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Internal Revenue Service v. Murphy

United States District Court, D. Maine

February 24, 2015

INTERNAL REVENUE SERVICE, Appellant,
v.
WILLIAM CHARLES MURPHY, Appellee. Bankruptcy No. 09-2042

DECISION AND ORDER ON DEFENDANT'S APPEAL FROM BANKRUPTCY COURT'S DENIAL OF 60(b) MOTION

D. BROCK HORNBY, District Judge.

On this appeal, the Internal Revenue Service ("IRS") seeks to overturn the bankruptcy court's refusal to vacate under Rule 60(b) a 2010 summary judgment. That summary judgment was rendered against the IRS and in favor of the bankrupt taxpayer in an adversary proceeding within bankruptcy core jurisdiction. The IRS requested relief from the bankruptcy court's summary judgment just shy of four years after the bankruptcy court entered it. The IRS's primary ground for relief is the assertion that the Tax Division of the Department of Justice ("DOJ") learned only recently that the Assistant United States Attorney ("AUSA") who handled bankruptcy court matters in Maine was suffering from dementia at the time of the summary judgment motion and as a result filed an inadequate opposition.[1] Alternatively, the IRS argues that the bankruptcy court's summary judgment order was void on account of sovereign immunity and the Tax Anti-Injunction Act, because the bankruptcy court mandated that the IRS unwind certain steps that it took that improved its position as a creditor after the bankruptcy court entered a judgment of discharge for the bankrupt taxpayer.

After oral argument on February 10, 2015, and supplemental briefing, I AFFIRM the bankruptcy court's decision. The judgment is not void under Rule 60(b)(4), given the power that Congress has accorded bankruptcy courts, and the bankruptcy court did not abuse its discretion in denying relief under the "catch-all" provision of Rule 60(b)(6) ("any other reason that justifies relief").

FACTS

For purposes of this appeal, I take the facts, from the record and as propounded in the briefs, in the light most favorable to the IRS as the 60(b) movant, although the taxpayer disputes the IRS's allegations related to the AUSA's illness, its onset, and its impact on this litigation. I do so because the bankruptcy court denied the IRS's motion for relief without an evidentiary hearing and, if the facts as the IRS describes them support a finding for relief under Rule 60(b), then the appropriate course is to remand and direct the bankruptcy court to "hold an evidentiary hearing in order to determine if the allegations are indeed true." United States v. Baus, 834 F.2d 1114, 1123 (1st Cir. 1987).

The taxpayer William C. Murphy ("Murphy") filed for Chapter 7 bankruptcy protection on October 13, 2005. Voluntary Petition, In re Murphy, Ch. 7 Case No. 05-22363, (Oct. 13, 2005) (Bankr. ECF No. 1). He listed taxes owing for 1993-1997, 2000, 2001, and 2003. Id. at 11-13. The bankruptcy court granted his discharge on February 14, 2006. In re Murphy, Ch. 7 Case No. 05-22363 (Feb. 14, 2006) (Bankr. ECF No. 5).[2]

Before filing his 2005 bankruptcy petition, Murphy paid $49, 050[3] that he designated for his 2003 tax liabilities and $16, 500 that was undesignated. Initially, the IRS applied those payments to Murphy's 2003 and 2002 tax liabilities respectively. Because debts for any taxes for which a return is due within three years of the filing of the petition are not discharged, 11 U.S.C.A. § 507(8)(A)(i), listed in § 523(a)(1)(A), Murphy's 2002 and 2003 tax liabilities were excepted from his 2006 bankruptcy discharge. But after the 2006 bankruptcy discharge, the IRS reassigned Murphy's 2003 $49, 050 tax payment and 2002 $16, 500 tax payment to his 1994 and 1993 tax liabilities, years that were subject to his bankruptcy discharge.[4] The IRS also sent notices of levies to Murphy's bank and clients.

On August 14, 2009, Murphy brought an adversary proceeding in bankruptcy court, seeking a declaration that his 2006 bankruptcy discharge covered the taxes owing for 1993-1997, 2000, and 2001, challenging the IRS attempts to collect taxes for the years covered by his bankruptcy discharge, and asking that the IRS be enjoined from all collection activities concerning the discharged tax liabilities. Compl., Murphy v. I.R.S. (In re Murphy), Ch. 7 Case No. 05-22363, Adv. No. 09-2042 (Aug. 14, 2009), (Bankr. ECF No. 1). Because the AUSA handling bankruptcy proceedings in this District accepted service of the complaint, Murphy's counsel did not mail a copy of the complaint to the Attorney General, as Bankruptcy Rule 7004(b)(5) would otherwise require. The Justice Department Tax Division and the Boston IRS Office of Chief Counsel were unaware of the commencement of the adversary proceeding. Br. of Appellant at 11, I.R.S. v. Murphy (In re Murphy), No. 2:14-cv-340-DBH (Sept. 10, 2014) (ECF No. 5). But the IRS insolvency adviser did know of the adversary case and agreed to a preliminary injunction, which required the AUSA to notify the IRS, its agents, and its attorneys that the IRS was barred from taking any further collection actions against Murphy for tax years 2001 and earlier until the lawsuit was resolved. Br. for IRS at 7, I.R.S. v. Murphy, Adv. No. 09-2042 (May 1, 2014) (Bankr. ECF No. 53).

In opposing Murphy's adversary proceeding, the AUSA in this District took the position that the tax obligations were excepted from the 2006 discharge under Bankruptcy Code section 523. Response and Objection for IRS at 2, Murphy v. I.R.S., Adv. No. 09-2042 (Jan. 22, 2010) (Bankr. ECF No. 33). As the bankruptcy court noted in its pretrial order, the IRS bore the burden of proving the applicability of an exception to the 2006 discharge. Pretrial Order at 6, Murphy v. I.R.S., Adv. No. 09-2042 (Oct. 20, 2009) (Bankr. ECF No. 19). The AUSA took limited discovery[5] and at the close of discovery Murphy moved for summary judgment that his earlier tax liabilities had been discharged by the 2006 bankruptcy discharge, and requested an order reassigning the payments of $16, 500 and $49, 050 to the 2002 and 2003 tax liabilities as the IRS had previously applied them.

The AUSA's opposition to the summary judgment motion contained allegations that, if supported by evidence, would have raised a triable issue of fact as to whether Murphy's tax liabilities were excepted, but the AUSA failed to cite any supporting evidence. Br. of Appellant at 14, I.R.S. v. Murphy, No. 2:14-cv-340-DBH (Sept. 10, 2014) (ECF No. 5). On June 22, 2010, the bankruptcy judge granted Murphy's summary judgment motion from the bench, stating: "I've looked at the summary judgment record very carefully and frankly, somewhat surprisingly, I'm not of the view that the IRS has put forth qualified, evidentiary quality-by affidavit or otherwise-materials that create disputed issues of material fact, and therefore I'm going to enter summary judgment for the plaintiff." Bench Ruling (Audio), Murphy v. I.R.S., Adv. No. 09-2042 (June 22, 2010) (Bankr. ECF No. 50).

In the ensuing order, the bankruptcy court ruled that after the bankruptcy discharge, the IRS had "wrongfully reversed" its earlier application of the $16, 500 and $49, 050 payments. The bankruptcy court directed the IRS to reassign those payments to 2002 and 2003, their original application. Order Granting Mot. for Summ. J., Murphy v. I.R.S., Adv. No. 09-2042 (June 22, 2010) (Bankr. ECF No. 48). Non-lawyer employees of the IRS insolvency unit were informed of the adverse summary judgment. Reply Br. for IRS at 7, Murphy v. I.R.S., Adv. No. 09-2042 (June 12, 2014) (Bankr. ECF No. 74). The IRS did not appeal the Bankruptcy Court's summary judgment.

On February 28, 2011, Murphy filed a second adversary complaint against the IRS under Internal Revenue Code section 7433(e), which permits a taxpayer to recover damages resulting from the IRS's willful disregard of a bankruptcy discharge. Compl., Murphy v. I.R.S. (In re Murphy), Ch. 7 Case No. 05-22363, Adv. No. 11-2020 (D. Me. Feb, 28, 2011) (Bankr. ECF No. 1). In his second adversary complaint, Murphy alleged that the IRS had violated Bankruptcy Code section 524 by levying on his discharged tax liabilities. Discovery closed on August 1, 2012, with no discovery taken by the AUSA. Request for Status Conference at 1, Murphy v. I.R.S., Adv. No. 11-2020 (Dec. 11, 2012) (Bankr. ECF No. 52).

According to a declaration of the First Assistant United States Attorney for the District of Maine ("the First Assistant"), which was filed in the second adversary proceeding in February of 2014, individuals who worked with the AUSA began to notice changes in the AUSA's behavior beginning in May or June of 2012. R. Murphy Decl. at 2, Murphy v. I.R.S., Adv. No. 11-2020 (Feb. 28, 2014) (Bankr. ECF No. 142-2). As described in the declaration, two information technology employees informed the administrative officer that the AUSA had been locked out of his computer due to mis-entry of passwords, and that he had some trouble updating them. Id . Around the same time, a paralegal voiced concern about the AUSA's physical demeanor and his difficulty with use of his computer. Id . Others noted that the AUSA seemed lethargic and that he had trouble with the use of his hands. Id.

Based on these reports, the administrative officer and the First Assistant called the Director of Personnel in the Executive Office of the United States Attorneys, and informed the Director that, while the AUSA would be retiring at year's end, some employees had expressed concern. Id. at 2-3. The Director indicated that if there were no appreciable performance issues, the United States Attorney's office should monitor the situation as the AUSA progressed toward retirement. Id.

Sometime in the summer of 2012, a Bangor attorney called the United States Attorney's office front desk to report that he had tried to reach the AUSA regarding discovery that the AUSA was to have provided a few months prior. Id. at 3-4. The First Assistant said that, to the best of his recollection, he discussed this issue with the AUSA and assumed that it was resolved. Id.

On August 13, 2012, the U.S. Attorney met with Chief Bankruptcy Judge Haines to inform him that a new AUSA would be taking over the office's bankruptcy practice, in light of the AUSA's impending retirement. Judge Haines indicated that he "had seen some change" in the AUSA's demeanor. R. Murphy Decl. at 4, Murphy v. I.R.S., Adv. No. 11-2020 (Feb. 28, 2014) (Bankr. ECF No. 142-2). Two days later, the administrative officer called the Employee Assistance Program and disclosed that the AUSA "had displayed blank stares, was falling asleep, had forgotten a deposition and was late on discovery in a case, had problems logging into his computer, had not been responsive to lawyers outside of the office, and mentioned dementia symptoms.'"[6] Id.

On August 28, 2012, the U.S. Attorney spoke with a person who had known the AUSA for many years. This person told the U.S. Attorney that the AUSA "may have been diagnosed with ALS." Id . On October 24, 2012, the AUSA's domestic partner disclosed to the administrative officer that the AUSA "had been diagnosed with ALS and frontal lobe dementia." Id . By this stage, "a substantial portion of open bankruptcy matters had been transferred" to another AUSA. At the end of October, this latter AUSA informed Tax Division counsel that the AUSA previously handling the matters had been diagnosed with dementia and ALS. Id.

On December 11, 2012, counsel from the Tax Division of the DOJ informed the court in a request for a status conference in the second adversary proceeding that the AUSA "is no longer assigned to this case due to his imminent retirement and for personal reasons" and that the DOJ would be taking over the defense of the adversary proceeding on behalf of the United States. Request for Status Conference at 1, Murphy v. I.R.S., Adv. No. 11-2020 (Dec. 11, 2012) (Bankr. ECF No. 52). In this same filing, Tax Division counsel disclosed that he had sought to reach an agreement to re-open discovery in the second adversary proceeding. Id. at 3.

On December 20, 2013, the bankruptcy court granted partial summary judgment to taxpayer Murphy in the second adversary proceeding. Specifically, it ruled that the preclusive effect of the June 22, 2010, summary judgment order estopped the IRS from asserting that Murphy's tax debts were not discharged; as a result, liability (not damages) was established. Order Granting Summ. J., Murphy v. I.R.S., Adv. No. 11-02020 (Dec. 20, 2013) (Bankr. ECF Nos. 94-95). Although the IRS sought an interlocutory appeal, on February 3, 2014, I denied the request, Murphy v. I.R.S., No. 2:14-mc-24-DBH, 2014 WL 840255 (D. Me. Mar. 4, 2014), ruling that the appeal should await final judgment. That appeal is still not before me or any other district judge.

In March of 2014, "government counsel persuaded the AUSA's healthcare power of attorney to authorize his medical providers to release" the AUSA's medical records "without a subpoena." Br. of Appellant at 17, I.R.S. v. Murphy, No. 2:14-cv-340-DBH (Sept. 10, 2014) (ECF No. 5). "The government then obtained records revealing that the AUSA had been diagnosed in late 2011, confirmed in 2012, with frontotemporal dementia ["FTD"], coupled with amyotrophic lateral sclerosis, and learned that three physicians all agreed that the dementia had its inception prior to the May 2010 summary judgment proceedings in this adversary proceeding." Id.

On May 1, 2014-more than 18 months after the United States Attorney's Office and the Tax Division of the DOJ learned that the AUSA was suffering from dementia-Tax Division counsel moved the bankruptcy court under 60(b)(6) and 60(b)(4), made applicable to bankruptcy proceedings pursuant to Bankruptcy Rule 9024.[7] Mot. to Vacate Final Order of June 22, 2010, Murphy v. I.R.S., Adv. No. 09-2042 (May 1, 2014) (Bankr. ECF No. 52). The motion asked the bankruptcy court to vacate the June 22, 2010 summary judgment in the first adversary proceeding that (1) ruled that Murphy's income taxes for the years 1993-1997, 2000, and 2001 had been discharged and (2) ordered the IRS to reapply his prepetition payments to the tax years to which the IRS had assigned them before the discharge. Id . In its 2014 motion, the IRS argued that the AUSA's dementia caused deficiencies in his 2010 summary judgment briefing that led to the adverse summary judgment against it. Br. in Supp. of Mot. to Vacate Final Order of June 22, 2010, Murphy v. I.R.S., Adv. No. 09-2042 (May 1, 2014) (Bankr. ECF No. 53). Thus, the IRS argued, it was entitled to relief under the catch-all provision of Rule 60(b)(6), which relieves a party from a final judgment for "any other reason that justifies relief." Id . Further, the IRS asserted that the injunction directing the IRS to reassign the payments of the $16, 500 and $49, 050 to the 2002 and 2003 tax liabilities was void under 60(b)(4). Id.

The bankruptcy court denied the motion without an evidentiary hearing.[8] The bankruptcy court held that the 60(b)(6) motion was untimely, and that "the failures to act and omissions by counsel could have been ascertained at the time, if indeed there were such failures, if there had been appropriate review during the course of the handling of the matter." Tr. of Bench Ruling at 8, Murphy v. I.R.S., Adv. No. 09-2042 (June 25, 2014) (Bankr. ECF No. 80). The bankruptcy court construed the 60(b)(4) motion as based on the IRS's assertion of a lack of personal jurisdiction, which "would have been an error of law and should have been addressed in a timely appeal." Id. at 9. Because the "government took no appeal, " the court found ...


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