LEONARD D. WEXLER, District Judge.
Before the Court is the motion of Defendant United States of America ("Defendant") to dismiss Plaintiffs' first, second, third and fifth causes of action of the Second Amended Complaint ("SAC") pursuant to Federal Rules of Civil Procedure ("Fed.R.Civ.P."). Defendant also seeks to have Plaintiffs Samsuddin Panjwani, ("Panjwani") and Nasreen Gilani ("Gilani") dismissed from the complaint. Plaintiffs' oppose. For the reasons stated below, Defendant's motion is granted in part, and denied in part.
This case involves a claim for a tax refund filed by the Plaintiffs in July 2007 and ultimately denied in June 2013. According to the complaint, Plaintiffs submitted to the IRS a request for a tax refund, ultimately revised to the amount of $14,462,484.23, for excise taxes paid prior to August 2006 on pre-paid phone cards sold by Plaintiffs ("Refund"). SAC ¶¶ 25-31.
Plaintiffs allege that in June 2008 they were told orally by an IRS agent that the refund claim had been approved and a check would be forthcoming, some time after the Fourth of July. SAC ¶ 32. Soon thereafter, in late July 2008, a criminal investigation was initiated into Diamond Phone Cards' business operations and the activities of its principals, and a valid search warrant was executed at Plaintiffs' offices and materials were seized. SAC ¶¶ 33-46. Two years later, in August 2010, Plaintiffs Samsuddin Panjwani ("Panjwani") and Nasreen Gilani ("Gilani") were arrested in their home and charged with structuring financial transactions to evade currency reporting requirements. SAC ¶¶ 47-54.
Plaintiffs allege that some time after the arraignment on the annual charges, Plaintiffs Panjwani and Galini scheduled a meeting with their lawyers and the Assistant U.S. Atttorney ("AUSA") of the Eastern District of New York, Carrie Capwell. During that meeting, Galini's lawyers asked about the status of the Refund, and after the meeting AUSA Capwell called defense counsel and "confirmed the IRS was, in fact, holding the refund." SAC ¶¶ 55-58. Plaintiffs allege that Capwell's "position changed" from her earlier stance that Galini and Panjwani serve jail time once she learned of the Refund. SAC ¶ 59. Ultimately, the parties negotiated a plea resolution with no jail time, which deal was memorialized in a written plea agreement, which acknowledged that defendant consented to the forfeiture of "($3,980,000.00) currently being held by the [IRS] (the "Forfeited Sum"), and which would have otherwise been paid to the defendant[s]." Plaintiffs Galini and Panjwani pled guilty pursuant those plea agreements on August 5, 2011 and September 23, 2011. SAC ¶¶ 60-62. Thereafter, a civil forfeiture proceeding was initiated, and on March 18, 2011, the parties executed a Stipulation of Settlement and Decree of Forfeiture, which Plaintiffs allege acknowledged Diamond Phone Card's ownership interest in the forfeited funds. SAC ¶¶ 63-66.
On February 23, 2012, the IRS issued a Formal Examination Report ("FER"), which precipitated a protest filed by Plaintiff Diamond, and then a subsequent filing by Diamond. SAC ¶¶ 70-79. Ultimately, on June 10, 2013, by way of written letter, the IRS Appeals Office issued a full disallowance to Plaintiffs' refund claim. SAC ¶¶ 80-81.
Plaintiffs bring this action asserting six claims: equitable relief under Federal Rules of Criminal Procedure ("Fed.R.Crim.P."), Rule 41(g) (first claim); a violation of the Fourth Amendment (second claim); a violation of the Fifth Amendment (third claim); a refund under 26 U.S.C. § 7422 (fourth claim); and, promissory estoppel (fifth claim). Defendant moves to dismiss Plaintiffs' first, second, third and fifth claims.
When considering a motion to dismiss made pursuant to Rule 12(b)(6), the court must accept the factual allegations in the complaints as true and draw all reasonable inferences in favor of Plaintiff.
Rule 41 of the Federal Rules of Criminal Procedure ("Fed.R. Crim. Pro.") governs "Search and Seizure." It defines "property" to "include[] documents, books, papers, and other tangible objects, and information." Rule 41(a)(2)(A). Rule 41(g) permits "[a] person aggrieved by an unlawful search and seizure of property or by the deprivation of property [to] move for the property's return." It applies to property seized during a criminal investigation.
Plaintiffs' SAC claims that the "IRS unlawfully seized the Refund as part of a criminal investigation into Dismon Phone Card's business practices." SAC ¶ 83. It alleges "the IRS did not have a valid warrant that authorized the seizure of the Refund," SAC ¶ 84, and that "[t]he IRS has refused to return the Refund to Diamond Phone Care or its principals." SAC ¶ 86. It seeks "the return of the Refund and all of the business records
Defendant argues that Plaintiffs' claim is misplaced. Rule 41(g) permits a motion to return property seized or deprived in connection with a criminal investigation; it is not a vehicle to claim entitlement to a tax refund.
The Court agrees. Rule 41(g) applies in the context of a criminal investigation, to property seized or deprived in the context of that investigation. Plaintiffs' entitlement to the Refund, whether valid or not, is not "property" as defined by Rule 41. Furthermore, Rule 41(g) "simply provides for the return of seized property, [and] does not waive the sovereign immunity of the United States with respect to actions for money damages relating to such property."
Plaintiffs allege that Defendant violated the Fourth Amendment by "unlawfully seiz[ing] the Refund without a valid warrant." SAC ¶ 93. They allege the Fifth Amendment was violated because "[t]he IRS unlawfully seized the Refund without giving Diamond Phone Card prior notice of the seizure." SAC ¶ 97. The critical issue to each of these claims is whether Diamond Phone Card had a "property interest" in the Refund. Defendant argues that no matter what the IRS agent may have said orally, or what the AUSA put in the plea agreement for forfeiture agreement, there is no property right in a refund until the IRS officially decides on and grants the refund pursuant to 26 U.S.C. § 6402.
This issue was addressed in
The parties don't disagree on this law that there is no refund until the IRS says there is a refund.
In
The Court is persuaded that this reasoning is fatal to Plaintiffs' claims under the Fourth and Fifth Amendments. Those claims rest on the theory that a property interest in the Refund was created by the oral statements of the IRS agent or the plea agreement with the U.S. Attorney's Office, and therefore the Government should be estopped from denying that property interest. Yet, the Supreme Court has stated clearly that "claims for estoppel cannot be entertained where public money is at stake,"
Plaintiffs also bring a claim for promissory estoppel. Like the Fourth and Fifth Amendment claims, promissory estoppel rests on the theory that a property interest in the Refund was created by the IRS agent or agreement with the U.S. Attorney's Office. As discussed above, equitable estoppel cannot be used against the government where "public money is at stake." damages.
This claim also fails because Plaintiffs fail to allege the required elements of estoppel. A party seeking estoppel "must have relied on its adversary's conduct `in such a manner as to change his position for the worse,' and that reliance must have been reasonable in that the party claiming the estoppel did not know nor should it have known that its adversary's conduct was misleading."
Defendant also moves to have Plaintiffs Gilani and Panjwani dismissed because they fail to allege an injury, since the claim for the Refund rests with Plaintiff Diamond Phone Card alone. As alleged in the SAC, Galini and Panjwani "owned the business together." SAC ¶ 8. The Court finds as the principals of the business Diamond Phone Card, which is the entity that has entitlement to the Refund, they sufficiently allege an injury to continue in this action. Defendant's motion to dismiss them is denied.
For the reasons stated above, Defendant's motion to dismiss Plaintiffs' first, second, third and fifth claims is granted; Defendant's motion to dismiss Plaintiffs Galini and Panjwani is denied. Counsel are directed to proceed with discovery on Plaintiffs' fourth claim for a refund pursuant to 26 U.S.C. § 7422.
SO ORDERED