U.S. v. Nichols, 93-1873
| Citation | 32 F.3d 570 |
| Decision Date | 28 April 1994 |
| Docket Number | No. 93-1873,93-1873 |
| Parties | -6184 NOTICE: Seventh Circuit Rule 53(b)(2) states unpublished orders shall not be cited or used as precedent except to support a claim of res judicata, collateral estoppel or law of the case in any federal court within the circuit. UNITED STATES of America, Plaintiff-Appellee, v. Evelyn K. NICHOLS, Defendant-Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (7th Circuit) |
Before CUDAHY, EASTERBROOK and MANION, Circuit Judges.
Evelyn K. Nichols appeals from a default judgment and order of foreclosure entered against her and three other defendants, including her late husband, Harold A. Nichols, in this suit brought by the government to collect the unpaid federal income taxes of Harold Nichols. See 26 U.S.C. Sec. 7403. Despite Evelyn Nichols's timely objections to the entry of default and of default judgment, the district court made no determination as to whether Harold Nichols's conveyance to Evelyn of the property upon which it ordered foreclosure was fraudulent. We therefore vacate and remand.
In 1989, the government filed a complaint against Harold and Evelyn Nichols, their son Glenn, and the First Federal Savings Bank of Wisconsin (Bank), seeking to reduce to judgment outstanding federal tax assessments against Harold Nichols for the taxable years 1983 and 1984, to set aside as fraudulent Harold Nichols's conveyance of his one-half interest in his residence to Evelyn and Evelyn's subsequent transfer of the property to Glenn (to occur upon Evelyn's death), and to foreclose its tax lien against Harold's interest in the residence. 1 Several months later, the Nicholses moved to dismiss the complaint on the basis of frivolous challenges to the court's jurisdiction. In denying the motion, the district court directed the defendants to file an answer to the complaint within ten days, and warned them that failure to respond would result in the entry of a default judgment. The Nicholses answered within the ten-day time limit, denying that Harold's conveyance to Evelyn of his property interest was fraudulent, and renewing their frivolous jurisdictional arguments. In response to the district court's notice of a status conference, to be held on May 25, 1990, Harold Nichols indicated that he would refuse to participate in any proceedings absent proof of jurisdiction. The district court advised Nichols that his submissions were abusive and frivolous, and advised all the defendants that failure to appear at the status conference could result in the entry of a default judgment against them.
No defendant appeared for the May 25, 1990 status conference. The district court then issued an order stating that unless the defendants filed affidavits showing good cause for their failure to appear, it would strike their answer from the record and enter a default judgment. Harold Nichols filed an affidavit asserting that the district court was without jurisdiction over him and that the IRS had no right to collect income taxes from him. He also asserted that ill health had prevented him from appearing at the status conference. The district court determined that Harold Nichols's failure to appear was due solely to his refusal to accept the court's previous rulings advising him of the frivolity of his argument, and ordered that the Nicholses' answer be stricken from the record. The court also directed the government to prepare a proposed final judgment. On July 7, 1990, the court entered default judgment against Harold Nichols for his unpaid federal income taxes, penalties, and interest for the years 1983 and 1984. It also ordered that the tax liens against Nichols's one-half interest in the residence be foreclosed, and that the residence be sold at public auction with one-half the proceeds paid to Evelyn Nichols. The district court did not, however, enter final judgment against the other three defendants; nor did it set aside as fraudulent the prior transfer of the interest to Evelyn Nichols, which in turn would negate the contract for transfer to Glenn Nichols. Because the district court's July 7, 1990 default judgment thus did not constitute a final and appealable order resolving all the claims of the parties, Harold Nichols's appeal was dismissed for want of jurisdiction. United States v. Nichols, No. 90-2574 (7th Cir. Jan. 13, 1992) (unpublished).
In light of this court's order of January 13, 1992, as well as Harold Nichols's intervening death, the district court determined that further proceedings were necessary. It accordingly reopened the case and ordered that a hearing be held on the government's request for entry of default and of default judgment against the remaining defendants. United States v. Nichols, No. 89-C-1409 (unpublished). Although it ordered the government to file a motion pursuant to Fed.R.Civ.P. 25 to substitute a successor or representative of the deceased as a party to the proceedings, and the government complied, the record reveals that the motion was never ruled on. On June 10, 1992, the court held a status conference at which the Bank again failed to appear, resulting in the entry of default judgment against it. 2 After settlement negotiations between the government and Evelyn Nichols proved fruitless, the government renewed its request that default judgment be entered against the two remaining defendants, Evelyn and Glenn. On February 4, 1993, the court issued an order stating that it would grant the government's request unless the Nicholses demonstrated that they had a meritorious defense to the action. In her response to that order, Evelyn Nichols asserted that the government's case was contingent upon proving that Harold's conveyance of his interest in their residence was fraudulent, and that the government had failed to do so. On February 25, 1993, without commenting on Evelyn Nichols's assertions, the district court notified the parties that final judgment would be entered in the form proposed by the government within fifteen days, and that the defendants would be permitted to object to the proposed final judgment within that time period. Evelyn Nichols filed timely objections to the proposed judgment, again contending that the government had failed to prove that the transfer of Harold's one-half interest in their home was fraudulent, and also maintaining that the government had failed to substantiate its assessments of tax liability as required under 26 U.S.C. Sec. 6203 and 26 C.F.R. Sec. 301.6203-1. The district court entered default judgment against her and Glenn Nichols on March 16, 1993, and Evelyn filed a timely appeal.
A district court's decision to enter a default judgment is guided by the same standards as its decision to dismiss a case for want of prosecution, for "both ... are sanctions for disruptive or dilatory conduct in litigation." Philips Medical Systems Int'l B.V. v. Bruetman, 8 F.3d 600, 602 (7th Cir.1993). 3 "Since sanctions should be proportionate to wrongdoing, the district judge should compare the size of the default judgment, discounted by the probability of collection, with the gravity of the defendant's procedural lapses or other misconduct." Philips, 8 F.3d at 603. Moreover, as this court observed in the context of a dismissal for lack of prosecution, "an earlier lack of diligence is not grounds for dismissal when the plaintiff is currently displaying diligence." GCIU Employer Retirement Fund v. Chicago Tribune Co., 8 F.3d 1195, 1201 (7th Cir.1993) (internal quotations, citation omitted). By similar reasoning, Evelyn Nichols's earlier procedural lapses must be judged in light of her more recent efforts to defend this action. See Philips, 8 F.3d at 602-03.
Viewing Harold Nichols's pleadings as abusive and his failure to appear for the May 25, 1990 status conference inexcusable, the district judge entered a default judgment against him on July 7, 1990. Since Harold Nichols's premature appeal of that judgment was dismissed, however, Evelyn Nichols has complied with every district court order directing her to defend this action, and has presented several challenges to the entry of default judgment, at least some of which are not meritless on their face. In addition to her recent diligence in responding to the district court's orders, the record also reveals that in June 1992, Evelyn and the government attempted to settle this suit, and the government has never contended that Evelyn entered into settlement negotiations in bad faith or for purposes of delay. These facts call into question the propriety of entering default judgment, and lead us to believe that a closer look at the merits of Evelyn's arguments is warranted.
First, Evelyn contends that Harold Nichols's conveyance to her of his one-half interest in their home was not fraudulent. Our review of the final judgment of March 16, 1993, reveals that although the district court entered default judgment against Evelyn, Glenn, and the Bank, it did not expressly set aside as fraudulent the conveyance of Harold Nichols's one-half interest in his residence to Evelyn--indeed, the judgment makes no mention of the allegedly fraudulent conveyance, nor does it address the effect, if any, of Harold Nichols's death on the ownership interests of Evelyn in the property subject to the government's lien. 4 The district court summarily stated that "the Federal tax liens reduced to judgment July 7, 1990, pertaining to Harold A. Nichols attach to the following parcel of improved real property ...," United States v. Nichols, No. 89-C-1409 (E.D.Wis. Mar. 16, 1993) (unpublished), mirroring the language of the prior judgment, where it stated that "the Federal tax liens created by the ... income tax liabilities of Harold Nicholas (sic) incumber the below-described parcel of improved real property...." United States v. Nichols, No. 89-C-1409 (E.D.Wis. July 7, 1990) (unpublished). As this court observed in its...
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