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Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 1 of 30

No. 06-305 T

(Judge Marian Blank Horn)

IN THE UNITED STATES COURT OF FEDERAL CLAIMS



CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. & SUBSIDIARIES

Plaintiff

Defendant

v.

THE UNITED STATES,



DEFENDANT'S SECOND MOTION TO COMPEL



EILEEN J. O’CONNOR
Assistant Attorney General

DAVID GUSTAFSON
STEVEN I. FRAHM
DAVID N. GEIER
JOSEPH A. SERGI
JAMES E. WEAVER
ADAM R. SMART

Attorneys
Tax Division
Department of Justice
Washington, D.C. 20044
(202) 616-3448 (telephone)
(202) 307-0054 (facsimile)



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 2 of 30

TABLE OF CONTENTS

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ii

QUESTIONS PRESENTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

STATEMENT OF FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

A.

B.

Background – The LILO Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Insufficient Responses To Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.

2.

3.

4.

5.

6.

7.

Interrogatory No. 2–Plaintiff’s other LILO transactions . . . . . . . . . . . . . 3

Interrogatory No. 3–Information underlying Plaintiff’s allegations
regarding the LILO transaction at issue . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Interrogatory No. 7–Plaintiff’s investigation of the
LILO Transaction at issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Interrogatory No. 12–Tax Indemnity Agreement . . . . . . . . . . . . . . . . . . . . 9

Interrogatory No. 14–Outside consultants regarding
the LILO transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Interrogatory No. 16–Reasons for a trust . . . . . . . . . . . . . . . . . . . . . . . . 11

Document Request Nos.1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

A.

B.

C.

Defendant Is Entitled to Information That Explains the Transaction . . . . . . . . . 13

Defendant is Entitled to Information Related to the Subjective
Intent of Plaintiff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Plaintiff’s Reliance on Rule 33(d) is Improper . . . . . . . . . . . . . . . . . . . . . . . . . . 23

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 3 of 30

TABLE OF AUTHORITIES

FEDERAL CASES

ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998), cert.

denied, 526 U.S. 1017 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

American Electric Power. Co., Inc. v. United States, 326 F.3d 737 (6th Cir.

2003)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

BB&T Corporation v. United States, No. 1:04-cv-00941, 2007 WL. 37798

(M.D.N.C. Jan. 1, 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Cabot v. United States, 35 Fed. Cl. 80 (Ct. Cl. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006) . . . . . . . . . 18-19

Frank Lyon Co. v. United States, 435 U.S. 561 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . 19

Harding v. Dana Transport, Inc., 914 F. Supp. 1084 (D.N.J. 1996) . . . . . . . . . . . . . . . 16

Helt v. Metropolitan District Commission, 113 F.R.D. 7 (D. Conn. 1986) . . . . . . . . . 13

Knetsch v. United States, 364 U.S. 361 (1960) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Muhich v. Commissioner, 238 F.3d 860 (7th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . 18

Rose v. Commissioner, 868 F.2d 851 (6th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . 18

S.E.C. v. Elfindepan, S.A., 206 F.R.D. 574 (M.D.N.C. 2002) . . . . . . . . . . . . . . . . . 23, 25

In re Sealed Case, 676 F.2d 793 (D.C. Cir. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

In re Sealed Case, 737 F.2d 94 (D.C. Cir. 1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Sochin v. Commissioner, 843 F.2d 351 (9th Cir.), cert. denied, 488 U.S.

824 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

In re Sulfuric Acid Antitrust Litigation, 231 F.R.D. 351 (N.D. Ill. 2005) . . . . . . . . . . . 23

Transpac Drilling Venture, 1983-2 by Dobbins v. United States, 32 Fed.

Cl. 810 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ii



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 4 of 30

COURT RULES

RCFC 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

RCFC 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

RCFC 37 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

MISCELLANEOUS

8 J. Wigmore, Evidence in Trials at Common Law § 2327 at 636 . . . . . . . . . . . . . . . . 16

iii



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 5 of 30

No. 06-305 T

(Judge Marian Blank Horn)

IN THE UNITED STATES COURT OF FEDERAL CLAIMS



CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC. & SUBSIDIARIES

Plaintiff

v.

THE UNITED STATES,

Defendant



DEFENDANT'S SECOND MOTION TO COMPEL



Pursuant to RCFC 37(a)(2)(B), Defendant moves this Court to compel Plaintiff to fully

respond to Defendant’s Interrogatories and Request for Production. Counsel for Defendant

discussed the issues with Plaintiff’s counsel in correspondence and by telephone in a good faith

effort to resolve the matter, but was unsuccessful. The Court’s assistance is essential, and

Defendant submits the following in support of its motion:

QUESTIONS PRESENTED

1.

2.

Whether a Plaintiff in a tax refund litigation may withhold information bearing on
the structure and mechanics of the tax shelter transaction at issue in the litigation.

Whether a Plaintiff in a tax refund litigation may withhold information bearing on
Plaintiff’s subjective intent in deciding to participate in the tax shelter scheme.



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 6 of 30

3.

Whether Plaintiff has properly relied on Court of Federal Claims Rule 33(d) to
respond to Interrogatories propounded to it, where it failed to specifically identify
the documents from which an answer may be derived or where the documents
cited do not contain information responsive to the interrogatory or do not contain
a complete response.

STATEMENT OF FACTS

A.

Background - The LILO Transaction

This case involves the proper tax treatment to be accorded Plaintiff’s LILO shelter

transaction. Consolidated Edison Company of New York, Inc. & Subsidiaries (“Con Ed” or

“Plaintiff”) participated in a lease-in/lease-out (“LILO”) shelter transaction involving a power

station (the “RoCa3” facility owned by South Holland Electric (N.V. Electriciteitsbedrifj Zuid-

Holland) (hereinafter “EZH”)) located in the Netherlands (hereinafter the “LILO Transaction”).

Plaintiff, a United States taxpayer, through a subsidiary, purported to lease property from its

owner, EZH, under a head lease and simultaneously purported to lease the property back to EZH

under a sublease. As is typical in a LILO transaction, the counter-party, EZH, is an entity, in this

case a foreign corporation, that is not subject to federal income taxation, and therefore is unable

to claim federal income tax benefits, like depreciation, associated with ownership of the RoCa3

facility. After the close of the transaction, EZH or its successors continued to operate the

property and retained all of the benefits and burdens associated with the property’s use and

ownership. Nevertheless, Plaintiff claimed rent and interest deductions associated with the

purported head lease. The specific substantive issue raised in this refund suit is whether Plaintiff

is entitled to deductions for rent, interest, and transaction costs its asserts were incurred in 1997

in connection with the LILO Transaction.

Defendant contends that the tax deductions claimed by Plaintiff are improper for several

reasons, including that Plaintiff did not acquire a genuine leasehold interest in property in 1997

2



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 7 of 30

when it participated in the LILO Transaction and did not incur a genuine debt obligation,

entitling it to tax deductions. Perhaps most important for the purposes of this motion, Defendant

contends that the LILO Transaction should be disregarded under the economic substance

doctrine, which requires, among other things, that the Court examine Plaintiff’s motivation for

engaging in the LILO Transaction.

B.

Insufficient Responses To Discovery

On September 29, 2006, Defendant served its initial discovery requests. These requests

were intended to narrow the issues for trial and determine which witnesses Defendant would

need to notice for depositions.

On November 2 and 3, 2006, Plaintiff responded. (Interrogatory Responses and Request

for Production Responses, attached as Exhibits A-1 and A-5 respectively1). Despite many

letters, emails and telephone calls, Plaintiff has failed to fully respond to the following

Interrogatories and Requests for Production.

1.

Interrogatory No. 2–Plaintiff’s other LILO transactions

Defendant’s Interrogatory No. 2 sought information and documents regarding other LILO

and tax shelter transactions Plaintiff evaluated from 1996-1998:

Identify all other LILO transactions or shelter transactions presented to,
considered, reviewed or analyzed by the Plaintiff in 1996, 1997 or 1998, and
identify all documents in connection with your consideration, review or
analysis.
In its initial response to this interrogatory (November 2, 2006), Plaintiff objected that it

was not relevant, overbroad, and unduly burdensome and, subject to that objection, identified

only a single LILO transaction (“NUON”), but refused to identify or produce to Defendant

1All exhibits referred to in this motion are attached to the Declaration of David N. Geier,

filed concurrently.

3



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 8 of 30

specific documents descriptive of its participation in the NUON LILO. (Exhibit A-1). Plaintiff

also advised that it would identify other LILO transactions it considered in response to

Defendant’s First Set of Requests for Production of Documents. (Id.). While Plaintiff’s

response to Request for Production Number 1 identified four leasing transactions it had

considered, it did not produce any documents, despite Defendant’s Request, that reflected

Plaintiff’s consideration, review, or analysis of those transactions. (See Exhibit A-5).

Soon after its initial response, Plaintiff advised in November 13, 2006 correspondence

that it would supplement its response. (Exhibit B-2). A few days later, however, Plaintiff

retracted that representation, stating it “is not prepared to respond at this time.” (November 17,

2006 correspondence, attached as Exhibit B-3). The following month, Plaintiff explained that

“[i]t is impossible for current representatives of [Plaintiff] to certify under oath what transactions

were ‘considered’ or ‘reviewed’ by any employee of the company approximately ten years ago.”

(First Supplemental Inter. Resp., attached as Exhibit A-2). Plaintiff limited its response to only

transactions “substantively evaluated and presented” to its Board of Trustees and then only to

discussions of “certain leasing transactions” contained in the Board of Director Minutes of Con

Edison Development.2 (Id.) (emphasis added). With only one exception discussed below,

Plaintiff has produced no further information concerning these transactions.

On February 16, 2007, two months after Plaintiff’s refusal to provide further

documentation pertaining to other LILO transactions it considered, Plaintiff produced limited

documentation pertaining to one LILO transaction considered during 1998, the MEGA

2Plaintiff originally claimed to limit its response to “LILO and other leasing transactions

which it entered or considered,” (Exhibit B-2), and then later further limiting its response to
those “substantively evaluated and presented” to its Board of Trustees. (Exhibit A-2).

4



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 9 of 30

transaction. (Exhibit B-6). This transaction is referenced in a few of the documents previously

produced by Plaintiff, as are several other LILO transactions. In addition to its failure to produce

information about these other LILOs, it appears that the documentation produced on February

16, 2007 with respect to the MEGA transaction is incomplete.3 For example, in its production

there is almost no correspondence pertaining to the transaction, nor any version of a “white

paper” which summarizes a transaction and generally is a component of such transactions.

Further, Plaintiff has not produced any further documentation pertaining to the other LILO

transactions mentioned in its own documents, apparently because of its unilateral decision to

limit Defendant’s request and exclude transactions that were not presented to its Board.

2.

Interrogatory No. 3–Information underlying Plaintiff’s allegations
regarding the LILO transaction at issue

Defendant’s Interrogatory No. 3 requested detail concerning the basis for Plaintiff’s

allegations in the Complaint regarding the mechanics of the LILO transaction at issue:

Describe how the rent obligation and various option prices described in
paragraphs 63, 64, 68 and 69 of the Complaint were negotiated, calculated
and allocated.

Plaintiff’s initial response on November 2, 2006, was vague, no less conclusory than the

allegations in the Complaint, and unhelpful (Exhibit A-1):

The terms of the Lease Transaction were negotiated to optimize the economic
returns to each party. In particular, Con Edison negotiated the terms of the
transaction to provide a yield for financial accounting purposes, consistent with

3Consistent with this evaluation of the documents produced, Plaintiff’s counsel, as

recently as the beginning of March, informed Defendant that it intended, at some undefined point
in the future, to produce further documents pertaining to the MEGA LILO transaction, as well as
another LILO, ENECO. Plaintiff has yet to do so, and this pattern of piecemeal production of
documents over a period of several months with no assurance that it is anywhere near complete
leaves Defendant with no choice but to turn to the Court to ensure Plaintiff makes prompt, full,
and complete production in response to discovery requests.

5



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 10 of 30

its investment objectives.” The parties’ negotiations were constrained by factors
such as the useful life of the property in question and the fair market value of the
leasehold interest acquired by Con Edison. In negotiating the specific terms of
the transaction, the parties utilized computer software which optimizes the
economic return to each party, taking such constraints into account.

The terms of the Lease Transaction were also constrained by the requirements of
section 467 of the Internal Revenue Code. The allocations of rental income and
deductions for tax purposes were designed to comply with section 467.

In response, Defendant wrote and explained that the answer contained no factual support

and instead relied upon conclusory contentions. (Nov. 8, 2006 correspondence, attached as

Exhibit B-1). On November 13, 2006, Plaintiff supplemented its response and relayed that the

Lease Transaction was actually subject to a competitive bidding process - a response that

conflicts with Plaintiff’s initial discovery response that the terms were negotiated. (Exhibit B-2).

Plaintiff’s supplementation remained extremely broad. While it identified certain

assumptions it made in submitting its “bid,” it failed to explain how many of these assumptions

were derived. Instead, Plaintiff explained that “computer software was used to set forth rental

schedules which ‘optimize’ the yield to Con Edison while maintaining the net present value

benefit offered to South Holland Electric.” (Exhibit B-2). Plaintiff offered that the “net present

value benefit bargained for by South Holland Electric is the amount of the benefit retained by

South Holland Electric after taking into account the net present value of its obligations under the

lease, including the potential exercise of the purchase option should South Holland Electric

choose that option” and that the allocation of income and deductions were “designed to comply

with section 467” of the Internal Revenue Code. (Id.).

Since Defendant’s Interrogatory asked for an explanation how specific amounts were

negotiated or allocated between the parties, but Plaintiff had still failed to answer that question,

6



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 11 of 30

Defendant wrote to Plaintiff on December 12, 2006, challenging the adequacy of the response.

(Exhibit B-4). By letter dated December 21, 2006, Plaintiff remained vague and unresponsive:

As explained previously, Con Edison and South Holland Electric
negotiated the rent and option prices in order to maximize their respective
economic returns from the transaction, should the option be exercised. Also, as
explained previously, the rental amounts were allocated in accordance with
section 467 of the Internal Revenue Code for tax purposes. Rental amounts were
calculated by reference to the fair market rental value of the property. As
explained in the supplemental information provided, which the United States
agreed was helpful, the parties’ negotiations on these points were constrained by
factors such as the fair market value of the property and its useful life. If, by its
request, the United States intended a different meaning for “negotiated,”
“calculated,” and “allocated” other than the meanings of those words as we
understand them, Con Edison requests that the United States clarify its request.

In response to the United States’ follow-up question in its correspondence
of December 12, 2006, the computer program used was called “ABC.” This
computer program is identified on the top of each of the pricing runs which Con
Edison previously produced. The program was created by Warren & Selbert,
Incorporated. See www.warren-selbert.com. Robert Holzman, identified in Con
Edison’s First Supplement to its Rule 26(a) Disclosures, ran this software
program on behalf of Con Edison. Con Edison has already provided information
on “how” the software was used. The ABC program is standard software which is
widely used in the leasing industry in order to perform the calculations required in
connection with leasing transactions. As previously indicated, one of the
functions of this software is to calculate rental amounts in a manner which will
optimize the economic returns to each party. It is also capable of performing the
calculations required by section 467 in order to ensure compliance with those
provisions.

(Dec. 21, 2006 correspondence, attached as Exhibit B-5).

This response, like its prior response, fails to explain how the specific amounts were

negotiated or allocated between the parties or how many of the assumptions were derived.

3.

Interrogatory No. 7–Plaintiff’s investigation of the LILO transaction at issue

Plaintiff alleges in its Complaint that it performed due diligence in connection with its

decision to enter into the LILO transaction at issue, and that entered into the LILO transaction

because it promised economic returns. (Compl. ¶¶ 49-60). Defendant therefore served

7



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 12 of 30

Interrogatory No. 7 to elicit information about due diligence investigation of the LILO

transaction:

Identify any studies, analyses, forecasts, projections or other due diligence
performed or prepared by any individual or entity in connection with the
Lease Transaction, including the individuals or entities that performed such
study or analysis, and all documents that mentions, describes or evidences
such study or analysis.

In its November 2, 2006, response, Plaintiff stated that it would produce documents “to

the extent not privileged” (Exhibit A-1):

The studies prepared by outside advisors are identified in response to
Interrogatory 1 and have been provided as part of Plaintiffs Rule 26(a) disclosures
or will be produced in response to the United States’ First Request for Production,
with the exception of legal opinions which are being withheld pursuant to the
attorney-client privilege. Con Edison also relied upon internal reports and
memoranda, all of which have been provided as part of Plaintiffs Rule 26
disclosure.

Con Edison will produce, to the extent not previously produced in its Rule
26(a) disclosures and to the extent not privileged, the documents which mention,
describe or evidence the aforementioned studies as part of its response to the
United States’ First Request for Production.

On November 8, 2006, Defendant noted that it had not received a privilege log with respect to

Plaintiff’s interrogatory responses and requested that to the extent information responsive to

interrogatories, such as Interrogatory Number 7, was being withheld from Defendant, that

Plaintiff specifically describe the information and the applicable privilege. (Exhibit B-1).

Plaintiff has not provided such a description.

4.

Interrogatory No. 12–Tax Indemnity Agreement

Defendant’s Interrogatory No. 12 asked for an explanation of the reasons for a Tax

Indemnity Agreement:

If Plaintiff executed a tax indemnity agreement, set forth the terms of each
such agreement, explaining the reasons for entering the agreement.

8



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 13 of 30

In its initial response, objected to the inquiry regarding the reasons for the Agreement to

the extent it seeks legal advice. (Exhibit A-1):

A copy of the Tax Indemnity Agreement was provided as part of
Plaintiff’s Rule 26(a) disclosure. The Tax Indemnity Agreement was entered into
to address the matters set forth therein. Plaintiff objects to this Interrogatory to the
extent it seeks legal advice concerning the reasons for entering into the Tax
indemnity Agreement.

On November 13, 2006, Plaintiff reiterated its position that a copy of the Tax Indemnity

Agreement had been produced and that it “was entered into for the purpose of addressing the

matters set forth therein” (Exhibit B-2), but then changed course, and represented that it was not

in possession of any documents setting forth its reasons for entering into the Tax Indemnity

Agreement and was not withholding any such information on a claim of privilege. (Id.).

Defendant challenged the sufficiency of the response. (Exhibit B-4). Plaintiff responded that tax

indemnity agreements “are commonly used in leveraged leasing transactions” and that both

parties to its lease “would likely have expected the closing documents to include a tax indemnity

agreement.” (Exhibit B-5). In circular fashion, Plaintiff articulated that the “reasons for entering

the agreement” can best be understood by examining the terms of the Agreement itself. (Id.).

According to Plaintiff, because “the burden of summarizing the terms of this agreement would

be ‘substantially the same’ for [Plaintiff] as it would be for the United States, [Plaintiff] has

provided a complete response to this Interrogatory. See RCFC 33(d).” (Id.).

On March 15, 2007, Plaintiff supplemented its response reversing itself once again and

contradicted its representation that it was not withholding any information on account of

privilege. (Exhibit A-4). Plaintiff now advised that it entered into a Tax Indemnity Agreement

9



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 14 of 30

“based upon the advice of its counsel.” (Id.). Plaintiff declined to further respond stating that

the advice was protected by privilege. (Id.).



5.

Interrogatory No. 14–Outside consultants regarding the LILO transaction

Plaintiff’s Complaint alleges that it entered into the LILO transaction at issue after

communications with outside consultants, so Interrogatory No. 14 inquired about those

consultations:

Identify all outside consultants you communicated with to locate potential
international energy infrastructure investment opportunities (including
energy facilities), including in your response the opportunities that were
presented to you and all documents that you reviewed or were provided in
connection therewith.

In its initial response to this Interrogatory, Plaintiff objected that the Interrogatory is

“immaterial and irrelevant,” specifically objecting that “Con Edison’s review of other

international energy transactions is not relevant to the determination of the proper tax treatment

of the Lease Transaction.” (Exhibit A-1). It also objected, claiming the inquiry was overbroad

and unduly burdensome, because Plaintiff communicated with numerous outside consultants.

Subject to its objections, Plaintiff identified two consultants, but provided no other information

and did not identify any documents, as requested. (Id.).

On November 8, 2006, Defendant wrote and explained that its effort to learn of

communications which address the subject matter of the lawsuit was an appropriate discovery

request if only for the fact that the consultants were referred to in Plaintiff’s Complaint (see, e.g.,

Compl. at ¶ 49). (Exhibit B-1). Further, to the extent that Plaintiff believed the requests to be

overly broad and/or unduly burdensome, it had not articulated any “burden,” nor had it explained

how the requests might be narrowed instead of ignored. (Id.).

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Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 15 of 30

In a December 21, 2006 letter, Plaintiff explained that it had identified all of its advisors

with respect to the EZH LILO Transaction, but refused to identify outside consultants other than

Cornerstone and International Energy Partners,4 refused to completely identify the responsive

opportunities presented to it, and refused to identify (or produce) all responsive documents.

(Exhibit B-5). On February 16, 2007, several months after its responses were due, Plaintiff

produced additional documents pertaining to International Energy Partners. (Exhibit B-6).

However, Plaintiff continues to refuse to produce responsive information pertaining to its other

advisors and the opportunities presented to it.

6.

Interrogatory No. 16–Reasons for a trust

Defendant’s Interrogatory No. 16 asks why a trust was used in the LILO transaction:

State the basis for your decision to form a trust to enter into the Lease
Transaction.

Plaintiff initially responded that the use of a trust was “standard and customary” in

leveraged leases and, at the same time (but inconsistently) objected on grounds of attorney-client

privilege. (Exhibit A-1). On December 13, 2006, Plaintiff confirmed its earlier response, yet

also suggested that the use of a trust was so standard that it should not be assumed that the

decision to use a trust was Plaintiff’s decision (Exhibit A-2):

Con Edison incorporates its original response to Interrogatory No. 16. Con
Edison further objects to Interrogatory No. 16 on the basis that it assumes the
decision to form a trust was Con Edison’s decision. As stated in the original
response to Interrogatory No. 16, the use of ownership trusts is standard and

4Plaintiff refused to identify such consultants despite the fact that in its original response

to Interrogatory No. 14 it stated that it had consulted with “numerous outside consultants to
locate potential international energy infrastructure investments.” (Exhibit A-1). Further,
Plaintiff’s own board minutes indicate that it had relationships with other consultants for the
purpose of locating potential international energy infrastructure investments. (See, e.g.,
PF009513-16, attached hereto as Exhibit C-1).

11



Case 1:06-cv-00305-MBH Document 22 Filed 04/04/2007 Page 16 of 30

customary in leveraged leases. Furthermore, while Con Edison has no specific
knowledge of South Holland Electric’s reasons, if any, for preferring an
ownership trust, Con Edison understands that lessees often prefer this structure.

On March 15, 2007, Plaintiff again supplemented its response. (Exhibit A-4). Plaintiff

now represented that it entered into the trust “based upon the advice of its counsel.” (Id.).

Plaintiff declined to further respond stating that the advice was protected by privilege.5 (Id.).

7.

Document Request Nos.1 and 2

Defendant propounded two document requests:

Request No. 1

All documents identified, described, mentioned or referred to in your
responses to the interrogatories served concurrently herewith.

Request No. 2

All documents relied upon or reviewed by you in preparing your responses to
the interrogatories served concurrently herewith.

Like its responses to interrogatories, Plaintiff either refused or failed to provide all

responsive information. Each time Defendant informed Plaintiff of the insufficiency of a

response, Plaintiff produced more information. (See, e.g., Plaintiff’s First and Second

Supplemental Responses, attached as Exhibits A-6 & A-7, and Exhibit B-6). Despite its

numerous supplements, Plaintiff has still failed to fully respond to the requests.

Because Defendant’s Request for Production essentially incorporates its Interrogatories

(see Exhibit A-5), Plaintiff’s objections to the document requests and claimed reasons for non-

5Plaintiff has not supplemented its privilege log as a result of this claim with respect to
Interrogatory Numbers 12 and 16; thus it is unclear whether Plaintiff is withholding responsive
documents on the basis of a privilege or whether Plaintiff is referring only to oral
communications with counsel.

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compliance were incorporated in the responses to these interrogatories and more fully discussed

above.

ARGUMENT

Defendant is entitled to discover information and documents in Plaintiff’s possession,

custody, or control that are relevant to the subject matter of this action. See RCFC 26(b)(1);

Cabot v. United States, 35 Fed. Cl. 80, 84 (Ct. Cl. 1996); Helt v. Metropolitan District Comm’n,

113 F.R.D. 7, 12 (D. Conn. 1986).

A.

Defendant Is Entitled to Information That Explains the Transaction

At the center of this case is a series of complicated documents, which Plaintiff claims, at

least from a federal income tax perspective, constitute a valid lease arrangement. Plaintiff

describes the LILO Transaction as “complex.” (Compl. at ¶ 47). Indeed, according to Plaintiff,

it was specifically designed to hinder the United States’ ability to uncover the truth. In

Plaintiff’s own words:

It is anticipated that the transactions will be structured in ways that will make any
challenge to the structure by the IRS difficult to support or litigate.

(CE012022, attached as Exhibit C-2). That this transaction was designed to frustrate the IRS

does not render documents which may shed light on this scheme exempt from discovery.

Plaintiff has made several allegations in its Complaint regarding the mechanics of the

LILO Transaction, including allegations concerning the rental payments and option prices.

(Compl. ¶¶ 63, 64, 68 & 69). Defendant’s Interrogatory Number 3 seeks to determine “how the

rent obligation and various option prices described in paragraphs 63, 64, 68 and 69 of the

Complaint were negotiated, calculated and allocated.” Despite this straight-forward request,

Plaintiff’s responses have been a moving target. Plaintiff first responded by asserting, “Con

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Edison negotiated the terms of the transaction to provide a yield for financial accounting

purposes, consistent with its investment objectives.” (Exhibit A-1) (emphasis supplied). Then,

on November 13, 2006, Plaintiff stated, “the investment in the Lease Transaction was subject to

a competitive bidding process. Bates #PF003241-46 [attached as Exhibit C-3]6 set forth the

terms of Con Edison’s bid.” (Exhibit B-2) (emphasis supplied). After that, on December 21,

2006, Plaintiff contended that the process was negotiated, and apparently not bid, stating that

“Con Edison and South Holland Electric negotiated the rent and option prices in order to

maximize their respective economic returns.”7 (Exhibit B-5) (emphasis supplied). Plaintiff’s

response is deficient, as demonstrated by Plaintiff’s lack of consistency in answering and the

absence of detail as to how the rent and other financial arrangements in the instant transaction

were derived. Plaintiff should be required to fully identify the details of its negotiations (or

those performed on its behalf) and/or the details underlying the assumptions used in making its

bid or engaging in negotiations.

6This document contained certain assumptions of values, interest rates, and time periods
related to the submission of a proposal from Plaintiff to EZH. However, Plaintiff did not explain
how the assumptions in the document were determined or how costs were allocated among the
parties. Moreover, Plaintiff failed to set forth any of the communications that occurred between
the parties to arrive at these assumptions.

7After receiving Defendant’s second follow-up request for information responsive to
interrogatory Number 3, Plaintiff stated “[t]he fact that the United States may have follow-up
questions as a result of [our] response does not indicate that Con Edison’s response was
deficient.” (Exhibit B-5). In fact, Plaintiff’s response is deficient, as demonstrated by Plaintiff’s
lack of consistency in responding and the absence of any detail as to how the rent schedules in
the instant transaction were calculated.

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Similarly, Interrogatory Number 12 asked Plaintiff to explain the reasons for entering

into a tax indemnity agreement.8 (Exhibit A-1). Plaintiff objected to the request on the grounds

of attorney-client privilege and referred the Defendant to the terms of the tax indemnity

agreement itself. (Id.). When pressed, Plaintiff acknowledged that no privileged information

existed. (Exhibit B-2).9 Now, months later, Plaintiff amended its response to state that it

entered into the tax indemnity agreement, “based upon the advice of its counsel,” and then

refused to disclose the advice given. (Exhibit A-4). Setting aside what appears to be Plaintiff’s

gamesmanship, Plaintiff has still not answered the interrogatory and it should not be permitted to

raise, waive, and then raise once again a privilege to avoid responding.

In Interrogatory Number 7, Plaintiff was asked to identify any studies, analyses,

forecasts, projections or other due diligence performed or prepared by any individual or entity in

connection with the Lease Transaction, including the individuals or entities that performed such

study or analysis, and all documents that mention, describe or evidence such study or analysis.

(Exhibit A-1). In response, Plaintiff indicated it was withholding legal opinions responsive to

this request. (Id.). Both in its Complaint (Compl. ¶ 49) and in response to another interrogatory

(Interrogatory No. 4 - in which the Plaintiff was asked to describe the risks associated with the

transaction and the steps taken to mitigate such risks), Plaintiff explained that it relied upon

8Among other things, the tax indemnity agreement prohibits EZH from taking an
inconsistent position with Plaintiff’s tax treatment of the transaction, or from making an
agreement within five years of closing of the transaction, among other things, committing EZH
to the exercise or non-exercise of the “Sublease Purchase Option”, which would render
Plaintiff’s tax treatment of the transaction invalid. (See §§ 3(e)-(f) & 4, attached as Exhibit C-4).

9Plaintiff indicated that it is not aware of any documents detailing its reasons for entering

into the tax indemnity agreement–thus, indicating that it understood the thrust of the question.
However, instead of providing an explanation of its reasons, it continued to point to the
agreement itself. (Exhibit B-2).

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outside consultants. Despite injecting the advice of consultants into the case, which evidently

includes counsel, Plaintiff nevertheless has withheld responsive information obtained from these

consultants on the basis of a privilege claim.

Plaintiff has the burden of sustaining any claimed privilege. In re Sealed Case, 737 F.2d

94, 99 (D.C. Cir. 1984). Despite Plaintiffs’ blanket claim of privilege, it is unlikely that all parts

of every document are entitled to be withheld on a claim of privilege. It is likely that at least

some withheld information originated with the promoters who designed and helped orchestrate

this LILO transaction.10 Moreover, when a litigant’s “conduct touches a certain point of

disclosure, fairness requires that his privilege shall cease whether he intended that result or not.

He cannot be allowed, after disclosing as much as he pleases, to withhold the remainder.” 8 J.

Wigmore, Evidence in Trials at Common Law § 2327 at 636 (J. McNaughton rev. 1961), quoted

with approval in In re Sealed Case, 676 F.2d 793, 807 (D.C. Cir. 1982); see also Harding v.

Dana Transport, Inc., 914 F. Supp. 1084, 1092 (D.N.J. 1996). Thus Plaintiff should not have the

benefit of pleading self-serving statements and then withholding information to determine

whether they are supported.

In addition to privileged material, there is evidence Plaintiff has withheld responsive,

non-privileged documents. For example, Board minutes of the predecessor to Consolidated

Edison Development, Inc. (“CED”), dated July 23, 1997, refer to a presentation to the Board of

Directors discussing a document entitled “Lease Screening Criteria,” dated July 21, 1997.

(PF009612-9614, attached as Exhibit C-5). Plaintiff has not provided this Lease Screening

10Given the relatively small number of documents set forth on Plaintiff’s privilege log, an

in camera review of the documents identified on the log would seem to be an appropriate
method for making such a determination.

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document. Similarly, CED’s October 27, 1997 Board minutes (PF009505-06, attached as

Exhibit C-6), indicate that there was a discussion of materials submitted to the Board of Trustees

of Consolidated Edison, Inc. in support of pursuing “tax advantaged leasing” (presumably

including the instant LILO transaction). However, it does not appear that these materials were

provided either. These materials evidently contain an analysis used in pursuit of the instant

LILO transaction. The information sought is designed to lead to relevant information related to

Plaintiff’s intent in entering into the transaction.

In Interrogatory Number 16, Defendant requested that Plaintiff state the basis for its

decision to form a trust to enter into the Lease Transaction. Plaintiff first objected on the ground

of attorney-client privilege. (Exhibit A-1). Plaintiff next responded in conclusory fashion that

the interrogatory mistakenly presumed that it was Plaintiff’s decision to form the trust and that

Plaintiff did not know what reasons, if any, EZH may have had for preferring a trust, and further

responded that “the use of ownership trusts is standard and customary in leveraged leases.”

(Dec. 13, 2006 Supplemental Response, attached as Exhibit A-2). Several months later, on

March 15, 2007, Plaintiff provided a new response, inconsistent with its earlier response. (Mar.

15, 2007 Supplemental Response, attached as Exhibit A-4). Plaintiff advised that it entered into

the trust, “based upon the advice of its counsel.” (Id.). Plaintiff declined to further respond,

stating that the advice was protected by privilege. (Id.). Plaintiff’s responses are, at the very

least, incomplete.11

11If Plaintiff does not know why it formed a trust, then simply stating that it does not
know why a trust was used would be a sufficient response. However, absent provision of its
reasons or a statement that it does not know why it formed a trust, Plaintiff’s response is
deficient.

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B.

Defendant is Entitled to Information Related to the Subjective Intent of Plaintiff

One of the issues in this case is whether Plaintiff can meet its burden to establish that its

LILO shelter transaction has economic substance. Under the economic substance doctrine,

transactions that are invented solely to create tax deductions and otherwise have no economic

substance, even though formally complying with the letter of the Internal Revenue Code, will not

be recognized. Knetsch v. United States, 364 U.S. 361 (1960); see also BB&T Corporation v.

United States, No. 1:04-cv-00941, 2007 WL 37798, at *11-*12 (M.D.N.C. Jan. 1, 2007) (slip

opinion) (a copy of which is attached as Exhibit D-1). That is, “whether the transaction had any

practicable economic effect other than the creation of income tax losses.” Rose v.

Commissioner, 868 F.2d 851, 853 (6th Cir. 1989). The first prong of this test requires an

analysis as to whether the transaction had economic substance beyond the generation of tax

benefits. This determination is exclusively an objective analysis. Coltec Industries, Inc. v.

United States, 454 F.3d 1340, 1356 (Fed. Cir. 2006). The second prong looks to whether the

taxpayer possessed a non-tax business purpose in entering the transaction, which is a subjective

analysis. Sochin v. Commissioner, 843 F.2d 351, 354 (9th Cir.), cert. denied, 488 U.S. 824

(1988); accord, ACM Partnership v. Commissioner, 157 F.3d 231, 248 (3d Cir. 1998), cert.

denied, 526 U.S. 1017 (1999); Muhich v. Commissioner, 238 F.3d 860, 864 (7th Cir. 2001);

Transpac Drilling Venture, 1983-2 by Dobbins v. United States, 32 Fed. Cl. 810, 820 (1995);

American Elec. Power. Co., Inc. v. United States, 326 F.3d 737, 741 (6th Cir. 2003).

To litigate this issue, Defendant must discover, among other things, Plaintiff’s motivation

for entering into the LILO Transaction. One mechanism to evaluate Plaintiff’s intent and

purpose in entering into the LILO Transaction is to compare it with other similar transactions

Plaintiff considered. As this comparison will yield valuable information as to whether the LILO

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Transaction reflects business or regulatory reality, the requested documents are relevant, indeed

essential, to a determination of economic substance. See Frank Lyon Co. v. United States, 435

U.S. 561, 583-84 (1978); Coltec Industries, Inc., 454 F.3d at 1355 n.13.

Interrogatory Number 2 requests that Plaintiff identify other LILO transactions or shelter

transactions presented to, considered, reviewed or analyzed by the Plaintiff in 1996, 1997 or

1998, and identify all documents in connection with its consideration, review or analysis.

Plaintiff objected to the request as overbroad and unduly burdensome and claimed it the request

was “immaterial and irrelevant” and “not relevant to the determination of the proper tax

treatment of the Lease Transaction.”12 (Exhibit A-1). Moreover, Plaintiff unilaterally limited

the scope of Interrogatory Number 2 to transactions “substantively” evaluated and presented to

the Board of Trustees of the parent company of Consolidated Edison Development (“CED”),

Consolidated Edison, Inc.13 (Exhibit A-2). Plaintiff can not unilaterally narrow the scope of

Defendant’s interrogatory so as to exclude relevant information as to which Plaintiff has made

no showing of undue burden.14

12 Plaintiff initially claimed that it did understand what a “tax shelter” was. In an attempt

to avoid further delay, Defendant provided Plaintiff with a printout from the IRS website.

13 Plaintiff also stated that “Con Edison and Consolidated Edison, Inc. did not

substantively evaluate and present to the Board of Trustees (or its equivalent at any subsidiary),
during 1996 through 1998, any shelter transactions, as defined by the United States’
correspondence of November 8, 2006, other than certain leasing transactions presented to Con
Edison Development.” (Exhibit A-2). Despite this final clause, Plaintiff failed to identify all
transactions and documents responsive to this request, instead relying on various and incomplete
references in various minutes of CED board meetings.

14 Plaintiff initially claimed that it is only aware of one other transaction: the NUON

transaction, but claimed the transaction is irrelevant and refused to provide complete
documentation pertaining to this transaction. (Exhibit A-1).

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Plaintiff’s response was insufficient, because it excludes matters that may have been

submitted to the Board of any of its subsidiaries and, critically, because it appears that a great

deal of planning, consideration and analysis of other international transactions occurred without

reaching the level of what Plaintiff has referred to as a “substantive” presentation to any Board.

For example, Defendant is aware that Plaintiff actually placed a bid on at least one other shelter

transaction, the MEGA transaction, but apparently that transaction did not obtain substantive

board review.15 (See PF009355-56; PF009544-47, attached as Exhibits C-7 & C-8). Further,

Plaintiff widely distributed an analysis of the MEGA transaction to members of the Board of

CED and other employees and officers of Plaintiff (See PF008309-17, attached as Exhibit C-9).16

Therefore, Plaintiff’s line drawing on what constitutes “substantive” review by its Board is

apparently designed to shield the disclosure of discoverable information.17 While the specific

actions Plaintiff could take without “substantive” input from its Board are unclear, it is apparent

15On February 16, 2007, Plaintiff produced further documentation pertaining to the

MEGA transaction. (Exhibit B-6). However, the documentation does not appear to be complete.
Further, it is not clear why Plaintiff has suddenly chosen to now draw the line at the MEGA
transaction, and still refuses to provide documentation pertaining to the other LILO transactions
identified in its previously produced documents.

16As is apparent from Plaintiff’s production of numerous versions of the ENECO White

Paper for another lease transaction (ENECO) (see, e.g., Exhibit C-10), and memoranda
discussing the proposed presentation of the transaction to the board of CED, along with a fact
sheet detailing the transaction (PF008320-21, attached as Exhibit C-11),Plaintiff’s response is
deficient, and a large amount of responsive information may exist, pertaining to the other
international leasing transactions Plaintiff considered.

17 In fact, a document entitled, “Con Edison Development, Inc. September 1998 Report to

Board of Trustees” contains a great deal of discussion concerning the MEGA transaction and
refers to numerous other leasing transactions being considered by Plaintiff. (PF009359-60,
attached as Exhibit C-12). Thus, it is readily apparent that presentations of these lease
transactions could have occurred at the highest level in Consolidated Edison, Inc., without
meeting Plaintiff’s unilateral limitation of “substantively considered.”

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that a great deal could be undertaken, and that Plaintiff’s limitation is shielding important

responsive information.

Plaintiff goes as far as to state that “[i]t is impossible for current representatives of Con

Edison to certify under oath what transactions were ‘considered’ or ‘reviewed’ by any employee

of the company approximately ten years ago.” Despite this, Defendant, after sifting through

documents produced by Plaintiff, was able to identify at least 22 other international lease

transactions considered by Plaintiff during the responsive time period.18 Many of the references

are cursory and indicate that much more information exists pertaining to these transactions.19

Defendant also requested that Plaintiff identify all outside consultants used to locate

potential international energy infrastructure investment opportunities and identify related

documents. (Interrogatory No. 14, Exhibit A-1). This request, like Interrogatory Number 2

discussed above, is intended to shed light on Plaintiff’s subjective intent in seeking out such

transactions. Plaintiff claimed this request was overbroad and unduly burdensome and that the

information sought was not relevant to the determination of the proper tax treatment of the Lease

Transaction. This response is baffling since, in its Complaint, Plaintiff placed these other

transactions at issue. (Compl. at ¶¶ 37-43). The Complaint contains numerous allegations

18 See, e.g., Exhibit C-12; PF006436 (attached as Exhibit C-13); PF009366 (attached as

Exhibit C-14); and PF004246-47 (attached as Exhibit C-15).

19While Plaintiff claims that Interrogatory Number 2 is burdensome, documents Plaintiff

produced during the IRS audit indicate that it organized its documents by transaction. (See
US08404, asking an employee to change a file cabinet name to EZH/EON Benelux in response
to a change in ownership of the RoCa3 facility, attached as Exhibit C-16). Further, in its
February 16, 2006, production of documents, Plaintiff produced the documents pertaining to the
MEGA transaction in sequential order by both CE and PF bates numbers, further indicating that
the documents are organized in a manner that would facilitate production. Therefore, Plaintiff
should be able to retrieve responsive documents from the file for each lease transaction without
undue burden.

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pertaining to Plaintiff’s purported international business investment plans to prove the subjective

intent prong under the economic substance doctrine. (Id.). In fact, the Complaint alleges that

“Con Edison Development also relied on outside consultants to locate potential international

energy infrastructure investment opportunities.” (Compl. at ¶ 39). Despite the fact that Plaintiff

put this subject matter at issue, Plaintiff objected to the request:

Con Edison continues to believe that Interrogatory No. 14 is overbroad. Con
Edison is – to state the obvious – an energy company. Its entire business involves
investment in energy infra-structure and thus Interrogatory No. 14 in effect
requests information regarding virtually all of Con Edison’s business operations
over an unlimited time span. . . .20

(Exhibit B-5). Plaintiff’s objection ignores the word “international” in the Interrogatory.

Plaintiff’s objections are without merit.

This Court should order Plaintiff to fully respond to Interrogatory Numbers 2 and 14 and

produce the documents corresponding with each of these Interrogatories in response to Request

for Production Numbers 1 and 2.



C.

Plaintiff’s Reliance on Rule 33(d) is Improper

Many of Plaintiff’s responses to the interrogatories identified above, and its subsequent

supplementations and explanations, refer to documents and make conclusory assertions that the

burden of culling through the Plaintiff’s records to the answer is equally burdensome to the

20 Plaintiff goes as far as to state, “Con Edison would like to avoid the United States’

current practice (see, e.g., Interrogatory Nos. 2, 3, and 14) of serving Interrogatories which are
overbroad or which the United States interprets in an overbroad manner and then unfairly
alleging a lack of cooperation by Con Edison. . . . . Con Edison believes, however, that this
process would be aided if the United States asked more specific questions.” (Exhibit B-5).
Interrogatory Number 2 sought information related to other shelters and LILOs considered,
Interrogatory Number 3 sought information on how various transactional data referred to in the
Complaint were negotiated and calculated and Interrogatory Number 14 seeks information
related to Plaintiff’s purported business purpose listed in the Complaint.

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parties and that Plaintiff had no further obligation to respond. (See Exhibits A-3, at pp. 3-4, B-2

at pp. 5-6, B-5 at pp. 2, 4 & 6). Plaintiff is wrong.

In order to satisfy its burden under Rule 33(d), a party must demonstrate (1) “that the

documents will actually reveal answers to the interrogatories”; and (2) the party must

demonstrate that the burden is in fact just as equal on the propounding party as it is on the

responding party. S.E.C. v. Elfindepan, S.A., 206 F.R.D. 574, 576 (M.D.N.C. 2002). Further,

the “producing party [must] have adequately and precisely specified for each interrogatory, the

actual documents where information will be found.” Id. Here Plaintiff has failed this test on

both prongs.

For example, Plaintiff has failed to identify the specific documents that would provide

the responses to the propounded interrogatories with respect to Interro