Litigation isn’t often pretty. And when there are big dollars at stake, it can turn downright nasty.
That’s exactly what happened when Jeffrey Prosser and his companies filed for bankruptcy. Prosser, the former owner of Innovative Communications Corp. (ICC) in the U.S. Virgin Islands, amassed personal wealth valued at more than $360 million in 2004 (in today’s dollars, that would be close to half a billion, or more than $455 million). Two years later, Prosser’s fortunes turned when a court held him jointly and severally liable to the tune of $56 million (downloads as a pdf) for his role in the fraudulent acquisition of the outstanding public stock of the predecessor corporation to ICC.
In an effort to regroup, Prosser filed a Chapter 11 bankruptcy petition. Under Chapter 11, the goal is reorganization: debts are still paid off but over time and often, with more favorable terms. With a Chapter 11 bankruptcy, it can be often be business as (nearly) normal. That wasn’t the result here: the Bankruptcy Court converted the case from Chapter 11 to Chapter 7.
A Chapter 7 bankruptcy is what most people think of when they think of a bankruptcy. With a Chapter 7 bankruptcy, assets are generally sold off in order to pay debts. To make sure that the right creditors get paid (since not everyone will get paid in every instance), a trustee is appointed. In Prosser’s case, James Carroll was appointed as bankruptcy trustee.
With that, the matter should have proceeded fairly normally. But it was anything but normal.
Bit by bit, Prosser’s empire was disassembled as the bankruptcy proceedings churned on in the Virgin Islands. Federal marshals showed up at his multimillion dollar mansion in Palm Beach to ensure compliance with an eviction order. Plans were made to sell his Lake Placid and St. Croix homes, as well as personal effects which included a wine collection initially valued at $3 million, jewelry and glassware.
The bleeding didn’t stop there. Creditors filed actions against ICC, resulting in an involuntary Chapter 11 bankruptcy petition for the company. As part of that bankruptcy, the Chapter 11 trustee moved to forced Prosser’s family to return property that was, they said, illegally transferred. Prosser was also accused by his own bankruptcy trustee, Carroll, of transferring millions of dollars worth of assets to his wife, Dawn, in an effort to shield those assets from the bankruptcy. In 2011, a district court found that Prosser had engaged in a series of fraudulent transfers and a flurry of appeals and other legal actions followed.
While that matter was being litigated, the legal maneuvering hadn’t slowed down. Before the ruling, in 2010, Prosser, through his counsel, filed a motion alleging a conflict of interest between Carroll and his attorneys regarding the payment of legal fees for Arthur Stelzer, Prosser’s former “valet and personal assistant.” Trustee Carroll was represented throughout the proceedings by Fox Rothschild, a nationally recognized law firm with its headquarters in Philadelphia. In the motion, Prosser’s counsel argued that Stelzer and Carroll’s attorneys “may have engaged in criminal activity (i.e. bribery).” The motion for a hearing was dismissed and Prosser’s counsel, Norman Abood, voluntarily dismissed the claims and withdrew objections to the payment of fees. The next shot over the bow was a motion for sanctions against Prosser and Abood for creating unnecessary litigation. After extensive legal proceedings, sanctions were imposed, reversed and reinstated.
Nearly ten years and several million dollars in fees after the initial bankruptcy proceedings were initiated, you’d think that the matter might finally be winding down. You’d be wrong.
In 2014, Abood sent a letter to Fox inquiring about an open tax matter. Abood suggested that Fox might have an outstanding tax obligation related to the performance of legal services to Trustee Carroll in the Prosser matter. Abood noted that he found such obligations relevant to the Prosser bankruptcy proceedings and indicated that, absent cooperation on the matter, he was willing to take it to court. By this time, clearly Abood and Fox were both pretty comfortable as adversaries in court.
In August, Fox fired back, filing an action against the U.S. Virgin Islands, the U.S. Virgin Islands Bureau of Internal Revenue (USVI BIR) and Does 1-5. The action alleges that not only did the USVI BIR improperly assess the firm’s tax liabilities but that the information related to those assessments was leaked from the USVI BIR. The smoking gun, according to Fox, is that Abood’s letter is dated September 21, 2014, while the tax assessments mailed to Fox were postmarked on September 23, 2014. Bam! Case closed.
Or maybe not.
According to Abood, the Fox complaint leaves out an important piece of information: the information referenced in his letter was publicly available. Specifically, Abood notes that on September 3, 2014, there were public hearings in the Virgin Islands legislature, broadcast on television and radio, focusing on the budget concerns in the territory. During those hearings, he says that two Senators, Sen. Nereida “Nellie” Rivera-O’Reilly and Sen. Kenneth Gittens questioned V.I. Internal Revenue Bureau Executive Director Claudette Watson-Anderson about efforts to collect outstanding revenues. In particular, Abood says, Sen. Rivera-O’Reilly, questioned Director Watson-Anderson about stateside companies with Virgin Island sourced income. According to Abood, she specifically referenced companies involved in the Prosser bankruptcy proceedings, including Fox. Those companies, noted Sen. Rivera-O’Reilly, were turned in by whistleblowers for failure, it was alleged, to report and pay tax on nearly millions of dollars.
Why would those kinds of specific questions arise at a budget hearing? Money. Foreign money. Or foreign(ish). Although the U.S. Virgin Islands are a U.S. territory, they have a different tax system. To keep things easy, most of their system “mirrors” IRS rules and procedures. In general, U.S. taxpayers who are not bona fide residents of the USVI but have USVI source income apportion the tax accordingly.
The failure to collect money earned by “stateside” companies who are doing business in the USVI has become a point of contention in the cash-strapped territory. Legislators want tax collectors to become more aggressive – and that’s what launched this dialogue. It’s the same kind of discussion that you’re seeing in the U.S. with respect to multinational companies like Apple, Microsoft and Twitter: when companies are increasingly mobile, how do you source the income for tax purposes?
The Prosser matter is, as Fox notes, likely the largest bankruptcy matter ever litigated in the USVI. There are millions of dollars in fees that have been generated over the years. And the USVI seems to want their cut. How much of a cut, if any, is key. In its complaint, Fox notes that it has no offices in the USVI and that its client in the Prosser matter, Trustee Carroll, is not a resident of the USVI. Most of the legal work performed in the Prosser matter was actually done, Fox claims, in the Philadelphia and New York offices, not in the USVI. And when attorneys did come to the USVI, they didn’t stay long. While Fox alleges that the BIR wants to ding them for 100% of the fees earned in the Prosser matter, Fox claims that the actual amount of time spent by its employees in the USVI on the matter was closer to 7%. Despite attempts to reach out to the Fox attorneys who filed the action, William H. Stassen and Scott Oberlander, neither offered comment.
Fox originally kept mum on the tax issues, a move that Abood criticized, saying that he had contacted attorney Yann Geron about whether Fox would respond to his request for information about the tax liability but did not receive a satisfactory response. Meanwhile, news of the assessment made its way around the island: The Consortium, a local news source in the Virgin Islands, claimed to have reviewed documents from BIR indicating that the following amounts were owed as of early 2015:
Rural Telephone Finance Cooperative – $312 million
Vinson & Elkins – $28 million
Greenlight – $27.5 million
Alvarez and Marsal – $17 million
Fox Rothschild – $8 million
Stan Springel – $2.5 million
Christies Auction House – $1.5 million
James P. Carroll – $500,000
An email to Ernice Gilbert, who founded The Consortium and wrote the article, was not returned.  Fox, through its complaint, has denied that the tax liability exists and further asserts that, despite Gilbert’s claims to have reviewed BIR documents, there are no documents available to the public with that specific tax assessment information.
So how did all of this information get out into the public eye? Fox claims through its complaint that the information was leaked either directly by the USVI BIR or a representative of the BIR to Abood. They have alleged the latter before and an investigation was launched, according to the complaint, which resulted in an internal finding that no leak occurred. The matter will now be resolved in court.
Of course, the initial inquiry into Fox’ finances also began with a leak, or more accurately, two whistleblowers who turned the companies to the USVI BIR on June 10, 2013. Fox alleges that the whistleblowers “were or are affiliated with Jeffrey Prosser.” I asked Abood whether that was true. He reminded me that under the rules of attorney-client privilege and whistleblower laws, he couldn’t say either way on behalf of Prosser. However, he could answer on his own behalf, saying definitively, “I am not the whistleblower.”

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Kelly Erb is a tax attorney, tax writer and podcaster.

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