt3te. where -re\-;ewi.ng- denial of :iummary jlld!fIT1ent v,d.S
client L":ln.Sf2~ :.:J..xe,,; to debtor \\ithout fi,QtJ!Clinc.less aodemic e."Cer~e.: --
requiri..'1g rlebtor ~o ;;e!!1"eg:lle tho~e funds
6. F e<ieral Courts c=>+)S0.25
and hold iliem in 0'U5~ thlJ..:l, ta"C p:ll'ment.5
made 00 benalf UJ client by debtOr "ithin 90
In general. denial of motion for sum-
mary judgment is not final artier since cor..se-
days of bankruptcy filing were avoidable
quence of denial is th~t case will go t.O rriaJ;
preierence,;. Ban.\;:!'.C ode. 11 Ii.S.C_-\.
§ j-li(bl: ~6 C.S.C--\.. ~9 ';'501, 75QHal.
thus. ordin.iriJy, re\;ew oi such denL11 is
sought through interlocutor:,.' appeal.
~. Trust..s C=>:lS6< 11
7. Federal Courts (!:::I769 :;
Cnder nannal principles af tr'USt... if
w-nel! int.erlocutDr:: appeal from denial
truste-e cran.sfer:s O'U.5t property to third par-
of motion for Su.rn.ITiary judgment is not tak· . ~
ty, third pan:; noid~ :.1uIt propen:; free of
en. deru.a.l of summa::; jud~ent is re\;ev.<l- ,_
tru.st :mJe.:;.s c-.1.St...~ ~mmitted breach Qi
ble upon entry oi fin:li jurigment.
t.nJ£t in con\'e~'tDg property. Resur.cmem
(Secondl or- TrusL5 ~ 253.
3. TT1.1s t5 C=' :!56<:! I D:I~id L. Kane! and P:mic:J S, ~l:ll', feld-

man. Waldman & Kline. San Francisco, CA. ~
.-\llsem bre.ar~ oi UL!.:it, when rru.,;t~
for plaintiff-appellant...
enters imo contr:lc t ',I-;U1 third p;LrT.j', :J..rIj" .'
trus t fun ds t::i":J.I1S i e rre<i to th.:l t UUrd party in Susan C. Cag:mn, Lath:J.m & Watkins. SaD: _];
considention oi CO[lu-J.Ct are tr.l.I1Sierred ~ Francisco, Cr_ :lIlci Raben D. Crocke[".., La--,g
,--
of tru.st un!e,;.s c-onL"d.C", prQ\ides that tr:I.!l5- tham £: Watkins, Los Angeles, c.:'_ tor defen- ,J
fe~d funds shalJ ~ held in trust. Restate- dant-appeUee. ~,~
ment (Second) of Tl1.L5t5 § 2$3.
Appe.aJ from the Tj ni~ St3tes Distrit:t
-I. Trus t.! (!';::> :t56<:~) Co~ for the Northern DisrriCl of CaliforciL
Depositing tn.!5t funds in bank :lC~un[
is not t:-ans i e!' 0 { O'USt property to t.b.ird Before: NORRIS, THOMPSON,
party wi~ meaning of provi... ion Rest.1tc- TROTT, Circuit Judges.
ment (Second) of Trusts th;Jl when trustee
cr.msfers t:ru5t property W third pany, third WILLIAM A. NORRIS. Circuit Judge::'
party holda thal property tree o{ trust unJes.s The banknlot...'), trustee of debtor Hi-~
trustee committ.ed bre.:Lch of trust in com'ey- ton Taft & Co~pany (Taft) :lppen.l:1 the'"~_:
ing property. Restatement (Second) or ruptey court's disrnissaJ of his suit to
-------- Tt:llSl!d 283. from S & S Company (S &. ~) ..F~eDts
IN RE HAJ'\1ILTO::'i TAfT &: CO. 2Si
CII . . . 53 F..J.d 2M 1'i1b Clr. I~~~I
:n;Idt! to the Internal Revenue Ser-1ce (IRS) improper diversion of funds. and Tail' 5
.~766.1
un behalf or' S & S. The crusr.ee also appeals c.i..ienLS fi.1ed the i.nvolun~ry baruc-.J!Jt!:y peri-
; han jurifidiccon to f1!-. :ht! rourt's denial of his motion for paruaJ :.ion that g-ave rise to thls J.Ct.:or_
"r:..ruptcy trustee's motion ,;ummary judgrnenL The question presentee
--:,' judgment in preference :.:l both :lSpects of the :!.ppeal i5 9.. hether the
In :\'taren, just prior UJ the filing 01 L1e
on i.,;sue th:!.t trust fund bankruptcy petition. S & S was notifieci that
:nuney Taft paid the IRS on behalf of S & S
r to IRS on behalf of :c was going to be audited anc requested tha,
-0..' e\'er the property of the debtor withl1l
'.n whom debt.or had con. :.~t.' ::It':min~ of BankruDt..'"\' Code ~ ,':H7fbl.
Taft provid e proof th:1'1. S & S's payroU .a.'CE3
11 t:!..."'(es :LIld prepare al.l '1
.. l''':
' _C ,~ -.1"'11.
.' ~ ='-{bl /;;",,; ,}",
• /1 '/TI'''·~. /r..u.rr Tere up to daLe through 'the end or" JanU<lrY,
---- In trULh. Taft h::ld v,ith.held cwo ~ayments
e propeny of debtor (or 3: Cz ~r-,~.<''''",."", <: /~_,Ii), . ."'":'*'
:ce purposes :Uter t'I"Ul on :'Tom the IRS that harl been due 00 January
.-: of Appeals re\'ersed dis- ! ';' and 2·1. Howe';er. in order to conceal tpis
j of trustee'; complaint
TIle rele... ant r"acts are not in dispute,~ :'rom S &: S, Taft immecii:!.tely issu~ cnecks
,_ .~r of 1::1..... tnIstee could T;ll-: .:onL"':lcted \\ith S & S and :'!S6 other for the missed payments L'l the arnoun, of
:or', -~nt funds paid to
.:.!Jt!nL.:i to pay the clients' fedenl. St::lLe and .r7,632.269 and sent S & S proof of payment.
..ng preference peri- ioc:U payToll taxes and prep:l.Te all the rele- _~ a result, when the bankrupLCY perition
\?Ilt ~purts, As consideration, S & 5 paid -:::-as filed,S & Shad onJy :5158,9'29 in iliims
~d t:!...xes to debtor v,ith-
.or to hold fumls in C"llSt; ;:u', the amount oi the taxes !D ad...ance....ci against Taft for unpaid uxes. Tm's other
.:;wnmary judg:ment w~ :.'l~' due daLe of the U:xes which enabled Taft client.5 were less fortunate-their unpaid :.a...'(-
Lic e.:'{ercise, '" .:~·t
;he benent of lhe use 'Jf the fJm':3 -:-:; tot..a.i ove!" $90 million doll;u:;, ,~O.5 r..1ilion
::U-::':J.; the inten'a1 bet".. een the date il re- 'Jr' which is attribut.able to r..a.."es that ·"ere
,,:;:>tl60.25 .%./\.t'd the funds from its clients :lIld L~e date :lOl paid for Janua..')'.
motion for sum· :! paid the ta:'{es. Thus, Taft was paid for its
. order since c:onse- lle.....;Ce5 from the "float" on S & S's money. The trustee filed this action to recan!!"
that ~e will go to trial; :rom S & S the January [2"'( paymenLS rn.u:Ie
Tne funds Taft reeeived from S & S and its
~~ ...;ew of such denial is :,y Taft on behalf of S & S to the IRS. .:: £:
"'L':f'r clients were not placed in separate
'locutor)' appeal . ~ moved for dismissal under Rule 12rOlfS).
~unts with the E..xception of funds from
~g that the funds paid to the IRS we~
7";1.Tl clients which had specific:::illy contracted
~769 ::e!d in st.1tutory u"ust under I.R.C. § -;-J-Ol
~or ~ecr-eg-ale{j treatment of their funds. AU
,.. Jr:' appeaJ from deni..aJ
<.her funds we~ commingled and used by
and. thereiore. were not properr:-' of the
f)' judgment is not tak- cebtor. The trustee, in turn, moved for ;:w-.
7'.:ul :"01' its 0'(l,'l1 purposes until paid to the
·1,)....: "'ogmenl is revieYooll- tiaI summar:y judgment seeking a determiD2-
~'Cinl! ::Iuthorities as the !.a.."(es bec:une due.
fin :dgmem, :;on that the funds used to pay the IRS were
.\ppro:om:!.tel.... S6 billion of client mone\'
;Jroperty of the debtor under 11 C,5.C,
~aIl.'P.rl throu'gh Taft's accounts :LIlnuall;'.
~ 547(b). Tne bankrupu:y court dismi..~~
lila Pauicia S. ~ar. Feld- HOI.I,·l'vp.r.b~:lUse of bad investments ~d
:':e complaint and denied the plaintiif5 :DC>-
t'l\ne. San Francisco. CA. Jther improper handling of these funds, Tm
~on ior partial swnmary judgmenL The ci.."--
::l."r.e to have dramatic cash flow problems
'::"".c: coun affirmed the decision, T'1e c-.:.:,-
.. Latham & Wat.ki.ns, San
itaber: D. Crockett. La-
-t ~1ri :'ell behind in making LJ..'C payments on
~l-.:U..f n[ its clients. It then began selective-
~ appealed the dismissal and the denial oi
~ summary judgmenL~
:r ·...ithhoJding federal payroll taxes during
Angeles. CA., for defen-' .
:.he fll"St month of each q~ in order !.D We review both d~i.ons ~e n~o. In rt!
~ those funci.s to pay delinquent taxes from .5tt:r.·~ 107 B.R. 702, 705 (9th Cir. E.-\.P
.. U niLed States Distri~ ~ prior qUarter. Taft anempted to conce31 1959) !1dec:ision to dismiss complaint under
." Dis tri et 0 f Calif0miL. . ~ facts from its clienLS_ But in March. Rule 12(b)(6) reviewed de novo); In n Xro:
~l. :!. fanner Taft compcrnller disclosed the Engl..lJ:n~. Fi.3h Co., 749 F.2d 1277, 1280 (9t..D
S. THOMPSON. and I. Thes.: facu ;lrt: derivc:d From the .J.ffid.:1viu pro- ~ Th~ tru.stee aka a.rgu~ th.. t io ruli..cg on the
~es. ~ In Ihe conu=xt of the:' U"\Utre·. mOlion "for tt1otion to dism.i..s.:;. the bankruptCY judge: imP"'f'>-
~l;;-~';mma,..\' judgmenL While the: Summ:lrV crly cansider"1'd ~dcnce auuide: the comp[.11n1
JUdIP'Y'c:TlI pap";' provided det.;oiu 10 .uppl"m"~1 without convening Ih" motion 10 Ji>.miss into :I
Ihr "Icadings. the: :lppdlcc does not dispute Ih~e: :cation for summary judsme:nL Bcc:lusc we :-c'
addll.lonal facts and agr~ that th")' do not maLe- vc:~ the ilis m is.s.aI on 0 lh.c r groun d.s .a..cd anla
f\al~ ;affect the: outcome of the marion to d15miSJO. the dinnet court (0 enter pani.1.l swnmJJ)' judg·
tt1cnl in the trustee's f:.vor. we n=d not adt1r=s
this issue.
Oonl~'J
288 ;)J FEDERAL REPORTER.. 3d SERIES
Cir.I!JS-lJ (summ:u-:: ju<i~~nt reviewed de 110 :iCL ~, :!2t>-l. 110 L.=:d.:2ci ·Hi (1990l.
naval. Hu..... e\·er. iller collet:uon. the tnlSt-funci ~'\_
es were L-:JJlS t'e rrecl to Taft \lo1 Lhou:. req u.i.'"in g
T;ut to ;;e~l'.ll.e those funds :l!ld hold th~rn
in tnls:.. Under normal pru1Qple::; oi trusts.
[II Section ,i-..j",rb) permits the uustee t.o if :l L'"1JSte-e L-:L.n.:;iers O'\Jst property tc a
recover L-:lnsfers oi the dei:Jt.Dr·s property third p allY, th e third part:: hoi cis t.h a t prop-
when the tr.l!'.sier OCC!..l!T-eti \\ithln the !XJ.-.day ~rty tree ui tru:i~ unless the t..-..LSLee commit ..
"preierence penoer' pnor to th~ riling ui the teci :.t bre:.tcn 01' trust Ir, COnVE'j1ng ,he prop-
bankruptcy petition. if tne transier was marie ert::. Rest.J.tement (Second) of Trusts ~ :2S3
for the benent. ui one oi i~ credito~.; If the (19591: IY Austin W. Scon £: \Villiam F.
reCjuirement.5 of ~ ,'>-I7ibJ :1fe met. the L-u.stee Fr.ltch~,. The L;lw of Trust.5 ~ ~'3 ~-1ti-, ed.
may recover the ';;l1ue of the property ttans- 1989). Thuli, ;lasent a bre3cn uj O'\Jst. when
ferred from eitiler the creditor on whose :l O"U$tee enter; inUJ :l cont.'dCL Int}. a third
behalf the mnsier was made or from the party. :lny tJ"'.lSt funds l:r:LTJ.:;ferred to that
p::u-ty Ul whom the tr.lnsier was made. 11 third party in consideration of the conc-act
U.s.C. § 5501:1)(1). In this C:l5e. lhere is no 3IE tr:msierred free of !:rUS[ unless the can-
riispute that the t.a.'\ parmenL~ the trustee tr.:lct pro\ldes th:lt [he tr.ln5ferred fund.s
seeks to ;.l\-oid were made for the beneiit of S ",hall be held in truSL
~ S \\ithin th prcierc:lce period. However.
S ,~ S :m,'1Je, that ~ ,')--!',lbi does not :.lpply [41 In [hi:; l':tSt:, ~ oS: S ri~5 not come:ld
bet:ause the t.:I..': payments Tm tr.Lnsferred to that it committed a breach ,)i tru.st by can-
the IRS were not property Qf the debtor, but \'e);n~ the trUst-fund t.1...-.:es t.D Taft as consia-
rather funds held in J :it.ltutory truSt for the eration for Taft's promise tD P3Y S & S', t.a..'>
benefit of the IRS. obligations and prepare the appropnate re-
S & S argues tha. the runds paid to the pons. Nor d06 S & S :lttempt to :inow that
IRS by Taft were funds held in trust pursuit ~ngeci \\ith Taft for thE' c-ansjerred
. ant to Intem:ll Re\'enue Code ~ 7501, which funds tQ be held in trust. \\1ti1e m-o of Taft'.:;
pru\ides; "[wlhenever any person c; required clients arra.nged to h3\'e their Ull5:.-fund t.a..'t:
UJ collett or \\;lhhold an}' intema.l re\"enue
pa)ments kept in segreg:lteo a.::COllllts, S &: S
t.1...'( from any other person and t.D pay o\'~r and the other clients did no,- Instead. Taft
such t:L-.: UJ the United States. the amount ui e.:n.ensiveJy commingled all of the hlnd5 it
the L1.."\ so collec:t.ed Dr withhelt! ~h:lJl be held recei....ed mci tre2t1:'C the fu!ld5 :!.S It,; oo,;,l\
to be :l sped:J.1 fund in O1l$t for th!: U rut.ed :J.SSets, usmg them to P;I:-· Its open.ting e.x-
S1.3Le:i," :26 eSc. § 7~OUal. penses ana irwe:iting the funci..:; ror its O\,l;tJ
benefit. Thereiore, unde, orri.in:.u-y princi-
(~, 3 J Il is cle3I that the funds S J: S ples of trust, Taft did not hold t.L.:~ funds in
\\ithhelcl from it.5 employee,; were impressed tn..lSt. Tnu:i, the funds wer~ pro~n:,' of the
in :l st.J.t1lLOr:-' trust when collected. BCg1i:T t'. debtor :.lnd the January L1.,"( pa)ments were
J/Liema!. Ret'wlLe Sen"ice, ·196 l:.S. 53, 01--62, subject t.o ;lvoidance. 1
3. [n full. lh~ 5r:lnJl~ pravi..ks: (5) rh:l~ cn:Jblt:s such crcdilor to ~eiv<= man:
tn= such cn:diror would rec.<:i'·c if-
the tn1.St~c m:lY :lvait.l any [r:lOder uf :In inler·
(AI the C~ w"rc a c;UC' untie~ chapler 7 of
nl ur Ute t.I"btor in prop~n~-
Ihi, liue: •
(I) 10 ar far the benefit of :> c",ditar.
. CB) the (r::msfer h"d not b=n m~de: and
C!) for ur un ~c;t:ount of :In 3nl"c"dent d~bt Ie) such t:rrdilor rrccI"cd palmen! of such
oweu b~' th" tkblor before such Ir.>nsfer \\Iou
..Jcbr 10 the ".~[<:nl prol'idcd b,' the provi.sio~
rruor:: of thi, lille.
0) m,.ac while !.he debtor ""as insolvent:
11 U.S.c. S 5-l7rbl.
(4) rn"de---
CAl on or within 90 d"Y' before the "bte of 4. S & S :.sSC'~ th:ll unuer omirurv principia 01
Ihe filing uf thc pclltion: or lrUsl.3,thC' trust funJ. n:m"in m:.. funw ~
(8) b"lwecn OIn"lY I.bys "m! un .. ycar b"fon: whilc in po"'-Cssion of an Lnlcnn...Ji:lry, cilinJ"
the dDte of th: minE: of the pelition, if such .BlCxiu and E. John Vila. Inc. I'. Fir:sl ~
crruilUr :11 Ihc 11m" af such lr.ln"fcr WElS an S",d: or
Murv/anti. B""kr.LRplf'. 7.1.012. J99!
insider. and WL 56335 rSankr.D.MLl.19911. In beth ~
000133;
:· .-
110 L.EIl.:;d 4ti (990),
tion. the L'LJsl-fund Wu.
I
.., .'..
-"
';".
. , -
:
\_~ "', !,~. : ~',. ~\\'

IN RE HAJtOL TON TAFT & CO.
OlT .. SJ F.:lcl Z8S 19thClr.
::i .\: S arg'Ues. howe\·er. that. such common
I'l!strictions were abropte<l by Congress
199~1
110 S.CL at 2206 (quoting 12-1 Cong.Rec.

32393. 32-11, (19,S) trem:1!'ks of Rep. :::d·
289
to Till \\;thout re-quiring

:n ~'n:\l:tinl; § 7501. rel:.'Ulg upon the Su- wards)]. Tne Cour: held that a ieO!SOnable
~-se funds md hold them
:In'II\l! Court';; decision in Begll·r. In that assumption in the case before it was that.
nal pnnciple,; of tnl.sts, :-.!.'l·. :In ;.ili-Unl' decb.red bankrupt::y mer "[tlhe ciebtor's act of volum.:uily paymg ;-.=;
.~:-s trust property to a
:~l\1nl.C t:eruin ....ithholciing raxes to the IRS. trust-fund tax ooiiplion ... is alCJne ::;LillS-
......d pany holds th::lt prop- r~t! airline had not kent :ill uf the trust-fund cient to est::lolish the required nems be:-;;-~n
~ss the U'1J..Ste!! commiz.- :.J,.-';'-,'; in ::l se~g-ateci account. but had p:J.id a the 'amount' held in trust :md ti:e f:mci;,
in conveying the prop- .uo.~t:tIltiaj portion of the ta.'te:i out of irs paid." lei at SQ-O":. 110 S.CL at ''''''57.
:Seconrt l of Trusts ~ 2S3 _"t'nt:'r:1J funds. Tne tru3tef :J.uempted to
..., ScOtt £: \Yilliam F. :-t....·l'\·t:'r from the [RS :.ill oi the ta.,es paid S & S argue~ th:It Segler comp=s Lhe
. Trusts ~ :!33 (4th ed. .::.Jr::1l! the preference period. The IRS conclusion that the funds paid to the IPS i.'l
.• :l bre:lch of trust., when "~;UlllL'U tbt the ta.:"es paid by the bankrupt this case were fund.: held in ;;wtu.or:; c-..l.S:.
'.0 :J l:ontT:lct \\ith ;j third "r11piu:,er were never pro~ny of thE nebtor. Hawever, the holding of Be[J1~r is not e.:.:-~:,.
is tr:l.nsferred La that out in...:teOld were funds held in trust for the ly appiica'ole to this case becau:;;e .nis C2.."<:!
. - 2r-:ltion of the conrr:act : (\~ pur;;uant [Q LR.C, ~ 7501. Cnder com- does not involve :i debtor ·....;olunta,;,]y P<i:·-'~'lg
... ..:..
-: c: 1st unless the con- g :nun b\\' principles. the IRS \\"oo1d h:Jve been its trust-fund ta.-.: obligation." ld.:it 66. 110
'':<%/
_L tr.:J.nsferred funds .~ ,-umpcIled to crace the funds it W<IS paid back S.CL at 226, (emphasis added). In.s'-2ad.
,~
:.1 t~.l' urib'1naJ 01.J5t-fund taxes \\ithheld from Taft was paying the ta.': obligation oi a :]-';"-d
::-.~. dl1ployees' pay. Howe\·er. the Co~ pany pursuant t.a a contr.1ct. S & S 2:'~';25
S & S rioes not contend .. ('\~r""l'd the legal ch:u-:lc:teristic:s of :l statu- that the fact that there WdS an intermeGia.r::
-e:Jch uf tl1,lst hy can. '..r:" ·.:"J,;t m;J.y be delineci by CongTess in Ol in this t::L5e i5 not :l 6igniiic:mt /!ifi'2renC!; c...::ci
axes to Tait :.IS consid- "-:.I~' tr.:.Jt is "r.J.CiicalJy diiTer-ent irom the com- that the rule of Begier still appli~e:...-once :.':e
i co to pay S & 8'5 tax ::11J:1-i;l\\' par:ldigm." ~96 C.5. at 62, 110 funds are paid to the IRS. they are COD!:::;-
Olppropriate re- :-:.LL :it ~fX. The co~ note<! that. con- sivel)' presumed to have been the O'USt pro~
.rnpt La show that :.-.l.r~.. to common law tnlst5.. § 7501 created :l en:}'. However. the fact that the debtor ~
art for the tnnsferred :J'"-C't in the amount \..ithheld. not in the this case is a third parry to whom trust-f:mci
-ust, Vv'hile two uf Taft's -".'"lu~ properc:; withheld. It concluded, ta.,,:es were conveyed 2.S conside!'2oon ior a
'e their trust-fund ta;t :..":~relore. that 'Congress had intended to ab- contr.l.Ct is of paramount impor.A!lce .
. gated :lccount£, S & S ~L":Ile the strict common law requirement
,; did noL Instead. Taft :h:.Jt the put::ltive crust funds paid to the IRS The exception to the common !a~ ~i:
i J11 of the funds it "f" rli.r-ectly traceable to the actual dollars ment of b'usts elabonted in Begier. ~ i:J.E-
he funds as its own ·.l~:.hheld from the employe->..5. Instead. the tilled by the language and purpose of § :-.:>01.
:0 its operating ex. Court 6uted. Congress intended that U[t]he However, these factors do not requLr-e ~e
.unds for its own mur..~ :-;hould permit the use af reasonable e:tcepaon to the common law tha~ S ~ ::: i5
Icier ordinary princ:i- :L"'''umptions under which the Internal Reve- seeking in this case. The St2.CUtory lan~~--e
~ ,lOt hold the funds in 'u~ :-:~nice. md other ta.."Cing authorities, can clearly indicates that the s:.<!tmory t:".:.5' :s
cis were property of the ,L-~On."L-;He that the amounts of WIthheld created far the benefit of the IRS. not :"::'e
• t3.X. payments were '.:I.'1:L"; ;lr[~ still in the possession af the debtor t.a.',:payer. See I.E..C. § 7501. \Ve 5r.O:LC
,~ :~I.: Cllrnmencement oi the case." ld.::It 65. not. therefore, easily impure to CLlngn,;.;: -"-:l
h cn:dilor 10 rc:cci,·: mo~ ........'. IruSl fund.! wcre held in a bank :Ie count. :lrT:Ulgcd 10 h"ve some of the cOn5lnlClioc :'=
lould receive i{- 'i .;. S ::IpP::Ircnth' contends th:ll placing trUSl paid dirl:Cuy 10 thc bc:nellciarie.s, rnthc ~
:;U" UJ'lde:' chapler j of lun~ In a b=k: :lecoum is l:!Iuiv;Uen~ LO paying h:l\'ing the funds pass through the contr:lcw.-,;
UUI lh" funtLi 10 a third parry as consideration for :Icc:ounts first. Tne issue beforc the eow-:. ....=
'laJ nOl been mad~: and .a ClJntr:1cl. Ho",cyc •. dep<Jsiting trust fun~ in :l ",hcther ieder.ll bankruplcy law would re-cop;-
- -cived paymenl o( 3ueh b.uJ1-. :lCeounl IS nor :l tr-:lnsfer of !IUSI propcny 10 a SellC·law s t:Il1J tor,' trU.Sl. The cour: held .u a
vidcd by rhe provisions .. third P:l~' within the rnc:lt1ing of § 2BJ of thc m:1tlcr of fedc:r.1l Ia'",· that funds in stale-cr--~
~1"tem"nL sONlOry trusts "'cre: nor property of the d~D1'
S 61 S :lbo relies upon Sdby \'. Ford .'vl%r Co .• wlCier li 5':71bl. [d.:lt 647. It :llso impli-=th,
~90 F.ld b~1 Ibth Cir.t979J. But ~lby did nOt held that. :ll :a. m:lller of St.;lle l:1w. the rna<>o:""
. ordinary principl= of paid lO the sUbcOntr.:lClors was propcl'tV UUI ~
un"'!-'e monev =nsfern:d bv the SUWtOl"V trUSl·
m:lin tJUst funds I:Yen
J \ ; .... lcnnecJi:lry. citing
<T In '" lhird p:lm" =
Inste:ld: the inv~lved ::I
!.l:ehil!an ,t:llUlC' .... hich sl.:Or.ed t1ur :Ill mone)'
COnlr.JClor held in :I slale-I""" Sl::lNIOr:v
. The coun did TlOt cDnsider whether the be: ::=':'1
=
10 Firsl AmrncQfI
~"j ,"10 ::t bUIlding conU':1CI fund ""~ 10 be held Ihe: mon"y W:l!i ne,'cr paid directly 10 the SON:'>-
•. 7-I.U I 2. I 99 I .., tru.'l for (.he: owner of the building :tnc! the ry lI'USl<:e deprived Ihe funds of their St:1N~'
In both th~ "'Ubconlr.>ctOr.i. In Seltry. the ~ontnlcu>r trust narus unda the Mic:hig:m saNle:.
nn011A
:!90 5.i FEDER:\L REPORTER. 3<i SERIES
intention t(l :1.ller tb~ rommon bw I)f t.'"U::it.s rii.~tric~ cour: erred in j:;."aIltinl; the motion to
"'ht;>n doin~ :oil
would nol ma tC'r.aJI,1" further dLSrniss,
the interest.; IIf the ben~llc:l:lr:> of thl:' ~[;J.lUte,
:-';UI' ~hullJu e..'\lenJ the holuing in BI'11I'

\\'f
III
,'r mure bro;ldly In:Lr\ i.; n~e::~:lry [0 aecom- [51 Tl\~
::rust.ee :ilio :lopeals L~e d~O'iC"_
pli:'h f[.:i rLL'"PIl,;e~ \\'ot:'n dOIn!; "0 neces5arii:: court's rier~
of tile tl""Jstee'; motio;; ior pa;-.
underml!1e:: rile Bankmp[(:y Code's core tl:..U ~umm:u-:, juOgmenL P~lr.e=- th:l!1 arl-
rnnC:lple of equJ.lit~' of dislrihution :unung dre~s the mt:'rits of th~ portion of the appeal,
creditor;;. In Bl'rna, the ClI\tri, (uuno :10 S & S mt'~iy :tr!!'Ues th:Jt thi.> court lacks
exct:'ptibn to the common l:.tw u( tnt:iL, W;15 jurisdiction iO re\le\\' ;1 cieOla.i oi ~urnmi:L-"
nece~sar:.· to effectuate the cun~:::;illnill in- judgment.
tent that the IF.S not be depri\'ed of funn::
th:Jt h:Jri heen 5pecific:illy \\ithheld from em- (6.71 1n general. the denial or" a motion
plo,vees' pay (or the e.'1lre5S purpose of p::ty- for surnm.:lry judgment is not a iinal artier
ment to the IRS, Han the trust-fund t:1..'(es ~ince the c\lnsequence of the denial i5 thaL
heen c:on~iderecl property of the oebtor in the cJ.Se \\ill go to m:.ll. Ordin:ui.ly. re\ie"..
Bp,qirr, the TRS woulcl h;1ve been compelled of ::uch a denial is sought through an inter-
to !"ec:ei\'E flani:J..! n:.t~ml'nc of t~e t~lses flue ll)cutory :.;:,?€,aJ. H owe\-er, ',\'he!1 i:ltl'rlocu-
like all the othl:'r t'reti i tor.; , HOWe\'Er. when tory i1pp~:i ~ nOt [;lken. :.l rienia! of ,:urnm;u-:.·
the bankrupt rlehtor is J thin; part~' and the juclgrnent :...~ re~;ew:l.ble upon erll:r~: of :! final
employer rem:tins ;;oh·ent. the concerns of judgment. .I,{omn ['. Aetna L~fr: In.!, Co..
Hegier dissolve. Tne ability of the IRS to ::\72 F 2d .~. :lOO--O1 19th C:r.l989L While
collect the ta.'(es owed- by Till's clients is WE will often decline to engage in the '"?Oint-
:iimply nOt impiic:lted in this C:lSe. S & S less ;lC;loe;.-':c e:'Cert'!se" of !"';?\ien1~g ;l cienUl
:lnd Tili's other clients remain liable to the of SturUTl:J.::' judgment :lfter a c:ial on the
IRS and. as far :IS we know. :rre financi.:illy merits. LraTL 1'. City and COILllty oj Hon..oi1J·
able to make the payments, The IRS \l,ilJ be in %.'3 F..:2d 1167. 1169-70 (9th Ci.r.19~).
::tole CD coUect the !2..'(es owed to it regardless such ~ C':L"-e is not presenred her£. ,;
of whether the ~tee is :lble t.o avoid Tail's There J.re no disputed i:;,iues ot rnar.e.riaJ
bst-minute payments on behalf o( some of its fact." Vie have held as a matter of law tiu.t
creditors. :Y10re imporu.ntly, the money re- if S & S :r:J.I'.5ferre d i t5 ~ [.I1lnd ta.,'( e.s 1.0
turned to the e.st.:lte waugh the :lvnici:lnce is Taft \\'iL~om ~quiring Taft to hold. L!lose
mon!:!}' th:.lt c:m be p:l.id to the other creditor- funds in tc.:.5l.. the tnl:ite~ may reeol'e:- from
employe!"S anu us!:!o to pJy thetr out.::itanciing S &: S the funds p:tid to the IRS an 1[3 behill
t.:L~ obligation,;_"
during- the preierence period. S & S disa-
\'o\\"~ :my a.tternpl to shoH' t!:.:.tt L-:utSier af
In sum, Begier does not :.tddress the cir-
funds cre-ar.ed :my common bw truSL Then:-
t'ase, In the absence of
cumSUlIlCE:; Dl tJu,;
fore, pa..r-al summa.ry judgment should be
any clear ~licy reason for extending Beqier,
we apply the common bl.w of t.rlu!t5 am.! hold entered in favor of the LrusL."':. holding t.b.a!,
that the funus paid to the IRS on beh;t![ of S the funds paid to the IRS Wet': the prop"~
of the ue1Jt.or under § 5-\irb). ._~
& S were not held in st::ttutary trust :lnd.
thus. th!:! payments ~e avoidable unuer 11 The fumet c.:OLL.""t's dis~ of the c:om:
U.S.C. § 54ilbl. Therefore. we hold that plaint is REVERSED, Upon R£~;
. !-:
.5. Nor doe..:! rJ,i.. ~,...., invelv" :In ;:11l~mpl by !.he some oLbcr clie:nt·~. were pJ.iJ jWI heron: lbi
1rU~lee 10 ~ov"r payme:nl from the: IRS, w" banJu-up""Y p!:lilioo "i=U fib.!. ,.
n=L1 '10\ dc.:id". therdore. whclhe:r the poli<:y ~ "
<:on,;"m~ anim:llln~ nC~lcr would forbiLl Ih" 6. 5 6.: 5 ;osscn.:; in p:u"inS UuL Ih",." m:ly ~
tr'W:Lc:e !rom collecting Ih" avoided pl&yTnenL:< U l:>etlU.! d..i.spule aboul ~ Ii.< S'~ ability Ie ~
from the IRS "'Iher than frem S I.L 5, IMlelld. th" Fund;s through T:lfl'! accounu, SiJ:u:,e,'.tI
we only nc"d 10 decide whether S & S j, 10 holt.ling d<x:! '101 ucponJ on .. he:thcr nu:l:!'''!
n:""i"o pn::fercnli"l Irearm"m .imply be:.:"UJ<- of lr.1dng is po!.ibl" or no I. ilJ\Y such la"tual ~
'----------- ---'I.hh£clfo~l"l[!!!.u'.l.ilD'!'us~""'c:."ei!id!'c'..!:n~l_.!.th~a~l~i'='-"'--la~1=_
.."S~.~r~D~lh~...:.'"r_'lll'ha~n'_ _ _.I=p~u~I,,~u not material. ' .-_;r.r.;,
'',I
"
,
u.s, v. VER.'fERS 291
CII. Ll 5J FJ<I ~I I lou, Or. l"~l
7" "' ••
~ the motion b) ''J.i~ ::r ,\i...;[..nc t rourt sh:ill enter pnrciaJ summ:l.~· 1. CriminnJ Lnw C'>113!l. 1l·I-U3(:l.. ~ 6),
._.-.~ };:-', ,u.iJ[m~nl in 1:J\"or uf the truS~, 1159.2( 7}
.. .t;".
".! •
In determining sufficiency of evidence.
coun re\iew3 record de no.... o and :lSks only
whether. uking evidence. both di.rect and
;pe:ll.s the ~--:~
. ,....
mouo n (or ~- '.;Z
,; c.irt:umstantial. together v.;th reasonable in-
ferences to be drav,n therefrom. in li'iht most
Ither than ad-~t fa'·ol.lble to governmenL re:J.SoTl'lble jur:-'
-,or. Ilf the appeaL ~:: rould find defendant guilty beyond re:l.Son-
this COUrt ~ ~ble doubt.
aJ of 5; .j ~. Drugs and ~arcotics C:07::l.1
.. ,p' r;';ITED STATES uf Amenc'l... To support con\;ction lor posses.5ion
Plain tiff-A ppell ee.. \\;th intent. governmen::-mu,,;c prove kno~\ing
-(
possession of controlled ;;uDst:Jnce \\;th intent
\'.
to distribuLe. although possession may be
L"lJ"tlan F, VER:'ffiRS. Defendnnt- constructive rather than actual. -.J
Appell::Jnt. 3. Drugs and ~arcotics C:O'j3_1
In order for indi\iduaJ constructively to
l:;ITED ST_-\TES of .-\.merica. po~sess prn!1erty. he must kno\\;ndy hold
P1:lintiIf-AppeJl ee, power .:md ability to exercise dominion :md
concrol over it.
\'.
-I. Drugs and ~arcotics c=>73.1

CUe-lUIinia VER:-rERS also known as
Guessinia Holland, Defend..ant- For purposes of comiccon of possession
Appellant. of narcotics. -constructive possession" is dE-
fined as appreciable ability to guide destiny
~os. 9-h'i029. 9-h'i030. of the drug.
See publication Words and Phr=
l'niLed St:Jtes ColU"t of Appeais. for other judici.J1 constructions :IJ'Id def-
Tenth Circuit. initions. '.
5. Drugs and ~arcolics C:OI07

April 11, 1995.
Jury could re:lSor.nbly infer that defc!l-
dam had constructive po55ession or' cocaine
fOllIld in his former bedroom and kitchen.
o.~ll~ncbnt :lI1d his mother were com;ct-
despite testimony that he no lon~er slept at
~ .:1 :.i;e l' niteci St:JLeS District Coun: Cor the
residence. in light of e\,;oence that he contin-
''·In.!".crn Di...;trict of Okl:iliuma, H. Dale ued to keep his posse~sions at residence. had
. -... ,t. J... ,1' \'molCi drug olTenses. and they
dominion and control o\"er bedroom. and had
~~(-d. Tne Coun of Appe:J..l.s. McKay, unfettered access to kitchen.
t:J'nlJl .Judge. neld that: (l) e\;dence sup-
I.anttJ defend:L1lt's conviction for possession 6. Drugs and N arcotic:s Q;;:> 123.2
r.!.h I1ltent to disaibuLe; (2) evidence that Testimony that amount of coc:Line reco\'-
1bo<.<.h'' T' \l,";J,,:; aware of presenc!! of drugs in ered "'-as in e."tcess of amount which might be
b.-r horne .....ould support aiding and abetting possessed for per-sonal use supported finding
~i.ct.inn but did not show intent to distrib- intent to distribute, when coupled \\;th pres-
~; f:J) e-\;dence did not show that mother ence of scales. razor
blades. guns and ammu-
~~n~ home for pw-pose of drug manu- nition. large amounts of c::lSh, and notebook
~1Jrinl:': :l1ld (-ll mother W:IS not entitled to in defendant's bedroom.
~l:"C.
7. Dru~ and Narcotics c=>73.1
!
Am-e" - Hi U 11l'
part, reVEr-sE d Ul
. par... an d Defendant's mother could not be eonvict-
~Ied.
,d ,r po...",i" with in",", " distri~~ f\ 1 Q ~
p I;L E D
1
FEB 1 91993
2 UNITED STATES DISTRICT COURT ,.... .... ,
1~:~;:'AR[lII.' t'·· ...
I' t· I • ':'. I: J :~. ...
NORTHERN DISTRICT OF CALIFORNIA fI,'Or,"l/-c;w, D:STfq" .~> ""U'~'

3 . ' .. , !:.;IN [)/STiJI;.·,j.-~:- .>~{ '.. \
"./ .:; ".~. ·F.. .
•. '-' t..:RN!
4 IN RE ) No. C-92-2996-CAL
)
5 HAMILTON TAFT & COMPANY, et al., )
6 -----------------)
)
7 AND CONSOLIDATED CASES )
-----------------)
)
8
FREDERICK S. WYLE, Trustee in ) Chapter 11
9 Bankruptcy of HAMILTON TAFT & ) No. 91-3-1077 LK
COMPANY, ) Adv. Proc. No.
10 ) 92-3-0057 LK
Plaintiff, )
)
11 v. )
)
12
S & S CREDIT COMPANY, INC., )
13 )
_0 Defendant. )
14 -----------------)
02 r/;1.3. °3
• \ t; .!.-_
--' ...:..
::::: l.L- 15
-:"'::J ORDER OF AFFIRMANCE
'.I)
.:..1 16
-0:::
I-- Plaintiff and appellant Frederick S. Wyle, as trustee
~<
I- 17 in bankruptcy of Hamilton Taft & Company, appeals from a
18
jUdgment of the Bankruptcy Court. That jUdgment was entered
19
on June 22, 1992. The judgment dismissed the complaint and
20
directed that judgment be entered for defendant. The court's
21
reasons were set forth in its findings of facts and
22
conclusions of law, filed on June 17, 1992.
23
This appeal was briefed, argued, and submitted to the
24
court for decision. The court has reviewed the record in the
25
bankruptcy court, the briefs and arguments .of counsel, and the
26
27
28
000150
~J~l- E: D
1
FEB 1 91993
2 UNITED STATES DISTRICT COURT :~:t· ...4RD 'l~!
\','; _.... ,..
.,. I:
3 NORTHERN DISTRICT OF CALIFORNIA (I,'Or;"'l/J;.;::;'

. ' .. , "c\N
-.
U:Srfi'l'"
[J/t'7' .. , i~;:.:.
I
C.E""'~'
tJ J:!~'.' ..:... ~- . - l /
' .. \
4 IN RE ) No. C-92-2996-CAL
)
5 HAMILTON TAFT & COMPp~Y, et al., )
6 -----------------)
)
7 AND CONSOLIDATED CASES )
-----------------)
)
8 FREDERICK S. WYLE, Trustee in ) Chapter 11
9 Bankruptcy of HAMILTON TAFT & ) No. 91-3-1077 LK
COMPANY, ) Adv. PrDe. No.
) 92-3-0057 LK
10 Plaintiff, )
)
11 v. )
)
12 S & S CREDIT COMPANY, INC., )
)
13
Defendant. )
14 --~--------------)
~
-=?
u ..... 15 ORDER OF AFFIRMANCE
II)
~
:u 16 Plaintiff and appellant Frederick S. Wyle, as trustee
-cr::
~« 17
l-
in bankruptcy of Hamilton Taft & Company, appeals from a
18
jUdgment of the Bankruptcy Court. That jUdgment was entered
19 on June 22, 1992. The jUdgment dismissed the complaint and
20
directed that jUdgment be entered for defendant. The court's
21
reasons were set fDrth in its findings of facts and
22
conclusions of law, filed on June 17, 1992.
23
This appeal was briefed, argued, and submitted to the
24
court for decision. The court has reviewed the record in the
25
bankruptcy court, the briefs and argurnentsof counsel, and the
26
27
28
000150
J
·.,
1
2 applicable authorities, and concludes that the decision of the
3 Bankruptcy Court should be affirmed.
4 The complaint seeks to recover for payments made by
5 Hamilton Taft & Company to the Internal Revenue Service on
.6 behalf of defendant S & S Credit Company. The complaint
7 alleges that the payments were preferential payments within
8 the meaning of section 547(b) of Title 11 of the United State~
9 Code.
10 That section requires that the trustee establish that
11 the transfers were the property of the debtor. However, this
12 court believes that the plaintiff's complaint and the
13 Bankruptcy Court t s dismissal of it, are governed by- Begier v.
14 Internal Revenue Service, 496 U.S. 53 (1990). The decision in
15 Begier controls the facts and the result here. The payroll
16 taxes withheld by defendant, and paid by Hamilton Taft to the
17 Internal Revenue Service, were trust funds pursuant to section
18 7501(a) of Title 26 of the United states Code and were not the
19 property of the debtor. The distinctions for which plaintiff
20 argues between this case and Begier do not change the
21 application of Begler to this case.
22 The complaint was properly dismissed without leave to
23 amend, because the alleged payments were as a matter of law
24 not the property of the debtor, and no change in the
25 allegations which might be made by plain~iff could alter the
26
Order of Affirmance
27 No. C-92-2996-CAL -2-
I
28 000151
I
I
;
;
! 1
result. The payments were as a matter of law funds held
2
trust for the Internal Revenue service and were not the
3
property of the debtor Hamilton Taft & Company.
4
The judgment of the Bankruptcy Court is therefo
5
affirmed.
6
Dated: February ~, 1993.
7
8 C-~ (c J--:r-.
CHARLES A. LEGGE u (.)
9 UNITED STATES DISTRIC~
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
·25
·26
Order of Affirmance
No. C-92-2996-CAL -3-
,27
128 000152
IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
No. 93-15455
IN RE: HAMILTON TAFT & COMPANY,
Debtor
FREDERICK S. WYLE, TRUSTEE,
Appellant
v.
S & S CREDIT COMPANY,
Appellee
ON APPEAL FROM THE JUDGMENT OF THE

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
BRIEF OF THE UNITED STATES AS AMICUS CURIAE

ON PETITION FOR REHEARING
On May 23, 1995, this Court invited the Government to file
an amicus brief "addressing whether the opinion filed in this
case, In re Hamilton Taft & Co., No. 93-15355 (sic], slip op.
filed May 2, 1995, adversely affects in any way the interests of
the IRS in collecting federal taxes." The following brief is
submitted in response to that invitation.
STATEMENT
The case is an appeal from a District Court jUdgment
~ffirrning a Bankruptcy Court's refusal to treat a payment of
federal taxes as a voidable preference under Bankruptcy Code (11
000154
- 15 -
CONCLUSION
For the above stated reasons, this Court should grant the
petition for rehearing and affirm the jUdgment of the District
Court affirming the Bankruptcy Court's judgment insofar as it
re~uses to treat payments made by debtor for S & SIS trust fund
tax liabilities as voidable preferences.
Respectfully submitted,
LORETTA C. ARGRETT
Assistant Attorne General
c:::J-- . I~) / ' I ,/.' _ _
_. l.L L--rt /\.. - {-fl. L-L-I L/i' I;:' d
GARY R. ALLEN (202) 514-3361

GARY D. GRAY (202) 514~3005
PAULA K. SPECK (202) 514-4329
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044
Of Counsel:
MICHAEL JOSEPH YAMAGUCHI
United states Attorney
AUGUST 1995
000155
Page 3
68 F.3d 337 printed in FULL format.
IN RE: HA1vfILTON TAFT & CO.• Debtor. FREDERICK S. WYLE, Trustee in Bankruptcy of Hamilton
Taft & Co .• Plaintiff-Appellant, v. S & S CREDIT CO., Defendant-Appellee.
No. 93-15455
UNITED STATES COURT OF APPEALS FOR TIrE NINTH CIRCUIT
68 F.3d 337; 1995 U.S. App. LEXIS 28742; Bank!. L. Rep. (CCH) P76,492; 95 Cal. Daily Op. Service
8031; 95 Daily Journal DAR 13763
October 12, 1995, Filed
PRIOR mSTORY: [>icl] D.C. No. CV-92-Q2996-CAl... OPINION: ORDER

The Court is advised that the case has been settled.
Original Opinion of May 2, 1995, Previously Reported
Accordingly, the appeal is dismissed 2.S moot and the
at: 1995 U.S. App. LEXlS 9848.
decision fued May 2, 1995, appearing at 53 F:3d 285,
is vacated.
nJDGES: Before: William A. Norris, David R.
Thompson, and-Stephen S. Trott; Circuit Judges.
000137
37
1 guess we can deal with it in that regard when it comes up.

2 THE COURT: I think one other comment, I am concerned
3 that you attach too much significance to this Ninth Circuit
4 decision which reversed my -- 1 / 11 call it my "tax decision. II
5 I think you should bear in mind and {houf} that that Ninth
6 Circuit decisionsa I am talking about in re Hamilton Taft,
7 53Fed3rd285a
8 Now, the Ninth Circuit said I was wrong in precluding that
9 the money made by the client in the Hamilton Taft therefore
10 then became a trust under united states Internal Revenue Code,
11 the 501. So I was wrong. But I don't think that answers the
12 question of there being a trust relationship between Hamilton

13 Taft and its clients because that was the 7501, the Internal
14 Revenue Code section dealing with the relationship between
15 Hamilton Taft and its holding funds vis-a-vis the IRS even
16 though they could mingle; and, therefore, those funds were not
17 a 7501 trusta
18 I don't think that means that there could not have been a
19 trust relationship between the customers and Hamilton because I
20 can give you money -- say, "Mr. Hanson, I am trusting you, you
21 are my trustee. Okay, you take my money. II For some reason you
22 don't comply with some other statute of the IRS, the IRS comes
23 in and grabs the money. I don't that affects the fact, or
24 upsets the fact, that you and I had a trust relationship. Or,
25 more particularly, in case a relationship where you owed me an

38
1 obligation not to defraud me.
2 MR. HANSON: And in that maybe is something excluding
3 important we discuss now what Your Honor's idea of what the
4 scheme defraud would entail. {teut} {poegs} {tf} defendant
5 Fowles that the trust relationship, however that might be
6 defined, cannot form the basis of a charge under the relevant
7 statute here unless there were statements made by the
8 defendants to those individuals from whom they receive money
9 indicating that the money was going to be used, spent,
10 whatever, in a certain way.
11 THE COURT: You may well be right.
12 MR. HANSON: Well, I think, Your Honor, whether it
13 comes down to this, if somehow that is not the case, then I
14 think we do have a problem in terms of how the case will be
15 presented to the grand jury. If the government stands and says
16 there were no specific promises made by the defendant to the
17 individuals here as to what would be done with the money when
18 it was delivered. But, none the less, {hrpblgz} you may
19 presume that there was some kind of trust relationship which~·
20 prevented the defendant Armstrong from spending any of the
21 money that were put in the corporation coffers for parties.
22 THE COURT: I would not think that would constitute
23 the elements of the crime.
24 MR. HANSON: I agree.
25 THE COURT: But if come in and say that Armstrong or

39
1 Fowles went to who was it {tped} and stated U{upb} {euf} and if
2 you put your payroll money with me and I will take your
3 payroll, I will pay your taxes promptly and on time. II Now

4 that, of course, could be a breach of contract.
5 On the other hand, if there was never intent to perform in
6 a {tkpweupgb} that could be criminal fraud. I think that is
7 what the government is trying to prove.
8 MR. HANSON: So the question becomes, if the
9 government----says -- and it would be argument -- let's say in
10 opening, that use the terms {tke} {sregs} let's use the
11 {tkpafrpl} which was used by government counsel a few minutes
12 ago about the {shreupbg} {aeug} as he put it, I am not so sure
13 I understand now the relevance of what such evidence would
14 show, {aur} absent some greater explanation by the government
15 that our clients were under some affirmative obligation not to
16 spend money which they received in a fashion such as some
17 corporate party, and if there was a genuine "trust obligation"
18 that might be broad enough to say: Well, you couldn't spend it
19 on a corporate party; then we are going to run into problems
20 because I keep corning back to the proposition that if the Ninth
21 Circuit, as I read the case, essentially says that there was no
22 such genuine trust, then this case has to {khrats} into what
23 you just explained.
24 THE COURT: Misrepresentation.
25 MR. HANSON: Misrepresentations, and unless the

40
1 government can point out there was a specific misrepresentation

2 undertaken by our clients, evidence of other activities, would
3 that--
4 THE COURT: We have the diversion counts, and the

5 payment -- late payment of taxes counts, and the cover-up
6 count.
7 MR. HANSON: And--

8 THE COURT: But what I am -- all I am saying is: You
9 can~t corne in and say because of the Ninth Circuit decision
10 there is no trust relationship between the customer and the

11 corporation. I don't think the Ninth Circuit decision says
12 that. If you are saying the government has got to prove
13 misrepresentation to the front-end and get the money indoor
14 under misrepresentations, I agree.
15 MR. HANSON: Okay.
16 THE COURT: For those counts the ones involved in

17 getting the money indoor.
18 MR. HANSON: Let's assume the Ninth Circuit decision
19 {pwpls} {eur} which is, if its been {srrs} essentially,
20 certainly stand for the proposition that we had some
21 affirmative obligation to do something with the funds, that is
22 to keep them a certain place or --
23 THE COURT: I think just assumes the fact that you
24 did not, you, the corporation
25 MR. HANSON: That is all I would --

41
1 THE COURT: -- assumes the fact the corporation did
2 not all based on fact the corporation corne in
3 MR. HANSON: So that is the only {prop} {roeugs} so
4 there is {tpo} implicit promise made by our clients to the
5 investors, or whatever, about what to do with the money. That

6 is all I want, and if there are no implicit {eupl} promise the
7 government can rely upon in terms of good faith management of
8 the money, then the government is obligated to show actual
9 misrep~esentation.
10 THE COURT: I don't know when you get -- certainly to
11 me {tru} {o} the front end {kts} counts call it the crimes
12 charged getting the customers put motion in once you get to
13 diversion counts, or how the money is used. I get --
14 MR. HANSON: I am not sure. It's needless to say I
15 am in the position we all are of as the government begins to
16 present its opening statements, to be howling about something
17 is going to come in and objectionable because of the relevance
18 is something will have determined prior to at least the opening
19 statements.
20 THE COURT: Well, it could be. I mean, you want more
21 in this motion. I can't say you won't, but -- what is our
22 trial date?
23 MR. HANSON: November 18th.
24 THE COURT: You've got time. All I am trying to tell
25 you is that, just don't use this IRS {srrs} this decision by
42
1 the Ninth Circuit as a holding {tphros} trust relationship
2 between the customer and the company; I don't think it says

3 that.
4 MR. BROWN: We joined Mr. Hanson in defendant Fowles'
5 in omnibus motion just to have brief comment. I listened very
6 carefully to what the court said and I appreciate the court's
7 comments. I would agree that at some point pre-trial we are
8 probably going to need some further clarification. I don't
9 mean to belabor this, I am concerned that there is going to be
10 a witness on the stand and the question is going to come up.
11 THE COURT: Let's take a few minutes right now and

12 kick a little around. This is not with the idea of rUling, but
13 maybe assisting us all now on what I call a front, counts 1
14 through 3 dealing with tax process allegations, and 4 through 6
15 the tax service agreements. I suppose that your government's
16 contention is going to be that there were representations --
17 misrepresentations made to the customer to bring the money in

18 and sign these agreements, and it was done with criminal intent
19 never to perform -- so it's going to be a fraud, a
20 misrepresentation case, right; is that right?
21 MR. HARDY: At least; yes, Your Honor is correct.
22 THE COURT: So, I think we understand. What about
23 the diversion counts? Now I assume you are going to show they
24 didn't keep the money that Armstrong took out the door and used
25 it in other ventures?
43
1 MR. HARDY: Your Honor, basically, through the
2 diversion, the government would be showing the existence
3 {poeps} {eu} schemes that monies were being removed and spent
4 at a rate they could not be replaced, and expenses were taken
5 out with the intent to repay them.
6 THE COURT: So, the customers' money was taken by the

7 corporation, or by the officer of the corporation, out of the
8 corporation funds -- out of the corporation under circumstances
9 which we infer what {tpho} {oeublt} to use them for purposes
10 {tpheu} {tkphapl} the front door.
11 MR. HARDY,: In essence, shows theft.
12 THE COURT: That theft -- okay, theft is a simple way

13 to phrase it --
14 MR. HANSON: The problem you are --
15 THE COURT: There get trust {kwe} corporate money

16 corporation their own money they were stealing. The only
17 people who has th~ right to complain about it are the
18 stockholders. I guess Mr. Armstrong was a sole stockholder, or

19 is it stilk somebody else's money? So we may get into the
20 trust question. We are going to get into the trust issue; what
21 do you think?
22 MR. HARDY: I think I -- Don't you need to {kabg} it
23 as trust? I think everyone if you call it an obligation, they
24 enter into obligations to pay certain taxes and to do certain
25 things, and they in fact went about a business which did not
44
1 involve doing that. They, in fact, stole the money by using it
2 for purposes other than the payment of taxes; and we were in no
3 position to replace those monies whatsoever. It's a trust in
4 the literal sense, it is still a theft~ It's a taking --
5 THE COURT: That becomes a question when it's their
6 money. Now this case, the Ninth Circuit said this was not the
7 IRS money. Okay~
8 MR. HARDY: Even by the contract it's not their
9 money. They are entitled to the use of the money pending
10 payment of taxes, but if the sole purpose of their getting the
11 monies in fact the payment of taxes, and in fact the money is
12 spent for purposes other than payment of taxes, it is no longer
13 available for the payment of taxes.
14 THE COURT: That {togs} front end {koepbts}, doesn't
15 it?
16 MR. HARDY: It {ogs} the {hraeuts} count as well,
17 Your Honor. Is directed to divide into discrete crimes. It's
18 ongoing pattern which I think defies the court's efforts to
19 divide it up, but the fact is: As time went on, increasing
20 larger amounts of money was taken for other purposes which
21 amounts to a theft. The money was taken without intent to
22 perform intent to take {paeubgs} is} was used for purposes
23 other than to pay taxes -- reach the point where payment of
24 taxes became unlikely as each new day came in was applied for
25 purposes other than what I {tkpweupl} to Hamilton {thras}

45
1 {thru} theft.
2 MR. HANSON: I think, Your Honor, {sreu} break it

3 down because assume for the sake of argument, there was no
4 up-front misrepresentation and they had the right to spend the
5 money as corporations have the right to {sreg} {ef} it.
6 Suppose those investments go belly-up? What is the difference
7 between the corporation heading toward bankruptcy as it tries
8 to invest its money in ways that will allow it to continue to
9 function and a criminal case in which they say: "Well, it was
10 spending the money out in certain investments and it could not
11 keep its prior promise,-" and that is where criminal cases and
12 civil cases become a {tkeu} to {tkeuf} {epbt}. I think to say:
13 tlWell, they were taking in money and because they couldn't pay
14 their bills and were headed toward bankruptcy that that becomes
15 criminal ll is simply not law. I think that is

16 THE COURT: Why don't we take this -- Say, you give
17 me your money to pay your taxes with but I put your money
18 elsewhere, use it elsewhere in order to pay taxes {wher}
19 {tkopb} I get some more money. I go to {ph} {pheus} {eu}
20 {hreus} {er} if you gave me money to pay your taxes I will pay
21 your taxes. She gave me that money, I don't use it to pay the
22 taxes. I use it to pay catch-up and pay {urs} crime.
23 MR. HANSON: Again, two issues, what did I promise?
24 THE COURT: That is {popbs} {eu} {khras}.
25 MR. HANSON: -- classic corporate investment which

46
1 is: You give me your money, Judge Legge, and I will put it in
2 the bank and I will pay you interest; and then I take your
3 money and I then go split it on some real estate investment
4 which I am pretty sure will give me enough money to pay your
5 interest; and then, somehow, those real estate investments go
6 bad and I can't pay your interest; and, so, then I continue to
7 try and keep my bank functioning by going to get other people
8 to invest money in my bank so that eventually I can pay the
9 interest lowe you.
10 THE COURT: What if I use your money to buy myself a
11 personal jet plane and take my wife on a trip to {kar}, things
12 like that?
13 MR. HANSON: Exactly right. So it {pwapls} {phats}
14 of {tkpwre} doesn/t it; which is to what extent can I
15 characterize something which the government tries to say:
16 Look, we/II say it's okay to put it in such and such a company,
17 but we now consider money being spent on a ranch in Texas as
18 being something which is clearly so frivolous or whatever that
19 that never be construed by a reasonable person to be an
20 investment.
21 THE COURT: That is a {skwreur} {kal}.
22 MR. HANSON: It may well be. On the other hand, it
23 may be a {hrel} {kal} on your part as to when that is relevant
24 at all considering what promises were set up front to these
25 individuals, {a-r} what point of fact we have

47
1 misrepresentations as what to be done, and whether or not
2 anybody can acquire {~aos} what they did with the money if, in
3 fact, they were otherwise trying to fulfill their promises.
4 THE COURT: Well, in other {popbs} {eu} scheme type
5 of investment what statute you follow {bgs} use what statutes.
6 MR. HARDY: Really {tpoepbs} case more often than not
7 mail fraud or wire fraud.
8 THE COURT: Just the mail fraud, wire fraud statutes?
9 Isn't there a specific statute bring in amounts of money for
10 purposes of saying the defendant's obligation to {pwfplt}.
11 MR. HARDY: It's simply another scheme to defraud.

12 MR. BROWN: Your Honor, there is a problem here that
13 I think is so essential to how the jury is going to perceive
14 this case. That is why I think we are going to need a

15 determination for the rUling this case, and that is, to a
16 jury -- and I say this because I know in the grand jury
17 transcript that we have been provided grand jurors asked
18 questions on one of the transcripts -- and I have it here with
19 me if you want me to read it. One of the grand jurors asked
20 one of the witnesses:
21 "How do you justify what Mr. Armstrong did when
22 he spending other people's money?"
23 At least that is how I see it., and then that --
24 THE COURT: {per} only assumes {seupbt} because you
25 are {tkhreupbt} was performing a financial service, it was

48
1 almost like a bank.

2 MR. BROWN: The Ninth Circuit says that he had the
3 use of that money; and, in fact, Your Honor, it was Hamilton's
4 money to use and to invest; and, as we all know, when he took
5 over that company there was {pweu} {sr} {kts} for 14, 18 or 20
6 million dollars of deficit in that company, and he had a
7 plan -- and it's not the only company that worked with plan to
8 try to make some investments that would in time mature and it
9 would cover that deficit.
10 Now, he did that with the money, now the government is

11 calling those IIdiversions. t1 They are making out as if the use
12 of those monies are kind of things where I am {pro} the jury
13 gets the impression they were other peoples' monies, the case
14 becomes a much more horrendous thing in the eyes of the jury.
15 In fact, they are a company with contractual obligations. The
16 ruling on this Ninth Circuit decision

17 THE COURT: Except that you did take the -- did take
18 some people's money now.
19 MR. BROWN: All the money was -- was tax money of

20 clients', but when it became -- when it got into Hamilton
21 Taft's hands, according to the Ninth Circuit, it was Hamilton
22 Taft's money to use as it saw fit.
23 THE COURT: Well, vis-a-vis the IRS. No trust was
24 credited that the IRS can claim.
25 MR. BROWN: They still had contractual duties. They

49
1 had to run the {tpwhus} reasonable fashion and they still could
2 be charged with misrepresentation if indeed there was
3 misrepresentation that I present. But as far as the use of
4 that money to pay expenses, I think the word "expenses," and
5 "costs,1I and "investment" are all within that Ninth Circuit
6 opinion.
7 THE COURT: {kwrao} if he -- taken in the money, and
8 invested it in CD's, during the period of a note, or government
9 notes during the period of -note, cashed it and made money on
10 the interest {spred}, no problem. That is what he was entitled
11 to do.
12 All right, so suppose he got out to the {tkeuf} type of
13 investment and taken the money and invested it in first deeds
14 of trust with 30 day maturity, if you can first deed of trust
15 with 30 day maturity fully secured, okay form of investment;
16 but you can get {tpurts} out that {kwrupl} on potential on
17 types of use of the money where you got to reach a point
18 eventually something has so bad it's absolutely fraud.
19 MR. HANSON: Didn't we do that criminal contract if
20 every time Wells Fargo, my bank, {thurs} on corporate parties
21 using my money, and our {sub} {all of assigned to claim that
22 when they promise to pay me interest and they are spending my
23 money for some kind of ski box down there at Giant's three com
24 park that I can charge them a criminal offense for representing
25 to me what they are doing with my money. I think we got

3
1 FRIDAY, NOVEMBER 8, 1996 1:30 P.M.
3 THE CLERK: CALLING CR-94-0276 UNITED STATES V.
4 CONNIE ARMSTRONG AND RICHARD FOWLES.
5 MR. SMETANA: GOOD AFTERNOON, YOUR HONOR, RONALD
6 SMETANA AND GEORGE HARDY FOR THE UNITED STATES.
7 MR. BROWN: GOOD AFTERNOON, YOUR HONOR, CHESTER L.
8 BROWN AND SOL WOLLACK ON BEHALF OF THE DEFENDANT ARMSTRONG,
9 WHO IS PRESENT IN COURT.
10 MR. SABELLI: GOOD AFTERNOON, YOUR HONOR, MARTIN
11 SABELLI ON BEHALF OF MR. FOWLES. MS. LEARY WILL BE JOINING US
12 SHORTLY.
13 THE COURT: ALL RIGHT. NOW WEIRE HERE FOR THE
14 MOTION BY THE DEFENDANTS FOR PARTIAL DISMISSAL OR FOR SPECIFIC
15 JURY INSTRUCTIONS, AND THEN WE ARE ALSO HERE FOR PRETRIAL
16 CONFERENCE. SO I THINK WE SHOULD, FIRST OF ALL, DISCUSS THE
17 MOTIONS FOR PARTIAL DISMISSAL OR FOR JURY INSTRUCTIONS.
18 NOW I HAVE READ YOUR MOVING AND OPPOSING PAPERS AND
19 OF COURSE THEY ARE SIMILAR BUT NOT IDENTICAL TO THE MOTION
20 THAT WAS MADE A NUMBER OF MONTHS AGO, BUT DO YOU WISH TO
21 ADDRESS THE MOTION IN ADDITION MR. BROWN?
22 MR. BROWN: YES, I DO, YOUR HONOR.
23 IN PREPARING, YOUR HONOR, TODAY FOR THE PRESENTATION
24 OF THIS MOTION, IT OCCURRED TO ME THAT I WAS THE THIRD
25 ATTORNEY THAT HAS REPRESENTED MR. ARMSTRONG, AND INDEED
DIANE E. SKILLMAN, OFFICIAL COURT REPORTER, USDC

4
I
1 THE COURT: AT LEAST.
2 MR. BROWN: AND I JOIN MY TWO PREDECESSOR COUNSEL IN
3 FILING A MOTION OF VERY SIMILAR CHARACTER AND NATURE, ALTHOUGH
4 THERE ARE SOME DIFFERENCES IN THE MOTIONS. IT IS NOT JUST A
5 MERE COINCIDENCE, YOUR HONOR, THAT THESE MOTIONS HAVE BEEN
6 FILED BY ALL COUNSEL BECAUSE IT GOES TO THE VERY ISSUE OF THE
7 DEFENDANTS' RIGHT TO DUE PROCESS AND A FAIR TRIAL.
8 ALL THESE MOTIONS HAVE AT THEIR CORE THE QUESTION OF
9 THE CHARACTER OF THE FUNDS AS CAME FROM THE NINTH CIRCUIT
10 DECISION WHICH INDEED WAS VACATED, BUT IT'S MORE THAN THAT,
11 YOUR HONOR. THE ISSUE OF THE CHARACTER OF THE FUNDS PERMEATES
12 THE ENTIRE CASE.
13 AND I TRIED TO THINK OF THE BEST WAY TO EXPLAIN THE
14 DEFENDANTS' POSITION SO THE COURT WOULD UNDERSTAND WHY THIS
15 MOTION IS SO CRITICAL, EVEN BEARING ON THE ISSUE OF THE RIGHT
16 TO A FAIR TRIAL, TO PROPERLY ADVISE THE COURT OF OUR CONCERNS.
17 AND AS I THOUGHT ABOUT HOW TO BEST PRESENT THIS, I
18 THOUGHT WE WOULD START WITH THE PROPOSITION --
19 THE COURT: LET ME PERHAPS SAVE YOU THE TROUBLE.
20 YOU SAY IT'S THE CORPORATION'S MONEY.
21 MR. BROWN: YES, YOUR HONOR. WE SAY, YOUR HONOR,
22 THAT THE CORPORATION HAD THE RIGHT TO THE USE OF THE MONEY
23 UNTIL THE TAXES WERE PAID.
24 THE COURT: OKAY.
25 MR. BROWN: AND WE BELIEVE THAT'S VERY CLEAR. SEE
DIANE E. SKILLMAN, OFFICIAL COURT REPORTER, UBDe

12
1 ASSUME WHAT YOUR SAYING IS TRUE. BUT LET ME ASSUME EVEN
2 FURTHER, I'LL SAY THAT THE MONIES THAT CAME IN, WERE HAMILTON
3 TAFT'S OWN MONIES, BUT AS LONG AS THE CHARGE IS THAT
4 MR. ARMSTRONG TOOK THOSE MONIES AND USED THEM FOR HIS OWN
5 PURPOSES, ISN'T THAT STILL A FRAUD?
6 MR. BROWN: HE HAD THE RIGHT TO TAKE THEM AND USE
7 THEM FOR HIS OWN PURPOSES. HIS DUTY WASN'T TO -- WAS ONLY TO
8 PAY THE TAXES.
9 THE COURT: THAT WAS THE CORPORATION'S DUTY. THAT
10 WAS THE CORPORATION'S DUTY.
11 MR. BROWN: YOUR HONOR, HE IS THE SOLE SHAREHOLDER
12 OF THE CORPORATION. HE HAD THE RIGHT -- AND THOSE ARE FACTUAL
13 CONTENTIONS. THE LEGAL
14 THE COURT: THAT'S WHAT 1 1 M GETTING AT.
15 MR. BROWN: THE LEGAL CONTENTION THOUGH, YOUR HONOR,
16 THAT'S GOING ON HERE, THEY'RE TRYING TO ARGUE AND PLACE BEFORE
17 THE JURY AN INCORRECT LEGAL POSITION THAT THESE ARE EARMARKED
18 FUNDS. AND WE ARE DEALING HERE, YOUR HONOR --
19 THE COURT: WHAT YOU REALLY WANT ME TO DO THEN IF
20 YOU CAN'T GET A DISMISSAL, YOU WANT ME TO TELL THE GOVERNMENT
21 THAT WHEN THEY MAKE THEIR OPENING STATEMENT AND WHEN THEY PUT
22 ON THEIR WITNESSES, THEY SHOULDN'T REFER TO THE FACT THAT THE
23 MONEY IS PUT IN BY THE CUSTOMERS WERE TRUST FUNDS?
24 MR. BRO\~N: THAT'S -- THAT WOULD BE IN THE FORM OF A
25 MOTION IN LIMINE, WHICH IS THIS IS CLOSE TO, BUT THAT IS NOT
DIANE E. SKILLMAN, OFFICIAL COURT REPORTER, USDe

13
1 WHAT WE ARE REALLY ASKING. BECAUSE TRUST FUNDS, I DON'T THINK
2 THEY ARE GOING TO USE THE WORD "TRUST FUNDS" ANYWAY. THEY'RE
3 TOO SMART TO USE TRUST FUNDS, ESPECIALLY IN LIGHT OF ALL THAT
4 HAS OCCURRED NINTH CIRCUIT OPINION AND THE LIKE.
5 WHAT THEY ARE GOING TO DO IS THEY ARE GOING TO CALL
6 THESE CLIENTS' MONIES, CLIENTS t TRUST MONI.ES.
7 THE COURT: YES, I KNOW. THAT IS WHAT I --
8 MR. BROWN: THAT'S NOT WHAT THEY ARE. THERE IS
9 GOING TO BE AN INFERENCE. IF THE JURY BELIEVES THESE WERE
10 EARMARKED, DESIGNATED RESTRICTED FUNDS AND THEY WERE USED FOR
11 SOME OTHER PURPOSE OTHER THAN TO PAY TAXES, THEY ARE GOING TO
12 FIND THE DEFENDANT GUILTY. IT IS VERY EASY.
13 THE GOVERNMENT CAN PROVE FRAUD IN THIS CASE IN TWO
14 WAYS. ONE IS THAT HE NEVER INTENDED TO PAY. THAT IS WHAT
15 THEY HAVE ALLEGED, AND THAT'S THE CORE OF THEIR FRAUD
16 ALLEGATIONS, AND THAT IS A FAIR FIGHT.
17 WHAT THEY ARE TRYING TO DO IS ADOPT A FACTUALLY AND
18 LEGALLY INCORRECT POSITION. I WOULD LIKE TO EXPLAIN WHY IT IS
19 BOTH FACTUALLY AND LEGALLY CLEARLY INCORRECT. THEY'RE TRYING
20 TO INFER SO THIS JURY WILL BELIEVE STARTING WITH THEIR OPENING
21 STATEMENT AND WITH THE WITNESSES WHEN THEY GET ON THE STAND
22 AND THE QUESTIONS THEY ASK AND THE WAY THEY ELICIT ANSWERS,
23 THAT SOMEHOW THESE ARE SOMEHOW RESTRICTED, DESIGNATED,
24 EARMARKED FUNDS. THESE ARE TAX MONIES.
25 TO A LAY JURY, WHO PROBABLY ALL OF THEM HAVE HAD
DIANE E. SKILLMAN 1 OFFICIAL COURT REPORTER, UBoe

14
1 WITHHOLDING TAXES TAKEN OUT OF THEIR PAY, THIS JURY -- THEY
2 ARE ALL TAXPAYERS, WE ASSUME. THEY'RE GOING TO ASSUME THAT
3 THESE FUNDS, WITHHOLDING FUNDS ARE SOME SACRED TYPE OF FUND
4 THAT THEIR EMPLOYERS TOOK OUT.
5 THE COURT: I UNDERSTAND.
6 MR. BROWN: BUT WE DON'T HAVE THAT HERE.
7 YOUR HONOR, HAMILTON TAFT -- THERE IS FIVE VERY
8 BRIEF POINTS ON WHY IT IS LEGALLY AND FACTUALLY INCORRECT.
9 WE KNOl-J THE GOVERNMENT, FIRST OF ALL, BEFORE WE GET
10 TO THIS, IS THE GOVERNMENT REALLY GOING TO SAY THAT THEY
11 WEREN'T HIS MONIES TO USE? WELL, KNOW THEY ARE. EVEN IN
12 THEIR TRIAL MEMO ON PAGE 11, LINE 24 AND 25, THEY MAKE THIS
13 STATEMENT: BUT THE MONEY TO PAY FOR ALL THESE EXTRAVAGANCES
14 WAS NOT HIS.
15 WELL, IT WAS. IT WAS HIS TO USE --
16 THE COURT: IT WAS THE CORPORATION'S.
17 MR. BROWN: IT IS THE CORPORATION'S. THEY ARE
18 CALLING THE CORPORATION AND ARMSTRONG BASICALLY THE SAME.
19 THEY ARE SAYING HAMILTON TAFT OR ARMSTRONG. WHAT HAMILTON
20 TAFT DID THEY ARE CHARGING ARMSTRONG WITH DOING. THAT'S NOT
21 THE THING.
22 THEY ARE SAYING HE DID NOT HAVE THE RIGHT TO INVEST
23 THOSE FUNDS. HE DID NOT HAVE THE RIGHT TO SPEND THOSE FUNDS
24 THE WAY HE SPENT THEM BECAUSE HE NEVER INTENDED TO PAY THE
25 TAXES.
DIANE E. SKILLMAN, OFFICIAL COURT REPORTER, UBDC

6
1 BUT I WANTED TO REALLY DISCUSS THE INSTRUCTION THAT
2 WAS REALLY THE OUTGROWTH OF OUR PREVIOUS DISCUSSIONS IN COURT
3 CONCERNING PROPOSED INSTRUCTION NUMBER 6.
4 AND I WOULD SUBMIT TO THE COURT THAT WE HAVE
5 CRYSTALLIZED THE ISSUE AND I BELIEVE FLESHED OUT THE PROBLEM,
6 AS WE CA!; SEE FROl·j THE GOVERN1'1ENT I S RESPONSE.
7 FROM THEIR RESPONSE, YOUR HONOR, I WOULD SUBMIT,
8 \\lITH J..LL Ol.-£ RESFECT TO GOVERNI'lENT COUNSEL, THAT THEY ARE
9 OPERATING CLEARLY ClJDER AN ERRONEOUS UNDERSTANDING OF THE LAW.
10 IT I S NOT JeST A LITTLE BIT ":ROI~G I IT 1 S t1ILES HRONG. IT'S vJAY
11 OFF COL1RSE.
12 THEY SUBI·iIT TO THE COePT THAT THE CHARACTER OF THESE
13 FUNDS I I'~HETHER THEY BE THE PROPEETY OF H':'.l·jJ LTOlJ TAFT, OR
14 \'JHETHER THEY BE TF;CST FU1'!DS, IS P. QUESTION OF FACT FOR THE
15 JUR"Y' TO DECIL1E. J;..l:D TH.::'.T JUST SIj·IPLY IS HOT THE LAl'L IT'S
16 UOT A QLTESTIOl: Of fhCT. IT I S A QUESTION OF LA\"J.
17 In YOCF~ HonOR I S OPINIon I I·JHICH h!AS REVERSED BY THE
18 HInTH eIReL-IT, THE COCRY STATED ON THE FINAL PAGE THAT IT'S A
19 QUESTIO:: OF L':.\<. THE COUET DID NOT REVERSE ON THAT BASIS
20
21 T ·~
•• ~.K • bRO\·:;,: : YOL~ lUDI c.; TID IT \·JAS.
22 THE cor~I: THE INTERPRETATION OF THAT STATUTE AND
23 THE EVI DINer PF:ISENTED TO l'lE BEcor'1E A QUESTION OF LAh1 •
24 Iv'lR. BROhin: YOUR HONOR, ~'JE ~\OULD SUBI'iIT THAT THE
25 CHARACTER Of THESE FUNDS, h1HETHER THEY BE TRUST FUNDS, OR WHAT
ROBERTA L. ROGERS, OFFICIAL REPORTER, USDC

SAN FRANCISCO, CA (415) 863-4211
7
1 THE CHARACTER IS OF THESE FUNDS, IS CLEARLY A QUESTION OF LAW.
2 THIS IS A VERY COMPLEX, SUBTLE DISTINCTION. AND
3 WHEN THOSE FUNDS ARE TURNED OVER FROM HAMILTON TAFT -- FROM
4 THE CLIENT COMPANIES TO HAMILTON TAFT THEY LOST THEIR
5 CHARACTER AS TRUST NONIES. IILL GET INTO THAT IN A MOMENT.
6 THE COURT: YOU STATED IT MANY, MANY TIMES.
7 II.~R. BRO\'JlJ: THERE I 5 -- BESI DES THE NINTH CIRCUIT
8 OPIl;IO!~, YOl1R H01~OR I THEEE t S -- THERE I S JUST NO QUESTION THAT
9 THi\T PP-.RTICULAR ISSUE IS P. QuESTIO!; OF LA\'~ FOR THE COURT TO
10 DETEREINE. IT I S NOT A QUESTIOH OF rJ...Cl. IT I S NOT FAIR GAME.
11 IT I S l~OT SOI·~ETHI1:G THJ..T P. JUP"l' I A LAY JURY, SHOULD
12 DETERl-1IlJE HHAT THOSE FUNDS AEE, \'iHETHER THEY ARE TRUST FUNDS
13 OR ~H[:RERt IIJDEED, THEi A~E THE PROPERTY OF HAMILTON TAFT.
14 THAT IS A QUESTION Of Lz...i·~.
15 AND THEY F.!!D THE SEconD POInT THAT THEY STATE
16 INCORRECTLY, DESPITE THE FACT THp.T \':E NO\\1 KNOI~ THE COMMON LAh'
17 OF TRUST I.'!.;}~ES I T CLE~.R, AS hIE' VI SEEN FRO!'! THE NINTH CIRCUIT
18 I OPINI01~ Al:D fRO~·: THE CASES r.1JD THE RESTATEHENT AND THE
19 TREATISI~ 0:: THE SUBJECT, THKT THEY ARE -- THEY .LOST THEIR
20 CHP-.RACTEP AS TRUST FUlJDS I AS EAR!'1ARYED FUNDS, AS DESIGNATED
21 RESTRICTED FUlJDS.
22 THE J.:I!:TH CIRCL:IT OPInIon -- THAT h'AS VACATED, ITIS
23 TRUE -- BeT IT \'JAS NOT VAC.:;TED, AS I'JE'VE CITED AS OUR
24 AUTHORITY FOR THAT, NOT VACATED BECAUSE OF INCORRECT LEGAL
25 REASONING. IT WAS VACATED BECAUSE OF MOOTNESS. THE CASE WAS

8
1 SETTLED.
2 THE COURT: I UNDERSTAND.
3 l'-1R. BRO\·~n: AND THEY STILL INSIST AT THIS POINT THAT
4 THEY ARE TRUST FUNDS, AND THEY MAKE AN ARGUMENT THAT THEY ARE
5 ENTITLED TO ARGUE TO THE JURY AlJD PRESENT EVIDENCE THAT
6 THEY'RE TRUST FUNDS.
7 I THAT'S NOT WHAT THIS CASE IS ALL ABOUT. THIS IS A
8 FRAL:D CASE 1 'lOCH HOl:OR. THE QUESTION BEFORE THIS JURY AND THE
9 REASOn ~'JE' RE HERE I S BECAUSE THEY'VE HADE AN ALLEGATION I AS WE
10 SEE FROH PARAGRAPH 18 , I\lHICH IS THE SCHEEE.
11 IN THEIR TR:!:.Z::.L r'H:l·l0 THEY TALK ABOUT THE FACT THAT
12 THERE IS A SINGLE SCHE!·jE, JdJ ARTIFICE TO DEFRAUD. THAT SINGLE
1] SCHE1·:I IS SET fDRTH ;'.T PJ..R;GRAPH 18, PAGE 11, OF THE
14 . InDICTJ'lEnT, TH.:'.T 1·:R. p.EI·jSTR01:C nEVER INTEUDED TO PAY THE TAXES

I
15 lAT THE TInE ;;.1 THE Tn,:~ THE COIJTRACTS \'~ERE ENTERED INTO.
16 I STATEI''lEl~T THAT THEY ~vANT TO PLAY ON
17 IA
I
LEVEL PL:;YII:G fIELD. \':E \'JANT TO PLAY on A LEVEL PLAYING
18 FIELD. \'~I'RE THE O!JE THAT'S GOING TO BE PREJUDICED,
19 PREJUDICED KHERE I DOI!lT THINK WE HAVE A CHANCE TO WIN THIS
20 I CASE 1l1~LESS THIS PF:ETPIf..L INSTRUCTIon IS GIVEN .
.21 \·:Hl-.T IS PIp.LL'l' HAPPE!JING HERE I YOUR HONOR, IS, AS
22 I liVE INDICATED, THERE IS 1'\':0 \\1A'iS TO PRO'/E THE CASE. \\lE
23 BELIEVE THIS BEIl~G A fR.;;UD CASE, J'lR. ARHSTRONG'S INTENT AT THE
24 TIME THE CONTRACTS ARE ENTERED INTO IS THE CRUCIAL FACTUAL
25 QUESTION THAT THIS JURY HAS TO RESOLVE, AND WE'RE PREPARED TO

9
1 DO THAT. THAT'S THE ISSUE IN THIS CASE.
2 FRAUD REQUIRES LYING, CHEATING, DECEIT, AT THE TIME
3 THE CONTRACTS \'~ERE ENTERED INTO. OUR SPECIAL INSTRUCTION
4 NUI-1BER 6 DOES NOT PRECLL'DE THEI"! FROI'1 ENTERING EVIDENCE AND
5 PROVIIJG THEIR CASE. IT SII·1PLY SETS T'HE RECORD STRAIGHT.
6 WHAT THE GOVERNMENT IS TRYING TO DO, IT'S TRYING TO
7 INJECT INTO THIS CASE S01'1E NE\'] TYPE OF SYLLOGISM THAT THERE
8 h'hS A COIJTRACT BETh1EElJ HAI'-1ILTOlJ TAFT AND ITS CLIENT COMPANIES.

I
9 I THE COnTRACT \';.".5 FOR THE PA'mENT OF TAXES. THE TAXES WEREN'T
10 I PAID. EPGO, CRII·1E.
11 THAT I S nOT THE L.~\.;. THAT'S NOT FAIR. THAT I S NOT
12 h'H.J\T THIS CASE IS ALL ABOUT. THEY TRY TO BOOTSTRAP THAT
13 I ARGUr1El:T B'l' SAY I IJG THAT THESE FUNDS SOI"1EHO\'~ - - AND THEY I RE
14 ! GOInG TO r·:;'.LE THE ~.RGUI·jE!:T'. \'~E "JERE CONCERNED ABOUT IT. NOW
1S IT HAS BEE),: rLE~;';~::'0 Ol~1. \':I SEE IT IJ! THEIR RESPONSE.
16 THE L;'.ST TIH£ ,,;t CAl-iE TO COURT, h!E HAD THEIR TRIAL
17 HII·iOR.AlJDur·! ":HERI AT ONE PARTI CULAR PAGE OF THEIR TRIAL
18 HEI'~ORAJJDL;J.j THE'; STATE THAT HR. AR1·lSTRONG I S EXPENDITURES WERE
19 OF r~10lJEY -- h'IRE E"; THE L:SE OF I~jONEY THAT \\IAS NOT HI S Oh'N.
20 \':ELL, \'OL;R HONOR I THAT 'S SINPLY NOT THE LA\\I.
21 I J.lP.. AR1'~STROnG H.!:.D THE PI GHT, AI~ 0 HAI·1I LTOIJ TAFT HAD THE RIGHT I
22 TO THE USE OF THAT nONE 'j . THAT I S TRUE FRaIl} -- \\lE KNO\,l THAT
'23 FRor·l THE COI·1!.'jOn LP.h' TRUSTS I FROI'1 THE NINTH CIRCUIT DECISION,
24 FROM THE NATURE OF THE BUSINESS THAT HAMILTON TAFT WAS IN, AND
25 FROM THE C01JTR.ll,CTS THEHSELVES I h7HICH EACH ONE OF THEM -- EVERY
ROBERTA L. ROGERS, OFFICIAL REPORTER/ USDC

10
1 SINGLE ONE OF THEr"1 STATE THAT HANILTON TAFT HAD THE RIGHT TO
2 THE USE OF THE FUNDS.
3 OUR SPECIAL PROPOSED INSTRUCTIOn NUMBER 6, YOUR
4 HONOR, NOT ONLY IS A DEFENSE THEORY OF THE CASE INSTRUCTION,
5 BUT IT' S A CORRECT STp.TEI'1ENT OF LA\'J AND IN NO WAY PRECLUDES
6 THE GOVERI:I'1[UT FROI·i PROVING THEIR CASE -- IN NO WAY. IT
7 SIMPLY peTS THJ~ CASE ,J:: h LE\:'EL PL~YING FIELD.
8 THE ISSUE THAT \.J[ \';OllLD SUBf·1IT TO THE COURT, RATHER
9 THAN THE SYLLOGIS!·l PROPOSED BY THE GOVERNI'1ENT, IS 1\10RE
10 PROPERLY THAT CONTRACTS \':ERE ENTERED INTO; THAT CONTRACTS \-JERE
12 HO\';[VER, AT THE: TIl'i£ THE CONTRACTS h"'ERE ENTERED INTO
13 DID NR. j\RHSTRO!:G LI E, CHEAT AND DECEIVE THESE \\10ULD-BE
14 CUSTOl·1ERS Il:TO BELI[VI!~G HE \';AS GOING TO PAY THE TAXES, AND
15 THEN THE Tp.~:[S \';ERE ~:01 P;.ID AIJD IS THAT A CRII-1E?
I6 I TH;'.T BRIljGS IT I1no THE COllTEXT OF THE CHARGES THAT

;
17 I ARE PRLSE!:T I!: THE Il:01CTEEllT. THAT IS \'JHAT THIS CASE IS
IS I ABOL'T .
I
19 II nOL, YOUE HO:·:OR, THE I~INTH CIRCUIT HAS N.l1DE IT VERY
20 I CLEAR -- ;-.!JD I \'~Ol]LD Sl'B!·:I'I T·J YOUR HONOP THAT OUR INSTRUCTION
I
21 I I S SUPPOFTEL~ E"; THE LJ...';.: AU 0 THE EVIDENCE. I TIS A THEORY OF
22 I DEFENSE I !~STRUCTIC<; . 1 T DOESN I T PRECLUDE THE GOVERNMENT F'ROt·1
2] PROVII~G THEI R C.Z\5E.
24 THE FAILURE TO GIVE A THEORY OF THE DEFENSE
25 INSTRUCTIon IS PER SE REVERSIBLE ERROR. THE DEFENSE IS

11
1 ENTITLED TO THAT INSTRUCTION WHEN IT IS SUPPORTED BY LAW AND
2 HAS SOME FOUNDATION IJJ THE EVIDENCE.
3 OUR WHOLE DEFENSE IS PREDICATED UPON THE FACT THAT
4 MY CLIENT HAD THE RIGHT TO THE USE OF THE FUNDS.
5 THE GOVERNMENT THEORY IS THAT HE INTENDED AT THE
6 TIME OF THE CONTRACT TO TAKE THE MONEY AND RUN, NEVER INTENDED
7 TO PAY THE TAXES.
8 AS I'VE SAlO, HE Kl~Oh~ THAT THAT IS THE SCHEME I THE
9 SINGLE SCHEI'JE I AS THEY INDICATE IN THEIR TRIAL MEMORANDUM, AND
10 THAT'S IN THE I 1: Dr CTI·n::r;T. THE CASE OF UNITED STATES VERSUS
11 SOTELO-I·jURI LLO I FOUllD AT 887 F. 2 D 176 I 1989, NINTH CIRCUIT
12 CASE, SAYS A THEORY OF DEFEUSE INSTRUCTION JV1UST BE GIVEN.
13 THE COURT: BUT THAT'S TALKING ABOUT INSTRUCTIONS TO
14 THE JURY AT THE EIJD OF THE CASE. IT I S NOT TALKING ABOUT
15 PRELlr·1I nARY I lJSTRl7CTI o~;s .
16 J.1R. BROE!;: THAT 1 S TRUE, YOUR HONOR.
17 THE COURT: AND THERE IS A BIG, BIG DIFFERENCE. BIG
18 DIFfEEE1:CI.
19 }\1R. BROElJ: LET r'lE JUI'1P AHEAD, I F I MIGHT I THEN.
20 p.;;D THERE IS A DIffERENCE. BUT \vE I RE DEALING
21 HERE .L.UD \',"!.::. GEl Sf-.cr 1'\~H Y h'E NEED I T NOh!. YOUR HONOR / IF
22 THIS IJ.JSTRUCTIOJ; \':AITS UUTIL THE END OF THE TRIAL, IF THIS IS
23 CONSIDERED AS FAIR GAME fOR THIS JURY TO HEAR THE GOVERNMENT1S
24 THEORY THAT THIS IS TRUST MONEY, IF THEY GET THE IMPRESSION IN
25 ANY WAY THAT TH:LSE ARE MONIES -- AND THESE ARE ALL LAY

12
1 PERSONS.
2 THEY ARE ALL TAXPAYERS. THEY'VE ALL HAD WITHHOLDING
3 TAKEN OUT OF THEIR PAYCHECKS. WE HAVE TO ASSUME THAT, AND I'M
4 SURE IT'S TRUE. THEY'RE GOING TO ASSUME THAT THESE WERE
5 SOMEHOW SACRED WITHHOLDING MONEY LIKE THEIR EMPLOYER TAKES OUT
6 OF THEIR PAYCHECK. AND IF THEY HERE USED FOR ANY OTHER
7 PURPOSE BUT FOR THE PAYI'·1ENT OF TAXES I THEtJ FRAUD WAS
8 COMNITTED.
9 THAT'S \-:HAT THE GOVERNI·1El:T IS TRYING TO INJECT INTO
10 THIS CASE. If THE INSTRUCTIon \'JE I RE SEE}~ING, \\IHICH IS ~
11 THEORY Cf THE DEFENSE INSTRUCTION, WHICH HAS TO BE GIVEN
12 AND 1 BY THE WAY, THOSE CASES DO NOT SAY IT CAN'T BE GIVEN AT
13 THE BEGI!:!:I~:-~ OF THE C.z..SE. IT SAYS IT HAS TO BE GIVEN. I
14 CONCUR. VOL ARE ~BSOLCTELY CORRECT. IT'S NORMALLY GIVEN AT
15 THE END OF THE CASE.
16 THI SIS J.. unUSUAL CASE, AS HE TALKED ABOUT LAST
17 TIHE. Tr.1 SIS .?-:. CASE INVOLVInG TAXES. IT IS INVOLVING NOT
18 JUST TA:-:ES I BCT \';ITHHOLDlnG TAXES. ALL THE JURORS \~ILL BE
19 FAJ-1ILIAF: \'~ITH TH.::.. T.
20 THE GO\'ERIJ1'lEI:T SEEES TO CALL THESE -- DESPITE THE
21 NII~TH CIRCUIT I DESPITE THE C0!-1I'10H LA\'~ OF TRUSTS I DESPITE THE
22 CONTRACT, THEY STI LL SEEK TO CALL THE!'1 TRUST 1"10NIES. THEY
23 SEEK TO Hhr~E -- GIVE THE II-JPRESSION THAT THESE ARE EARMARKED
24 FUNDS.
25 Any SUCH I11PRESSION LIKE THAT IS GOING TO CAUSE THIS

13
1 JURY TO INFER FRAUD. \\1E CAN'T DEFEND THAT. THAT IS NOT WHAT
2 THE CASE IS ABOUT. THIS CASE IS A CASE OF INTENT. THAT'S
3 WHAT THE CASE IS ABOUT.
4 THEY'RE NOT PRECLUDED FROM PROVING THEIR CASE WITH
5 THAT PRETRIAL INSTRUCTION. IT SIMPLY MAKES THE CASE FAIR FOR
6 BOTH SIDES. IT EXPLAINS TO THE JURY \-JHAT THE SITUATION \\7AS
7 WITH REGARD TO THESE FunDS; THAT HAJ'1ILTON TAFT, INDEED, HAD
8 THE RIGHT TO THE USE OF THE FUNDS UNTIL THE TIME, PURSUANT TO
9 THE CONTRACT, THAT TAXES HERE DUE TO BE PAID.
10 NO\-: , THE GOVERNI'lENT CAN BRING IN ALL THE EVIDENCE
11 THEY \~~ &:... ~ J T ABOL:T \"{HAT HAPPEl<JED '\lITH THIS IvlONEY. THERE'S NO
12 QUESTIotJ THEY I RE GOING TO DO THAT. "JE HAVE NO PROBLEM WITH
13 THAT. IJJ FACT, hiE LL STIPULli.TE TO

I '·~HERE THE MONEY WENT. AND
14 IT DIDIJ'T ALL GO TO THE PAYMENT OF TAXES. WE ALL KNOW THAT.
15 IF THIS JURY InFERS THAT SOJVJEHO"J THESE MONIES COULD
16 ONLY BE USED fOR THE PA Y!\1EUT OF TAXES, THEN THERE I S NO PURPOSE
17 IN THE TRIAL.
18 THE \':HOLE FRAUD CASE REQUIRES PROOF OF INTENT,
19 INTENT TO DECEIVE, INTEnT TO CHEAT, LIES TO THESE PEOPLE AT
20 THE TIME THE COr:TRACTS WERE ENTERED INTO. THAT'S THE SCHEME.
21 THAT'S \'~HAT THEY H.L."JE TO PROVE.
22 NO'..: , YOUR BONOR, THESE LAY JURORS THAT ARE GOING TO
23 COll.1E HERE, If THEY IRE SUBJECTED TO \~HATEVER THIS TRIAL
24 TAKES -- T\'JO r\101~THS , SIX h1 EEKS, THREE MONTHS POSSIBLY, THAT
25 WEIVE HEARD ALL THESE DIFFERENT ESTIMATES -- AND, YOU KNOW, WE

14
1 ALL TRY TO MAKE THOSE ESTIMATES AS ACCURATE AS WE CAN.
2 BUT IF THIS JURY GETS THE IMPRESSION THAT THESE ARE
3 EARMARKED FUNDS, THESE ARE TRUST MONIES j THROUGHOUT THIS
4 TRIAL, THEY'RE GOING TO HAVE THEIR OPINIONS HARDENED LIKE
5 CEMENT BEFORE THIS TRIAL IS OVER WITH. WE KNOW THAT AS A
6 PRACTICAL MATTER.
7 THAT INSTRUCTIOn THAT YOUR HONOR l-JOULD GIVE AT THE
8 END AFTER LENGTHY TRIAL DE.~LING "JITH THESE KIND OF MONIES
9 \\1013 'T E'V'[]; J.1.1I.TTER AT THAT PARTICULAR TIME, AND THERE WILL BE
10 SO MUCH ERROR InJECTED AnD PREJUDICE INTO THIS CASE AND
11 MISl NDERSTJl_NDlnGS Il-1POSED UPON THIS JURY.

1
THAT CAN ALL BE
12 CURED \';ITH p.i: I!;STF:UCTION THAT h1AS TAKEN RIGHT OUT OF THE
13 NINTH CIRCUIT OPIIJIOIJ. AIJD THhT OPINION, YOUR HONOR, WAS NOT
14 VACATED.
15 THE" C·~l'RT': r·1E. BRO\'JlJ, HOh1 1·1ANY TIMES HAVE YOU SAID
16 THAT? 1 HEARD YOC THE FIRST TIME. YOU SAID IT TWO WEEKS AGO.
17 YOU'VE NO~ SAID IT AT LEAST FOUR TIMES TODAY. I UNDERSTAND
18 YOUR POI1:T. I AGREE. I THINK I SHOULD BE GUIDED BY THAT
19 I NIIJTH CIRCUIT DECISIOU.
20 THE QUE S T I 0; J I JJ 1'1":1:' 1,1 IN 0 I S \',' HAT THE Y DE CI DE 0 • I IM

I
21 I GOInG Tel TArE TH;'.T AS l·~'l' F:)LEST.z:..R \-JHEIJ THE TII·1E cor·1ES TO MAKE
22 THE DECISIon Ol~ THIS THING. 1 1 1'1 NOT GOING TO DUCK \"JHAT THEY
23 SAID BECAUSE IT ~hS VACATED FROM ME.
24 I'-1R. BRo\-,'n: OKAY. I APPRECIATE THAT.
25 YOUR HONOR, h1E HAVEN I T' REALLY -- NONE OF US REALLY

SAtJ FRANCISCO, CA (415) 863-4211

Amended 2255 Motion 22-26

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Amended 2255 Motion 22-26

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Hemming Morse, Inc.

11160 Spear Streel

Frederick S. Wyle, Esq.

We have compiled the following financial statements, in accordance with Statements on

Consolidated Statement of Cash Receipts and Disbursements for the Cumulative

Consolidated Schedule of Cash Balances and Projected Disbursements as of

The accompanying financial statements include both the consolidated Post-Petition

A compilation is limited to presenting, in the form of financial statements. information

As required by generally accepted accounting principles, a complete financial statement

Cumulative for Post-Petition Periods

Total Litigation and Claim Recoveries $0 $25,000 $25,734,158 $25,759,158

Cumulative for Post-Petition Periods

Total Other Receipts $596,499 $1,076,010 $B.768,749 $10,441,258

Detail of Beginning Cash Balances

Cumulative for Post-Petition Periods

Detail of Operating Costs Paid:

Cost of sale - livestock 10,943 10,943

Total operating costs paid $1,040.032 $587,163 $3,205,726 $4.832,921

Interest Bearing Accounts:

U.S. Trustee Fees 4,750

Amount available for distribution to Class 4 Creditors $954,369

C'r =nergy Services 4,000 114,000 19,342

HAMILTON TAFT & COMPANY 0

a " :\ nf 4 Drpn: 7/'Jnnn

• We have compiled the accompanying consolidated statements of cash receipts and

A compilation is limited to presenting, in the form of financial statements, information that is

1f"'~tt m~-M) Qfl<:.-.

• Statement of Cash Receipts Bnd Disbursements

For the cumulative Post-Petition periods ended December 31,1991

Cumulative for Post-Petition Periods

Gross real estate sales 711,250 120,000 831,250

• Net proceeds 1rom sale of livestock - HTC Ranch

• Ranch operating costs

Excess of Disbursements over Receipts

Beginning Cash and Cash Equivalent Balances

• Ranch cash balance as of August 1, 1991

Ending Cash and Cash Equivalent Balances $5,125,643 $0 $162.758 $5,288,401

For the cumulative Post-Petition periods ended December 31,1991

Cumulative for Post-Petition Periods

D.9t!'.il. of. Ot."'!!~ R!!OOi,~t.!::

1 clal Other Receipts

Detail of Other Operating Costs Paid:

• Affiliate expenses paid

• Total other operating costs $469,098 $16,829 $79,009 $564,936

• Statement of Cash Receipts and Disbursements

Cumulative Trustee Periods

• Net proceeds from sale 01livestock-HTC Ranch

Excess of Disbursements over Receipts

Beginning Cash and Cash EqUivalent Balances

Ending Cash and Cash Equivalent Balances $5.125,643 $0 $162,758 $5,288.401

• Statement of Cash Receipts and Disbursements

Cumulative Trustee Periods

• Di;!t;\i1 01 Other Receipts:

Monthly service fees $32,109 $32,109

. Net customer funds (Tax Agency funds)

Total other receipts

Detail of Other Operating Costs:

• Affiliate expenses paid

Prepaid expenses & deposits 62,522 2.740 65,262

• Total other operating costs $469,098 ($58,645) $79,009 $489,463

• Statement of Cash Receipts Bnd Disbursements

For the cumulative Post-Petition Period and the cumulative

• Oil and gas revenues