Investment banker Gary di Silvestri and timber baron Timothy Blixseth were friends before 2006 when di Silvestri sold Blixseth a luxurious tropical island.

Now the two are locked in a prolonged dance of litigation with political overtones over who will finally be on the hook for $1.7 million in stamp duty taxes for the property sale and millions more in penalties plus interest, which already has been paid to the government of the Turks and Caicos Islands.

The property that changed hands was Emerald Cay, a 5-acre paradise with a 30,000-square-foot mansion that Blixseth wanted to turn into a time-share for millionaires in the vein of his exclusive Yellowstone Club World in Montana, where di Silvestri and his wife had a place. The club tumbled into bankruptcy in 2008.

In the latest round, a Miami federal judge dismissed Blixseth’s case against di Silvestri on Jan. 31 "in favor of the TCI courts." U.S. District Judge Patricia Seitz decided the court lacked jurisdiction because of the parties’ insufficient ties to Florida.

In the suit filed last July, Blixseth claimed di Silvestri engaged in a racketeering conspiracy aimed at misleading Blixseth into believing the property, which sold for $28 million, could be valued at $10 million when determining the stamp duty tax. Since buyer and seller were equally responsible for the tax, Blixseth would save more than $800,000. Fortune estimates his net worth has tumbled from $1.3 billion to $230 million.

He claimed di Silvestri, who developed Emerald Cay, touted his strong ties to the government. When suspicions arose about the property valuation, Blixseth alleged di Silvestri "bribed government officials to suppress an investigation into the underpayment in order to delay plaintiffs from learning about the investigation until after they had paid defendants all money owed under the agreements," Seitz’s order states.

The judge concluded, "TCI courts have a strong interest in adjudicating claims involving bribery of their government officials with respect to a real estate transaction between two TCI corporations concerning property located in the TCI."

RICO Claim

Was the Florida filing an example of forum shopping?

Curtis Alva, a Holland & Knight partner in West Palm Beach who represented di Silvestri, doesn’t call it that but lists reasons why filing in Florida might be an attractive option.

"Blixseth brought a RICO claim here, and the Turks and Caicos doesn’t have that or punitive damages or attorney fee awards," he said.

Speaking generally, Alva added, "In the U.S. with our broad discovery rules, if you can survive a motion to dismiss, you can make a meritless lawsuit extremely expensive to defend."

Blixseth’s attorney, Philip Stillman, of Stillman & Associates in Cardiff, said the suit could legitimately be filed in Miami because di Silvestri has enough Florida ties to warrant personal jurisdiction over him including a condo, driver’s license and a car registered in the state.

"Di Silvestri and his lawyers crafted a structured agreement for the sale of the property which was tax-advantaged to him, and to my clients it made no difference whatsoever," Stillman asserted.

Reminded that the deal would have saved Blixseth more than $800,000, he said, "My clients paid $28 million, so another $800,000 in stamp duty could have been dealt with. They didn’t care."

Stillman said the government in place when the deal closed had no problem with the valuation, but that changed when a new government came in. The gap between the closing and alarms going off was nearly seven months, according to Seitz’s opinion.

The Turks and Caicos Supreme Court entered judgment against Blixseth’s and di Silvestri’s companies last year for $9.3 million: $1.7 million in unpaid stamp duty tax, $7 million in penalties for underpayment and $570,000 in interest accruing at 6 percent per year.

The court held the Emerald Cay transaction "was a carefully crafted scheme of tax evasion," Seitz quoted the ruling as saying. Government claims against Blixseth and his in-house counsel Andrew Hawes are pending.

Stillman said his client has settled with the government for "substantially less" than the $8 million that has been reported. He said the property, finally free of a tax lien, was sold in October to a Turks and Caicos corporation he declined to identify.

An indemnification agreement between di Silvestri and Blixseth assures Stillman’s client of liquidated damages and attorney fees. The attorney said he intends to refile the Miami lawsuit in the Turks and Caicos. "The bottom line is, because it’s so clear-cut, we’ll be able to dispose of the case very quickly in the Turks and Caicos and recoup some or all of the money that my client has had to pay," Stillman said.