FEDERAL JUDGE UPHOLDS V.I. ATTORNEY GENERAL'S RIGHT TO HIRE OUTSIDE LAWYERS FOR $12.9M TAX FIGHT

A federal magistrate has sided with the V.I. Attorney General in a dispute over whether private lawyers can be brought into government cases, clearing the way for outside counsel to remain on a nearly $13 million tax dispute.

U.S. Magistrate Judge G. Alan Teague issued his decision on October 3, rejecting Ocwen USVI Services LLC's attempt to remove attorney James N. Mastracchio from the matter. Ocwen had sought to disqualify Mastracchio, who was designated as co-counsel for the director of the V.I. Bureau of Internal Revenue.

The case itself involves a tax assessment. VIBIR determined that Ocwen owes $12,948,684 in income taxes for the 2019 tax year. Ocwen contests this finding and maintains it is owed a $1,348,518 refund instead.

Teague identified the core legal question as a matter of first impression for the territory: whether the Attorney General possesses the power to bring outside lawyers into government litigation when the Virgin Islands Code contains no express permission to do so.

Ocwen contended that only the Attorney General and regularly appointed assistant attorneys general can represent VIBIR in tax cases. The company also raised concerns about Mastracchio accessing its confidential tax records while occupying what it considered an improper position.

The court acknowledged that Virgin Islands law does not explicitly authorize the Attorney General to designate special assistant attorneys general. However, Teague determined that common law supports the practice.

The judge pointed to the territory's track record of engaging private attorneys for significant government litigation, including cases involving JPMorgan Chase, Takata and environmental matters. He also reviewed precedent from other jurisdictions that recognize an attorney general's inherent power to appoint special counsel.

Teague reasoned that limiting the Department of Justice to permanent staff would create practical difficulties in handling specialized or complex litigation, particularly given the territory's small population and constrained resources. He stressed that Mastracchio functions as co-counsel alongside the Attorney General's office, not as its substitute.

Mastracchio, admitted to practice in New York and Washington, D.C., joined the case in June 2024. The Attorney General and governor designated him as a special assistant attorney general, with the appointment backdated to March 2, 2024.

The decision permits Mastracchio to continue his work as the underlying tax dispute proceeds. Ocwen filed its challenge in March 2024, several months after VIBIR issued the deficiency notice in December 2023.