Embezzling Order May Have Been Too Hasty

(CN) - A man sued for his alleged role in a multimillion-dollar embezzling scheme should have been allowed to speak up after trying to waive the Fifth Amendment privilege he had previously invoked, the 5th Circuit ruled.

In a November 2010 summary judgment decision, U.S. District Judge Kenneth Hoyt ordered 14 defendants to pay $60 million for a family-run embezzling scheme that allegedly bilked the oil services company Davis-Lynch of $15 million over 12 years.

The Texas company filed suit against 20 individuals at the beginning of that year, alleging that a missing copy machine helped it uncover the massive scheme in its accounts payable division, managed by "trusted employee" Nancy Moreno.

Moreno's daughter, daughter-in-law and an in-law from a previous marriage all worked under her supervision in accounting and helped her pull off the scheme, according to the complaint.

After a two-month investigation, Davis-Lynch allegedly discovered that Moreno's family members had created a series of fictitious businesses that charged the company for millions over the past 12 years.

In their initial answers to the racketeering complaint, Moreno's husband, Alfredo Moreno, and her son-in-law, Ronald Wayne Pucek III each invoked their Fifth Amendment rights against self-incrimination.

Alfredo Moreno waived his privilege in September 2010, however, and answered opposing counsel's questions in a contempt hearing. Davis-Lynch moved for summary judgment the following month, but it never addressed Alfredo's privilege waiver.

Alfredo noted that he had already waived privilege in his answer. His son-in-law, Pucek, purported to waive the same privilege in his answer. Both men submitted affidavits denying the charges against them.

But Davis-Lynch objected to the withdrawals, and Hoyt agreed to strike their affidavits, holding them to the grindstone for "refus[ing] to participate in discovery during the designated period of pre-trial proceedings."

The men appealed after the Houston court held the 14 implicated defendants liable on summary judgment.

A three-judge panel of the New Orleans-based federal appeals court sided with Alfredo, but said Pucek was out of luck.

"The timing and circumstances under which a litigant withdraws the privilege are relevant factors in considering whether a litigant is attempting to abuse or gain some unfair advantage," Judge Jacques Wiener Jr. wrote for the panel.

"Generally, withdrawing the Fifth Amendment privilege at a late stage places the opposing party at a significant disadvantage because of increased costs, delays, and the need for a new investigation," the Jan. 10 decision states. "Furthermore, a litigant who provides previously withheld information at summary judgment places the opposing party at a significant disadvantage in responding to such information."

"A party may withdraw its invocation of the Fifth Amendment privilege, even at a late stage in the process, when circumstances indicate that there is no intent to abuse the process or gain an unfair advantage, and there is no unnecessary prejudice to the other side," Wiener concluded.

Moreno's waiver at the contempt hearing occurred one month before the discovery deadline, so Davis-Lynch did not face an exceptional burden in this respect. As such, Hoyt should not have struck his affidavit, the 21-page ruling states.

Since Pucek, however, made an "eleventh-hour" withdrawal of privilege five days before the discovery deadline, the court decided that he put Davis-Lynch at a disadvantage.

The panel also tossed the summary judgment order with respect to Pucek and Alfredo, since there were issues with Davis-Lynch's motion.

"An order that essentially amounts to a default judgment is not appropriate on a motion for summary judgment," Wiener wrote. "Here, the District Court struck the appellants' affidavits and then appears to have rendered summary judgment against them on the basis that they had not responded to the Davis-Lynch's allegations, without further analysis or consideration. Such a default-like judgment is not appropriate in this context. A plaintiff seeking to establish civil RICO claims must meet its burden of establishing the particular elements of each claim, and the District Court may not grant summary judgment if the plaintiff has not done so. Davis-Lynch did not put forth facts to establish its civil RICO and state law claims against the appellants, relying instead on broad, general statements. On remand, the District Court must allow full discovery so that the factual basis of the appellee's claims may be established with respect to the appellants."

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