Free Reply Brief - District Court of Delaware - Delaware

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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE TESLA INDUSTRIES, INC., a Delaware Corporation, Plaintiff, v. DAVID C. WALDMANN, LYNDOL W. HOLLINGSWORTH, CHARLES MINNICK a/k/a CHUCK MINNICK, and NEW MILLENNIUM TOOLS, INC., an Oregon Corporation, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) )

Civil Action No. 06-55-GMS

PLAINTIFF, TESLA INDUSTRIES INC.'S, REPLY MEMORANDUM IN SUPPORT OF ITS MOTION IN LIMINE TO PRECLUDE TRIAL OF UNPLEADED ISSUES

Brian A. Sullivan (#2098) Robert D. Wilcox (#4321) Amy D. Brown (#4077) WERB & SULLIVAN 300 Delaware Avenue, 13th Floor P.O. Box 25046 Wilmington, Delaware 19899 Telephone: 302-652-1100 [email protected] Paul E. Crawford (#493) CONNOLLY BOVE LODGE & HUTZ LLP 1007 N. Orange Street P.O. Box 2207 Wilmington, Delaware 19899 Telephone: 302-888-6262 [email protected] Dated: April 26, 2007 Attorneys for Plaintiff Tesla Industries Inc.

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TABLE OF CONTENTS I. II. Counterstatement of Facts........................................................ Argument......................................................................... 1 2

TABLE OF AUTHORITIES CASE LAW Fujisawa Pharm. Co., Ltd. v. Kapoor, No. 92 C 5508, 1999 WL 543166, at *17 (N.D. Ill., July 21, 1999)...................................................... C.R. Bard, Inc., v. M3 Systems, No. 93 C 4788, 1994 WL 270252, N.D. Ill., June 16, 1994) ....................................................................................

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RULES

FEDERAL RULES OF EVIDENCE RULE 608 ....................................

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FEDERAL RULES OF EVIDENCE RULE 403 ........................................ 3

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This is Plaintiff, Tesla Industries, Inc.'s, Reply in Support of Its Motion in Limine to Preclude Trial on Unpleaded [Tax Evasion] Issues (DI 147). This replies to the scurrilous accusations in NMT Defendants' Memorandum in Opposition to that Motion in Limine (DI 158) "Defendants' Memo"). 1 NMT seeks to introduce evidence that Tesla's President and CEO (1) filed false and incomplete tax returns, (2) failed to file tax returns, and/or (3) knowingly testified falsely in an Affidavit to this Court. (See NMT Op. Brief p.1-2, 3.) Such evidence is clearly barred by F.R.E 608(b). This Court should also use its discretion to bar the evidence under Rule 403 due to its unfair prejudicial effect. For the following reasons, Tesla respectfully requests this Court to grant its motion in limine to preclude the introduction of evidence related to purportedly false, incomplete, or nonexistent tax returns. I. COUNTERSTATEMENT OF FACTS Contrary to Defendants' Memo, page 2, Tesla did not underreport 2001/2002 taxes. The simple response to Defendants' scandalous claims is that Tesla's accountant is human and susceptible to human error. In simple terms he goofed! His assistant mistakenly used the same revenue data for both 2001 and 2002 tax years. (See Affidavit of Dee Ridgeway, Exhibit "A" hereto). The obvious error belies any intent to defraud the IRS. Next, Defendants' Memo, (page 2) cites tax liens against Tesla as a sure sign that its president, David Masilotti, belongs in leg irons. Once again there is a simple, non-criminal, answer for this. These liens were the subject of a lengthy meeting between another Tesla Accountant, Cordua & Assoc., and the IRS, as explained in the attached Affidavit of Mr. Cordua (Exhibit "B" hereto). This Affidavit details a meeting with an IRS agent in August, 2005 to explain that all wage withholdings had been made by Tesla despite IRS inability to find those
The other Defendant, David Waldmann, belatedly joined in opposing Plaintiff's Motion in Limine by filing a one sentence embrace of Defendants' Memo (See DI 158). This was filed after the deadline for opposing Plaintiff's Motion and should be disregarded.
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payment in its archaic database.2 Everyone ­ including the IRS agent ­ left the meeting agreeing that there were no deficiencies or delinquencies in Tesla's tax payments. However, it appears that the IRS did not lift the tax liens they had filed. II. ARGUMENT Defendants have lodged over twenty counterclaims (See DI 26-27) to distract attention from their theft of Tesla's trade secrets and confidential information, and now seek to add tax evasion to their shotgun defenses hoping that something will stick or distract the jury from Defendants' misdeeds. Defendants' Memo (page 3) tries to bootstrap its relevancy arguments with an alleged discrepancy between the amount of expenses deducted by Tesla for research and design, selling and marketing versus the assertions in Mr. Masilotti's Affidavit that millions were spent on these items. Ignoring for a moment that this alleged underreporting of expenses is a testament to Mr. Masilotti's candor in dealing with the IRS3, it is symptomatic of a larger problem if Defendants' have their way on this ersatz tax evasion issue. It opens up a battle of experts over this unpleaded issue. If Defendants are allowed to proceed with this tack Tesla will be left with no option but to present its reasons for every deduction covered by five or more years of tax returns.4 1. A Purported Violation of the Internal Revenue Code is Irrelevant to NMT's Damages 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. F.R.E. 401. Whether or not Tesla has been investigated or prosecuted by
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In fact, the IRS has been unable to account for an approximate $78,000 payment made by Tesla's president to an IRS withdrawal. See Exhibit "B". 3 Underreporting of expenses necessarily increases taxes. 4 Tesla has only recently started up, but does not yet operate, software that would better enable it to allocate its labor costs to R&D associated with its product developments. Prior to this several persons, particularly operators of Tesla's multi-million dollar contracted machining mills spend considerable ­ if not all ­ of their time on product development. These are highly skilled personnel making high five figure salaries. But allocation of their time between development and production is not possible until the new software is implemented.

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the Internal Revenue Service is completely irrelevant to the issue of the quantum of damages. Such evidence can be gleaned from other financial documents, e.g., invoices, quarterly sales reports, income statements. The party to the litigation is Tesla, not Mr. Masilotti. His character is not at issue to be tried. Thus his character cannot be challenged merely because he is an officer of a corporate entity against which the IRS has mistakenly filed tax liens. The cases cited in Defendants' Memo (pp 4-5) relate to use of tax issues to challenge the character of a party and are thus inapposite here where tax issues are proposed as fodder for cross-examination of Mr. Masilotti, a non-party. Fujisawa Pharm. Co., Ltd. v. Kapoor, No. 92 C 5508, 1999 WL 543166, at *17 (N.D. Ill., July 21, 1999) (attached hereto as Exhibit "C") was a RICO action. Plaintiff filed a motion in limine to preclude defendant from introducing evidence of plaintiff's guilty plea to a prior price-fixing conspiracy charge and also an industrial espionage investigation in which several of plaintiff's employees were arrested. Id. at *17. Defendant argued that Rule 608(b) allowed such evidence for purposes of impeaching the credibility of plaintiff's witnesses who would testify as the representatives of the corporation. Id. The court disagreed, stating: The difficulty with such an assertion is that Rule 608(b) refers to `the conduct of a witness,' [and i]n the instant case, it is undisputed that none of [plaintiff's] trial witnesses was implicated in the industrial espionage incident and that none has been convicted of any crime. Further, [plaintiff] asserts that [plaintiff] itself, as a corporation, is not a witness [and defendant has not offered evidence that the witnesses are the corporation's alter egos]. See also, C.R. Bard, Inc., v. M3 Systems, No. 93 C 4788, 1994 WL 270252, N.D. Ill., June 16, 1994) (Attached hereto as Exhibit "D"). For the foregoing reasons, this Court should grant Plaintiff's Motion in Limnie to Preclude Trial of Unpleaded Issues.

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April 26, 2007

/s/ Brian A. Sullivan Brian A. Sullivan (DE No. 2098) Robert D. Wilcox (DE No. 4321) Amy D. Brown (DE No. 4077) WERB & SULLIVAN 300 Delaware Avenue, 13th Floor P. O. Box 25046 Wilmington, DE 19899 Telephone: (302) 652-1100 Facsimile: (302) 652-1111 and

Paul E. Crawford (I.D. # 493) CONNOLLY BOVE LODGE & HUTZ LLP 1107 N. Orange Street P.O. Box 2207 Wilmington, DE 19899-2207 302.658.9141 [email protected]

Attorneys for Tesla Industries, Inc.

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CERTIFICATE OF SERVICE

I hereby certify that on April 26, 2007, I caused a copy of the foregoing document to be served upon the persons listed below in the manner indicated:

VIA E-MAIL & FIRST CLASS MAIL John A. Adams, Esq. Susanin Widman & Brennan, P.C. 455 S. Gulph Road, Suite 240 King of Prussia, PA 19406 Louis S. Mastriani, Esq. Rodney R. Sweetland, III, Esq. David F. Nickel, Esq. Adduci,Mastriani & Schaumberg, LLP 1200 Seventeenth Street, N.W. Fifth Floor Washington, DC 20036-3006

VIA HAND DELIVERY John D. Demmy, Esq. Stevens & Lee, P.C. 1105 North Market Street, 7th Floor Wilmington, DE 19801 Steven J. Balick, Esq. John G. Day, Esq. Lauren E. Maguire, Esq. Ashby & Geddes 500 Delaware Avenue, 8th Floor Wilmington, DE 19801

/s/ Brian A. Sullivan Brian A. Sullivan (#2098)