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Jerry Payne, attorney and ex-strip club owner, vs. the IRS and the Houston Chronicle

Strap yourself in and hang on when Payne starts talking.
Photos by Daniel Kramer

Jerry Payne can be a hard guy to keep on track.

It's not because when you go to interview him — whether it's at 1:30 or 2 on a weekday afternoon — he immediately asks if you want to join him in a beer. Truth be told, he just nurses a bottle through the ensuing hours.

And it's not because he talks blithely of having “a puff of marijuana” once in a while. Because whatever Payne is during a conversation, a mellowed-out stoner he's not.

But following his point can often be tough, because it comes at 100 miles per hour, and it's usually at the end of four or five tangents, discursions or a backstory he's suddenly remembered to provide.

Then again, there's a lot of story to tell: palling around with both George Bushes; finding himself the somewhat hapless owner of a Houston titty bar; taking on the IRS in a decade-long battle featuring stripper-obsessed federal agents; and, nowadays, fighting the Houston Chronicle and its parent, the media giant Hearst Corporation, over claims the Chron faked its circulation numbers and Hearst itself is a monopolizing, bullying threat to press freedom.

About the only time he isn't going 100 mph is when his 38-year-old daughter Julia walks in the room. Born with cerebral palsy and “general retardation,” she has had a difficult time adjusting to adult life. The long-divorced Payne has essentially taken five years off from his practice to focus on her, a slow, often frustrating project that appears to be succeeding.

When Julia leaves, it's back to the pinball-type conversation. What becomes clear is that Payne is a guy who loves taking on long-shot battles, and so far has done pretty well at them. The Chronicle fight is probably the longest shot of all, but he's not flinching.

It is, after all, the third of Payne's fights against intimidating opponents, and the track record is there for anyone to see.

The First Battle:

In which Payne takes on furtive Greeks and Germans, horny feds, conniving state bureaucrats and the all-powerful IRS

Even after he got a law degree from UT in 1966, Payne had a varied career; at one time he was an Austin real-estate developer until the 1980s bust hit. Still, he never saw himself owning a “gentleman's club,” especially one that helped usher in the Galleria area's nationwide reputation as a Mecca for the upscale table-dance experience.

As with almost all things Payne, the details are voluminous, complicated and involve more technicalities than anyone wants to read. In essence, though, he took over Caligula XXI (And what name screams “class” more than Caligula?) in the late 1980s because its owners couldn't pay the legal fees they owed him.

The two owners had hired Payne to help them get their liquor- and sexually-oriented-business licenses. The pair — the multinational team of Gerard Helmle and Leo Kalantzakis — then had a falling-out. It's the kind of thing that can happen when charges of dealing drugs or of being a drug informer start getting tossed around.

Kalantzakis left for parts unknown and Helmle struggled to get the proper licenses while the drug accusations hung in the air. So he sold the club to Payne, who figured he wasn't going to get any other payment for his time spent representing the two.

Payne quickly found that — especially before such clubs “matured” into the huge businesses they are today — running a legal practice is no training for running what he always refers to as “a titty club.”

“Who do you get to run the club? Titty-bar managers are not my favorite category of people to pay money to,” he says.

Payne had great ideas for injecting some business discipline into the operation. “I would do things, have meetings and have key personnel, and then I'd leave it,” he says.

But what he calls “the kid in the candy store” philosophy soon struck. “There's so much cash and so much stuff — I can set it up [rules], but it needs daily care and handling by someone who's an owner who makes or loses that money,” he says.

The titty-bar industry as a whole turned its back on Payne's noble efforts to reform things. As the city discussed an SOB ordinance in late 1996, Payne stepped forward. “I wanted to form the Houston Association of Adult Entertainment,” he says. “I got [HPD] vice involved, I got TABC involved, all so there would be uniformity of conduct and all of these logical things. But none of the titty bars would do it...I tried to get HPD vice and the clubs out of a general condemnation of each other, but topless-club owners are just not organizable.”

 

Despite being thwarted in his attempt to be the Great Reformer, not to mention the troubles with managing things, Payne's club did make money. It went to a trust for his daughter. But it also triggered Payne's ten-year fight with the IRS.

Payne paints a dark picture of the beginnings of the fight, saying people he'd pissed off — like one of the former owners, like an HPD vice cop — sicced the authorities on him. The lengthy investigation included one IRS agent being fired for enjoying the talents of a rival club's strippers (His defense, which essentially was “Hey, some of that, I paid for!!” didn't wash).

Most of it, of course, played out in court and in tedious back-and-forth accounting arguments about the legitimacy of the sale to Payne and about his finances. (His complicated and not overly organized finances, of course.) He was indicted on criminal counts; he countersued in civil court.

A weary panel of judges for the U.S. 5th Circuit Court of Appeals summed up things in one ruling: “The expansive record in this case certainly demonstrates that Payne has no acumen for keeping orderly records of his financial dealings, and we sympathize with the government and the Tax Court for the difficulty in reconstructing Payne's financial affairs.” But, they concluded, the government had failed to prove Payne had fraudulent intent.

At one point Payne got a judge to order the IRS to pay him $1.7 million; he says now that all of the litigation — including what the IRS says he owed them, including what the judge says the IRS owed Payne — is settled “to my satisfaction,” but he can't discuss details.

Ten years fighting the IRS took its toll. He had been living with a woman for 13 years and, he says, they were planning to marry; she got freaked when he was arraigned.

“She had this thing about governmental authorities from a long time ago and the thought of me being there, she just got frightened and she ran away,” he says. “She had a percentage of the club and she was afraid of what in the world would happen to her if I was convicted.”

“It's a nightmare,” Payne says of becoming an IRS target. He told one reporter at the time that “If they zero in on you it's like a smart bomb; they can go to every corner of your life.”

But even as he represented himself against a never-ending stream of IRS lawyers and all the paperwork they can create, Payne won three separate court victories that earned him headlines as the man who took on the big, bad feds.

It was the first of his long-shot battles, and he had won.

The Second Battle:

In which Payne finds that he has to, somehow, completely turn off his hyper personality

Payne is, by his own admission and by the overwhelming evidence of meeting with him, a somewhat scattershot guy. Intense at moments, reflective at others, he rarely stays on the subject for long without finding a (possibly) relevant topic to turn to.

Which makes it all the more amazing to see the patience he exhibits with his daughter Julia.

She may ask for the same can of Coke five times, and each time Payne will remind her she has to wait until the time they agreed on. Each time you can see the lawyer in Payne struggle to solve the problem efficiently and logically, and each time you see him bite that urge back and talk it out with his daughter.

The pair have lived together, with some custodial help, for almost all her 38 years. He says she was diagnosed as an infant with symptoms of cerebral palsy and general retardation.

Payne tried diet and massage therapies that he says improved her symptoms, and the problems seemed manageable. But as she grew into an adult, Julia started exhibiting behaviors that prevented her from working with others in group activities.

“Julia is a person that I believe has a great deal of skill and knowledge inside her, but for whatever reason her brain is mis-wired,” says Carol Whitmore, the assistant director for Brookwood, an “educational, residential and entrepreneurial community” for disabled adults in Katy.

Julia's social interactions were strained when she first arrived at Brookwood four years ago. “When she wants to talk to someone, or visit with someone, she might kind of swat at them rather than say, ‘I like what you're wearing' or ‘I'd like to be your friend,'” Whitmore says. “It isn't any deliberate thing Julia does; she is one of those whose brain function kind of prevents her from entering into a regular relationship or friendship, mainstream kind of interaction, with her peers or you and I even.”

 

Julia is at Brookwood three days a week now and may soon be able to work there five days and, eventually, live there.

It's a result of Payne working endlessly, slowly, repetitively with her.

“Julia functions much like an autistic person,” Whitmore says, “and their needs are for things to be structured, logical and predictable. The way a lawyer would approach things is exactly right.”

Four years ago, just as he was winning a key ruling in the IRS fight, Payne essentially closed down his law practice. He bought a large, rambling house on a huge, gated lot in Piney Point Village so his daughter would be free to roam, and he began trying to help her adjust.

He found out about Brookwood. Julia “was too much of a terror there” at first, so he had to tag along as she learned her new job skills. “I actually got pretty good at ceramics,” he says.

Most of the work on Julia's behalf, though, was done at home, just Payne and her.

“This is not really my personality, you know,” he says. “I'm surprised I've been able to do it, because my deal is kind of an aggressive-type thing and this takes just the opposite. But the other option, according to the experts, was to send Julia to ‘behavior modification,' which to me — it's like thinking of big dogs with obedience training, and Julia's so stubborn I couldn't do that.”

Instead he finds himself explaining the day's schedule over and over (“And if I say something will happen, I have to make sure it does when I said it would”), letting Julia roam the grounds, listen to music (she can name any '60s oldie within the first few bars, Whitmore says) and trying to correct any behavioral missteps.

“I probably should have focused on the behavioral thing ten years earlier than I did,” he says. “But once I'm tuned into what I need to do, I do it.”

When it gets too much for Payne, when his patience is strained, he takes off forÉa strip club. He says he doesn't get table-dances or anything, but after being in the business he says he just likes the atmosphere. (Hey, thousands of fellow Houstonians and tourists can't be wrong.)

“I'll go over there and drop by,” he says. “I still know some of the people.”

He and Whitmore believe that Julia will slowly progress to the point where she can join the 100 other residents who live at Brookwood. “Absolutely that's a goal after getting her to full-time work here,” Whitmore says. “She actually makes kind of a good case study for us — [showing that] someone who came here not quite work-ready can work towards getting that way.”

“Within the next two years we'll find out how many smarts she has in there now that the behavioral problems have been addressed,” Payne says. “It's an amazing process, how slow you have to work and all the little bitty components you have to analyze — you can try five things and one of them will work...It's really worked well and been very rewarding for me.”

It's the second of Payne's long-shot battles, trying to get his daughter a place in the world when the odds are against her. It may be too early to declare victory, but he's definitely winning.

The Third Battle:

In which Payne takes on the most fearsome opponent of all — the Houston Chronicle and Hearst

During the time he essentially shut down his practice, Payne still had one client: his brother.

Jimmy Payne was a distributor for the Houston Chronicle until he was fired in 2002 because, he says, he wouldn't go along with the paper's schemes to fake their circulation numbers.

Jerry Payne figured he'd get an easy settlement for his brother, who had only a one-year contract. The damages wouldn't be that big for the Chron, even including the handful of other former distributors who had joined the suit.

But then Payne ran into the Hearst Corporation. “They were so condescending to me, with all this ‘We're just not going to pay anything,' that it got to me,” Payne says. “So I got hooked into this lawsuit by my brother and by my own personality. It's become bigger than a favor to my brother.”

Also, most likely, a far longer shot than either of his other two fights.

Payne first brought his claims to state court. There is a dispute whether he withdrew the case before or after the judge ruled against some of his claims. (Or all of his claims, according to the Chron.)

 

He then went to federal court, where he said he had standing to sue on behalf of his clients — even though Texas law would allow them to be fired at will — because Hearst and the Chronicle had engaged in antitrust violations on their way to becoming a monopoly daily.

The federal judge didn't agree, and both sides are waiting for the 5th Circuit to rule on Payne's appeal.

Getting the conservative 5th Circuit on his side is no easy task, but he's gotten a break for a possible future U.S. Supreme Court appeal. A federal judge in San Francisco ruled earlier this month that individual readers have the right to sue over media mergers under antitrust laws.

Essentially, Payne is arguing that the Hearst Corporation has a pattern of antitrust actions in San Francisco, San Antonio and Houston. (Which resulted in the death of the San Antonio Light, the Houston Post and the fact that the San Francisco Examiner is now a shell of its former self.)

“It's kind of a tough argument to make because there really aren't that many two-newspaper towns now anyway,” says Jennifer Saba, who covers the industry for Editor & Publisher magazine.

Payne, of course, is unabashed, saying the growing trend of media monopolies is a threat to democracy.

“Before I got into this particular case I never thought or pondered on the danger of media monopolies, never lost any sleep over it,” he says. “But if you think about it, you have the voters, you have the politicians, and who is determining what the voters think about the politicians? It's the media. It's the filter through which everything runs.”

Such grand thoughts aside, if somehow he wins a court hearing, the case will focus on more mundane, if sometimes entertaining, claims.

Newspaper circulation figures are audited by the Audit Bureau of Circulations, a group funded by publications, advertisers and ad agencies. Audits of individual newspapers typically last a week.

Affidavits filed by Payne claim Chron distributors would take the ABC auditors out to strip clubs during their weeklong stay. They also would dump papers at recyclers and count them as sold, and grossly inflate the amount sent to schools under the Newspaper in Education program.

“There was always a veiled threat that if you wouldn't go along, the next guy would,” says one distributor's affidavit.

Circulation was falsely inflated by 15 percent most years in the 1990s, Payne figures.

Bill Ogden, the Houston attorney representing the Chronicle in Payne's suit, is utterly dismissive of the case and the claims.

“It's frivolous and it's groundless and it's been thrown out by the state court,” he says. “I do feel like the evidence has never supported the claims, and all the petitions filed were groundless and bordering on bad faith.”

He says Payne's antitrust arguments “show some desperation, because having lost on the state theories it was an attempt to recast the same tired facts in new clothing.”

Payne's claims may sound far-fetched, but for years ABC was considered a somewhat lax watchdog. It wasn't until fairly recently, when advertisers and others spoke up, that newspapers such as Newsday in New York, the Dallas Morning News and the Chicago Sun-Times had to admit they'd falsely inflated their figures.

Those companies, though, are public corporations. Hearst is private, which makes getting information about business practices a tougher task.

Not to mention they play tough. IRS lawyers have nothing on Hearst's, Payne says.

“Out of all the entities I've gone against — the United States of America, the IRS, the Saudi royal family, the TABC and the City of Houston, there's not any of them that are as good at this as Hearst is,” he says. “And they're pretty vicious, too.”

Ogden says the company is just defending itself and that settling for even a small amount, rather than paying the huge fees they'll spend defending the suit, isn't an option. “There's absolutely no thought given to a settlement because we feel the suit is frivolous,” he says.”

Payne's dream is to get a favorable ruling from either the 5th Circuit or the Supreme Court, and then to start adding advertisers to his suit. Damages to a handful of distributors won't amount to much, but if you could convince a jury that car dealers and department stores who spent huge bucks on advertising were defrauded about how many readers their ads reached, then the payday becomes a little more exciting.

“Advertisers are where the damages are,” he says.

The trouble is, such advertisers have been reluctant to join him so far. “They're scared that the Chronicle won't run their ads,” he says.

 

Which sounds a little odd to E&P's Saba. “With Newsday a lot of advertisers sued, particularly the automobile dealers,” she says. “They're not afraid to sue a newspaper...Advertisers certainly have the upper hand these days over newspapers because there's so much competition right now and newspapers are really losing ad revenue.”

Still, a man can dream.

He expects fully to win the right to a trial. And then, he says, “Probably Hearst is going to try to make me spend a million or so in the first year to drive me off the playing field. I'll have to make some decisions then on whether I can still do it, but it's not something I want to give up.”

The third great long-shot battle of Jerry Payne is probably the longest shot of all. But hey, he's been counted out before.

Payne, as he relaxes in his Piney Point home, sipping his beer on an early afternoon and railing against big-business monopolies, might seem a radical. In truth he's a rather solid Republican. He knows both Bushes. He helped piss off Texas Democrats in 1990 when he was able to sneak his pal, State Senator Buster Brown, onto the ballot for an Attorney General's race despite what the state constitution seemed to clearly say about senators being ineligible to run for positions for which they had voted a raise in salary.

But he loves such fights. The Saudi royal family found that out when he represented two employees who claimed they were kept as slaves during one prince's stay at the Ritz-Carlton in Houston.

When Prince Saad Bin Abdul Aziz Al Saud demanded extensive protection during his deposition, Payne demanded the judge allow him to bring an equal number of bodyguards for his clients. And allow TV cameras.

He, like a lot of lawyers, has clips of his exploits, and he smiles as he rummages through them.

“When I reread them I'm kind of impressed with myself,” he says, “especially if I've had a puff of marijuana.”

Even if the Hearst case sputters out, Payne doesn't expect to be out of the headlines for long. With Julia making the progress she is, Payne's “self-imposed exile” is ending.

“I'm going to come out of isolation now,” he says. “I may sell this house or may not, but I'll hire staff and start looking for cases again.”

More long-shot battles? No doubt. Because while it might be a difficult thing to keep Jerry Payne on track during a conversation, it's just as hard to keep him from taking on the big targets and letting loose.


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