United States v. Swartz

391 F.Supp.3d 199

UNITED STATES of America,

v.Christopher M. SWARTZ, Defendant.

5:16-CR-264

United States District Court, N.D. New York.

Signed August 9, 2019

HON. GRANT C. JAQUITH, TAMARA THOMSON, ESQ., Ass't United States Attorney, United States Attorney for the Northern District of New York, 100 South Clinton Street, P.O. Box 7198, Syracuse, NY 13261

JOHN N. KANE, JR., ESQ., UNITED STATES DEPARTMENT OF JUSTICE - TAX DIVISION, Northern Criminal Enforcement Section, 601 D Street NW, Room 7122, Washington, DC 20530

GABRIEL M. NUGENT, ESQ., BARCLAY DAMON LLP Attorneys for Defendant, Barclay Damon Tower, 125 East Jefferson Street, Syracuse, NY 13202

LEE E. WOODARD, ESQ., HARRIS, BEACH LAW FIRM, Attorneys for Defendant, 333 West Washington Street, Suite 200, Syracuse, NY 13202

SCOTT M. KESSLER, ESQ., AKERMAN LLP, Attorneys for Claimant Orienta Investors, LLC and Edward St. Onge, 666 Fifth Avenue, 20th Floor, New York, NY 10103

RAYMOND R. GRANGER, ESQ., GRANGER & ASSOCIATES LLC, Attorneys for Claimant Change Capital Partners Fund I, LLC, 40 Fulton Street, 23rd Floor, New York, NY 10038

RICHARD ANTHONY LAFONT, ESQ., PLATZER SWERGOLD LEVINE GOLDBERG KATZ & JASLOW, LLP, Attorneys for Claimant Change Capital Partners Fund I, LLC, 475 Park Avenue South, 18th Floor, New York, NY 10016

EDWARD A. O'HARA, III, ESQ., OFFICE OF EDWARD A. O'HARA, III Attorneys for Claimant Swartz Family Trust, 304 South Franklin Street, 300 Crown Building, Syracuse, NY 13202

CONTINENTAL TRUST CORPORATION LIMITED, Claimant, Pro Se, 12 Par-la-Ville Road, 5th Floor, Richmond House, P.O. Box HM 646, Hamilton HM CX, Bermuda, 441-405-8100

MEMORANDUM–DECISION and ORDER

DAVID N. HURD, United States District Judge

TABLE OF CONTENTS

I. INTRODUCTION...203

II. BACKGROUND...204

III. LEGAL STANDARD...209

IV. DISCUSSION...210

A. The Government's Omnibus Motion to Dismiss...210

1. The Swartz Family Trust...211

2. Continental Trust...213

B. The Government's Motion for Interlocutory Sale...214

C. Orienta's Motion for Injunctive Relief...215

V. CONCLUSION...216

I. INTRODUCTION

This is the aftermath of a criminal prosecution for wire fraud and tax evasion brought by the United States of America (the "Government") against defendant Christopher Swartz ("Swartz" or "defendant"), an entrepreneur from Watertown, New York.

For at least a decade, Swartz leveraged his controlling interests in various companies to bilk lenders and investors out of millions of dollars while at the same time evading his obligations to the Internal Revenue Service ("IRS"). By the end of his run as a white collar criminal, defendant had netted over $19 million in ill-gotten gains and staved off roughly $5 million in personal and business taxes.

Swartz's shell game relied heavily on his ownership and control of Jreck Subs, a franchised chain of sandwich shops popular in Central and Northern New York. Defendant abused the brand's reputation in service of his own goals, using it not only as bait to lure in new investment but also as a shield to ward off anyone who might be inclined to look more carefully into the underlying stability of his financial affairs.

On September 19, 2016, Swartz waived indictment for his crimes and, in accordance with an agreement reached with the Government, pleaded guilty to a two-count information that charged him with wire fraud in violation of 18 U.S.C. § 1343 and tax evasion in violation of 26 U.S.C. § 7201. Defendant was later sentenced to 150 months' imprisonment and ordered to pay restitution of $21,041,249 to his wire fraud victims and $4,619,340 to the IRS. See United States v. Swartz , 758 F. App'x 108 (2d Cir. 2018) (summary order).

As relevant here, Swartz also consented to the entry of an order under 18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461(c) directing the forfeiture of "any and all interests" he held in the Jreck Subs franchise, including the franchise rights, trademarks, and other brand-related intellectual property ("Jreck Subs" or the "Asset"). The Court entered a preliminary order of forfeiture ("POF") to that effect on September 23, 2016.¹

Thereafter, four claimants filed petitions under 21 U.S.C. § 853(n) asserting an interest in the Asset: Edward St. Onge and Orienta Investors, LLC ("Orienta") (Dkt. Nos. 43, 55, 83, 84, 103); Change Capital Partners Fund I, LLC ("Change Capital") (Dkt. Nos. 68, 81); the Swartz Family Trust (Dkt. Nos. 75, 80); and Continental Trust Corporation Limited ("Continental Trust") (Dkt. No. 86).

On September 26 and December 20, 2017, the Government moved under Federal Rule of Criminal Procedure ("Criminal Rule") 32.2(c)(1)(A) to dismiss all four petitions. Dkt. Nos. 85, 106, 176, 177. The Swartz Family Trust and Orienta opposed dismissal, Dkt. Nos. 89, 112, and in reply the Government withdrew its motion to dismiss Orienta's petition, Dkt. No. 117, but not its motion to dismiss the other petitions, Dkt. No. 159. The Court also received full briefing on a request by Orienta for leave to supplement its petition. Dkt. Nos. 103, 108, 111, 113, 115.

On May 9, 2018, Orienta and the Government filed an additional set of motions in their struggle for continued control over the Asset. Orienta, for its part, requested injunctive relief related to the ongoing operation of the franchise. Dkt. No. 119. The Government, on the other hand, sought approval under Criminal Rule 32.2(b)(7) to conduct an interlocutory judicial sale. Dkt. No. 120. The Court permitted extensive briefing on these motions. See, e.g. , Dkt. Nos. 130, 131, 132, 134, 135, 136, 137, 146, 148, 149, 150.

On June 1, 2018, the Court heard oral argument on Orienta's motion for injunctive relief and the Government's motion for interlocutory sale. Thereafter, the Court allowed supplemental briefing on these and other issues. See, e.g. , Dkt. No. 143, 159, 163, 165, 166, 167, 168, 169. Shortly thereafter, a group of franchisees moved to intervene, Dkt. No. 170, but then decided against it, Dkt. No. 172, and withdrew their request, Dkt. No. 173.

On January 16, 2019, the Government advised, and on July 25, the petitioner confirmed, that Change Capital's claim has been fully satisfied and therefore its § 853(n) petition is moot. Dkt. No. 181, 185. The remaining matters are now fully briefed and will be decided on the basis of the written submissions and the points of counsel heard at oral argument.

II. BACKGROUND ²

The sprawling operation now known as Jreck Subs first sprung into existence in the summer of 1967, when three schoolteachers looking to make some extra money joined forces. The trio purchased a decommissioned school bus and set up shop at the entrance to the local U.S. Army base, where they sold submarine sandwiches to the hungry soldiers stationed there.

It turned out to be a good business model, and the next summer the three original founders added two more friends to the mix. Jreck Subs assumed the corporate form in 1968, taking its legal title from the first letter of each founder's given name—Jerry Haley, Robert Martin, Ellis Martin, Charles Lehman, and Keith Waltz. The quintet headquartered their operation in Watertown, New York, and began the hard work of growing the franchise into a series of brick-and-mortar stores across Central and Northern New York.

In 1972, Swartz's father Thomas, a practicing Watertown attorney, joined the corporation. Thomas purchased a minority interest in Jreck Subs from the widow of one of its founders in the early 1980s, and in 1991 he obtained a controlling interest by buying out the surviving founders. Thomas financed a substantial part of the buyout using promissory notes, issuing separate $365,000 notes to each of the four remaining members.

Thomas never repaid those notes, and his misbehavior on that score later turned out to be just a small piece of the financial misconduct in which he had been engaged. On January 4, 1996, a federal grand jury sitting in the Northern District of New York returned a four-count indictment against Thomas and Harry S. Pack ("Pack"), another lawyer and the former president of Jefferson National Bank ("JNB") in Watertown, New York. See United States v. Pack , 1996 WL 760178 (N.D.N.Y. Dec. 27, 1996) (Pooler, J.).

Among other things, the federal indictment accused Thomas of giving Pack kickbacks in exchange for funneling JNB's legal business to his own law firm, and alleged that Pack routinely influenced JNB to make improper loans to Thomas and his "affiliated entities." Pack , 1996 WL 760178 at *1. After a four-week trial that wrapped up in October of 1996, the jury found Thomas and Pack guilty on all counts. Id.

Thomas, possibly in an effort to shelter the family's assets, handed over ownership and control of Jreck Subs to his son. Guided by his father, Swartz quickly took the company public using a "reverse merger," which occurs when "the private operating company merges into the public company, usually a shell company, and the public shell company survives the merger with the private operating company's shareholders gaining a controlling interest in the voting power and outstanding shares of capital stock of the public company and the private operating company's management taking over the board of directors and management of the public company." Lorne & Bryan, 11 Acquisitions & Mergers § 3:11.10.

In textbook fashion, Swartz bought up a Colorado public shell company with no operating assets and merged Jreck Subs, Inc., the private franchise company, into the empty public shell. What emerged on the other side was a new public company named Jreck Subs Group, Inc., with defendant as its Chief Executive Officer and Director. Defendant headquartered the new company in Heathrow, Florida, but kept operations, accounting, management, and pretty much everything else in Watertown.

Thereafter, Swartz renamed Jreck Subs Group, Inc. to Ultimate Franchise Systems ("Ultimate Franchise"). The renamed company's business plan called for expansion and in particular the acquisition of multiple additional franchise chains. Defendant hired...