Crime and Federalism event
Should we amend Rule 48?

Hearsay in the Ninth Circuit

Is a state court judgment determing property ownership admissible hearsay in a tax evasion prosecution?

In United States v. Boulware, No. 02-10338 (9th Cir., Sept. 14, 2004) the court held that a state court judment adjudicating property rights was admissible FRE 803(15) (Statements in documents affecting an interest in property).

Michael H. Boulware was the sole shareholder of Hawaiian Isles Enterprises (HIE).  In 1989 the company was reporting gross recipts of $55 million.  Mr. Boulware was married to Mal Sun Boulware.  He also kept a girlfriend on the side - Jin Sook Lee.

In 1987 Mr. Boulware asked Ms. Boulware for a divorce.  Since Hawaii is a community property state, Mrs. Boulware was entitled to 1/2 of HIE.  Mrs. Boulware said that she would force Mr. Boulware to liqudiate HIE unless he paid her several million dollars.  Since he was not liquid enough to meet her demands, he said that it would take some time.  Mrs. Boulware said she would wait.

Mr. Boulware then started transferring millions of dollars from HIW to Ms. Lee.  Mr. Boulware's attorney told him that if he transferred the money from HIE to Lee, that it would not be taxable income to him.

By 1994, Lee held enough cash for Mr. Boulware to allow him to pay off his wife.  However, Lee refused to give him the money.  Finally, after litigation, a state court jury found that Lee was holding the money ulawfully: The money belonged to HIE.

Sometime in 1999 or 2000, the government filed criminal tax evasion charges against Mr. Boulware.  The government alleged that he had been siphoning off money from HIE to Lee.  Lee would then give the money to Mr. Boulware.  In other words, Mr. Boulware would indirectly dividents from from HIE withoiut paying income tax. 

At trial, Mr. Boulware tried to introduce the state court judgment into evidence.  His theory was clear: The money belonged to HIE, and this verdict proves it.  Or, at the very least, it shows that Lee was holding the money for the company in trust.  In sum, I did not obtain dividends from HIE, and thus, I did not underreport my income tax liability.

Unsurprisingly, the government fought against admitting this evidence.  The District Court agreed.  Mr. Boulware was convicted.

Judge Thomas joined Judge Tashima's 2-1 decision:

[Is the state court judment relevant] The district court excluded the state court judgment pursuant to Federal Rules of Evidence 401 and 402, stating that whether the transfers to Lee were gifts “is not relevant to the ultimate issues of the case.” This ruling was erroneous. Evidence is relevant if it has “any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.” Fed. R. Evid. 401. Whether Boulware transferred the HIE funds to Lee for personal purposes or for her to hold in trust for HIE was a key issue in the case. That he pursued a successful litigation against Lee to force her to return the monies to HIE has some tendency to make it more likely that he gave the monies to her to hold in trust. Indeed, the government conceded at oral argument that the state court judgment is relevant.

(2) Hearsay Hearsay is “a statement other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted.” Fed. R. Evid. 801(c). A prior judgment is therefore hearsay to the extent that it is offered to prove the truth of the matters asserted in the judgment. A prior judgment is not hearsay, however, to the extent that it is offered as legally operative verbal conduct that determined the rights and duties of the parties. See United States v. Pang, 362 F.3d 1187, 1192 (9th Cir. 2004). Although Rule 803 contains exceptions for certain kinds of judgments, such as judgments of previous felony convictions and judgments as to personal, family, or general history or boundaries, see Fed. R. Evid. 803(22) & (23), civil judgments do not fit comfortably into any hearsay exception.

Under the plain meaning of Rule 803(15), hearsay statements are admissible if they are contained within a document that affects an interest in property, if the statements are relevant to the purport of the document, and if dealings with the property since the document was made have not been inconsistent with the truth of the statements. See Silverstein v. Chase, 260 F.3d 142, 149 (2d Cir. 2001). Here, the state court judgment meets each of these requirements. The judgment affected an interest in property by declaring HIE to be the legal owner of the funds and by requiring Lee to return them to HIE, and the statements are relevant to the purport of the document. In addition, there is no indication that the parties acted inconsistently with the judgment; it was undisputed that the judgment was valid and could be authenticated.

Slip opinon at 15-20.

Judge Silverman wrote a 1-page dissent.

In my view, the district court did not abuse its discretion in refusing to admit the state court judgment into evidence. The judgment does no more than establish that, as between Jin Sook Lee and Hawaiian Isles Enterprises, the money belonged to Hawaiian Isles Enterprises. This has no bearing on whether Boulware diverted corporate funds to his girlfriend for his own benefit without paying tax on the money. The judgment establishes only that she was not entitled to keep the cash. It does not prove, or even tend to prove, that he didn’t siphon off the money from the corporation, tax-free. Why would it? That was not at issue in the case.

District courts have wide latitude in ruling on the relevancy of evidence. United States v. Alvarez, 358 F.3d 1194, 1216 (9th Cir. 2004). Implicit in any such ruling is an evaluation of probative value. 1 McCormick on Evidence § 185, at 637 (5th ed. 1999) (“There are two components to relevant evidence: materiality and probative value.”). Because the state court judgment against Lee sheds little if any light on whether Boulware committed tax evasion, I would hold that the district court did not abuse its discretion in ruling the Hawaiian judgment inadmissible.