Angelopoulos v. Keystone Orthopedic Specialists, S.C., Wachn, LLC
| Decision Date | 18 January 2018 |
| Docket Number | Case No. 12-cv-5836 |
| Parties | DR. NICHOLAS ANGELOPOULOS Plaintiff, v. KEYSTONE ORTHOPEDIC SPECIALISTS, S.C., WACHN, LLC, and MARTIN R. HALL, M.D., Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Before the Court are two closely related motions: (1) Plaintiff's motion for entry of judgment under Rule 58 [440] and (2) Defendants' motion for judgment on partial findings under Rule 52(c) on Count I or for alternative relief [450]. Both motions [440, 450] are denied without prejudice, although in this opinion the Court resolves many of the sub-issues relating to the request for damages and authorizes limited, targeted additional discovery to take place by March 16, 2018. The Court also defers certain matters, including the "double recovery" issues, until after a Rule 58 judgment is entered combining the jury verdict (as it now stands) and the Court's forthcoming damages award under Count 1. As explained below, the parties are directed to contact the Courtroom Deputy within two business days after they receive the last transcript of the depositions that are permitted pursuant to this opinion so that a prompt status hearing can be set. The Court will then discuss with counsel a plan for the final disposition of Count 1 and provide further guidance on the post-judgment issues that the parties have previewed in the briefing on the current motions. As a housekeeping matter, the Court also denies as moot Plaintiff's motion for directed verdict on Defendants' counterclaims [414] because Plaintiff prevailed on those claims at trial; and denies Defendants' Rule 50(a) motion for partial summary judgment [423] without prejudice to Defendants raising the issues preserved in their Rule 50 motion in any Rule 59 motion that they may file.
By way of background, Plaintiff Dr. Nicholas Angelopoulos brought suit against Defendants Keystone Orthopedic Specialists, S.C., WACHN LLC, and Dr. Martin R. Hall. The Court previously has set out in detail the parties' respective factual and legal contentions in its rulings on motions to dismiss and summary judgment [see 258, 303]. On June 6, 2017, a jury returned a verdict in favor of Plaintiff on Counts 1 (violation of 26 U.S.C. § 7434), 2 (fraud), 3 (breach of fiduciary duty), 5 (breach of WACHN operating agreement), and 6 (breach of Keystone agreement). By agreement of the parties, the issue of damages in the event of a verdict for Plaintiff on Count 1 was reserved for determination by the Court. Plaintiff now seeks a damages award on Count 1, as well as prejudgment interest on Counts 2, 3, 5, and 6 and equitable relief on Count 3—all of which Plaintiff would like incorporated into a Rule 58 final judgment order. Defendants oppose most of the relief sought by Plaintiff and have themselves moved for judgment on partial findings pursuant to Rule 52(c) on Count 1, as well as other relief sought in the alternative. The gap between Plaintiff's request for approximately $327,000 in fees and costs and Defendants' contention that the Court's award should be limited to the $5,000 statutory amount underscores the extent of the parties' disagreement on the proper disposition of what remains of Count 1. As explained below, the parties are at odds on almost every sub-issue, thus necessitating both a lengthy opinion at this time and further work by the parties and the Court going forward.
In Count 1 of his complaint, Plaintiff sought recovery under 26 U.S.C. § 7434, alleging that Defendants Keystone and Hall caused a fraudulent IRS Form 1099 to be filed in Plaintiff's name reporting more than $159,000 as taxable income for tax year 2007. Plaintiff acknowledged that approximately $38,000 should have been reported on the 1099, but claimed that the excess amount was included by Keystone and Hall out of spite arising out of the larger disputes between the parties. The jury agreed with Plaintiff as to liability. By agreement of the parties, the calculation of damages will be done by the Court.
Section 7434(b) governs "damages" for the filing of a "fraudulent information return." It permits the Court to award either (1) a flat sum of $5,000 or (2) the sum of (a) "any actual damages sustained by the plaintiff as a proximate cause of the filing of the fraudulent return (including any costs attributable to resolving deficiencies asserted as a result of such filing)," (b) the "costs" of the civil action, and (c) "in the court's discretion, reasonable attorneys' fees." Defendants insist that a minimal $5,000 award is sufficient compensation; Plaintiff seeks an award of more than $325,000, which includes all of the attorneys' fees and accounting expert expenses that he incurred in the underlying tax court proceedings as well as roughly 25% of certain categories of attorneys' fees and expert expenses in this litigation—amounts that Plaintiff submits "fairly pertained to proving Count 1 and that would have been necessary even if Count 1 had been the only count." [440, at 12.]
Although the case law construing Section 7434(b) is rather sparse, a few sensible governing principles emerge to guide the Court's analysis here. To begin with, a taxpayer tagged with a fraudulent tax from an inflated 1099 may "have to initiate costly proceedings tostraighten out the mess." Bailey v. Shell W. E&P, Inc., 1998 WL 185520, at *2 (N.D. Tex. Apr. 14, 1998). When the taxpayer convinces a trier of fact of "the unlawfulness of [the wrongdoer's] willfully fraudulent filing of the 1099," "it would be a major injustice for [the taxpayer] to be compelled to bear, unrecompensed, the amounts expended" to demonstrate the fraud. Shiner v. Turnoy, 2014 WL 3907043, at *2 (N.D. Ill. Aug. 11, 2014), rev'd on other grounds, 850 F.3d 923 (7th Cir. 2017). And because distinguishing between a proper 1099 filing and a fraudulent one may require lay taxpayers to employ both legal and accounting assistance, attorneys' fees and expert witness fees properly lie within the scope of expenses reimbursable to a wronged taxpayer. Cf. Uniroyal Goodrich Tire Co. v. Mut. Trading Corp., 63 F.3d 516, 526 (7th Cir. 1995) (); Bright v. Land O'Lakes, Inc., 844 F.2d 436, 444-45 (7th Cir. 1988) (); Heiar v. Crawford Cty., Wis., 746 F.2d 1190, 1203 (7th Cir. 1984) ().
To those principles, the Court adds two more. First, given the important private and public interests served by dealing honestly with the government in regard to taxes—both on the part of the taxpayer and any employers reporting taxpayer income—a court should not second-guess the taxpayer's decision to retain professional assistance to sort out any alleged deficiencies associated with his return. Put slightly differently, when faced with an accusation of shorting the government, the issues at stake go beyond a straightforward cost-benefit analysis and it would not be irrational for a taxpayer like Plaintiff here to spend more money on lawyers andaccountants to clear his name than he likely would be to recover in the form or a refund or reassessment of his tax liability. Second, with that said, any court asked to make a discretionary award of attorneys' fees and other litigation costs must have some standard to apply and cannot simply rubber stamp the bills submitted by the prevailing party in a Section 7434 action. Drawing on the analogous context of attorneys' fees awards in civil rights actions, the Court will use "reasonableness" as its touchstone in considering Plaintiff's request here. See Farrar v. Hobby, 506 U.S. 103, 114-15 (1992) (); Montanez v. Simon, 755 F.3d 547, 553 (7th Cir. 2014) ("the district court is in the best position to make the 'contextual and fact-specific' assessment of what fees are reasonable" (quoting Sottoriva v. Claps, 617 F.3d 971, 975 (7th Cir. 2010)); Jafee v. Redmond, 142 F.3d 409, 414 (7th Cir. 1998) (). As the foregoing analysis suggests, while it will be Plaintiff's task to demonstrate the reasonableness of his damages under Section 7434, he will not be faulted for taking a cautious approach to his tax liabilities by hiring reputable (and expensive) lawyers and accountants, nor will their decisions to thoroughly explore the problem and potential solutions be second-guessed with the benefit of hindsight.
How the Count 1 damages inquiry is to proceed is the subject of Defendants' Rule 52(c) motion and the parties' briefs for and against it. The Court does not find either side's proposal entirely satisfactory. Plaintiff's suggestion to take the somewhat cursory records submitted withthe briefs and proceed to trial without any additional discovery on damages is not persuasive for several reasons. To begin with, although there was extensive fact discovery in this case, it did not include a close analysis of the legal and expert bills from the IRS proceeding and the litigation in this Court. Indeed, it would have been wasteful to have taken such discovery, as it would...
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