In re Ryals

• Decision Date: 12 November 2009
• Docket Number: Bankruptcy No. 3:bk-07-00399.,Adversary No. 3:08-ap-0065-JAF.
• Citation: 424 B.R. 539
• Parties: In re Jack C. RYALS, Debtor. Jack C. Ryals, Plaintiff, v. United States of America, Defendant.
• Court: U.S. Bankruptcy Court — Middle District of Florida

Page 539

424 B.R. 539

In re Jack C. RYALS, Debtor Jack C. Ryals, Plaintiff, v. United States of America, Defendant.

Bankruptcy No. 3:bk-07-00399.

Adversary No. 3:08-ap-0065-JAF.

United States Bankruptcy Court, M.D. Florida, Jacksonville Division.

November 12, 2009.

COPYRIGHT MATERIAL OMITTED

Keith H. Johnson, Johnson and Johnson P.A., Jacksonville, FL, for Plaintiff.

Mary Apostolakos Hervey, United States Department of Justice, Washington, DC, for Defendant.

ORDER GRANTING UNITED STATES' MOTION FOR SUMMARY JUDGMENT AND GRANTING JACK C. RYALS' CROSS MOTION FOR SUMMARY JUDGMENT

JERRY A. FUNK, Bankruptcy Judge.

This proceeding came before the Court upon United States' Motion for Summary Judgment and Memorandum of Law in Support (the "Motion"), Ryals' Response and Counter-Motion to [the Motion] (the "Response and Cross-Motion") and United States' Reply in Support of [the Motion] and Opposition to Ryals' Cross Motion for Summary Judgment. Jack C. Ryals ("Ryals") commenced this adversary proceeding by filing a complaint pursuant to 11 U.S.C. § 523(a)(1)(C) seeking to discharge his unpaid federal income tax liabilities for the 1978 and 1979 tax years. He later filed an amended complaint for damages, claiming the Internal Revenue Service violated the discharge injunction when it sought to collect his unpaid taxes. The United States of America (the "United States") filed an answer challenging Ryals' discharge and damages claims. Ryals' liability for 1979 has been paid. Therefore, the case only concerns the dischargeability of Ryals' 1978 tax debt. The United States contends that Ryals' 1978 tax liability is excepted from discharge pursuant to 11 U.S.C. § 523(a)(1)(C) because Ryals willfully attempted to evade or defeat such tax. Ryals contends that he did not willfully attempt to evade or defeat such tax. Ryals also asserts that the 1978 penalty and the accrued interest thereon were discharged by the filing of his Chapter 7 bankruptcy petition. Upon a review of the Motion, the Response and Cross-Motion, and the Reply, the Court finds it appropriate to grant the Motion and to grant the Cross-Motion. The Court will enter judgment in favor of the United States and against Ryals as to the 1978 federal income tax liability and consequent claim for violation of the discharge injunction and judgment in favor of Ryals and against the United States as to the 1978 fraud penalty and the interest thereon. The following facts are undisputed.

Undisputed Facts

In April 1983, a multi-count indictment charged Ryals with, inter alia, cultivating marijuana for distribution and sale and evading the resulting federal income taxes for years 1975 through 1979 in a scheme in which he hid his unlawful income using cashier's checks and offshore banks. (United States' Ex. 1, Indictment.) Count One charged Ryals with conspiring with others to impede, impair, obstruct, and defeat "the lawful government functions of the Internal Revenue Service ... in the ascertainment, computation, assessment, and collection" of income taxes from approximately December 1974 through the date of the indictment. (Id. p. 1.) Count Five charged Ryals with knowingly attempting to evade or defeat his income tax liability for 1979. (Id. p. 23.)

On October 7, 1983, Ryals entered into a written plea agreement, in which he admitted guilt on Counts One, Five and Six of the criminal indictment. (United States' Ex. 1, Plea Agreement.) As part of the plea agreement Ryals "certifie[d] that he [could] and [would] knowingly, voluntarily and truthfully respond affirmatively to the questions set forth in the attached `Personalization of Elements', which [was] incorporated [t]herein by reference, and [did] also ... admit that the United States [could] prove the allegations set forth in the attached `Factual Basis', which [was] incorporated [t]herein by reference." (Id., Plea agreement p. 8.) By affirmatively answering the questions in the Personalization of Elements, Ryals admitted

• that two or more persons came to an understanding between 1974 and 1983 to try to accomplish a common and unlawful plan, to impair and impede the ascertaining and collection of income taxes of Jack C. Ryals;

• that he willfully became a member of that conspiracy;

• that during the conspiracy, at least one conspirator knowingly committed at least one of the overt acts listed in the indictment;

• that the overt act was knowingly committed at or about the time alleged in an effort to accomplish some object or purpose of the conspiracy;

(United States' Ex. 1, Personalization of Elements p. 1.)

The Factual Basis incorporated by reference into the plea agreement which Ryals executed contained additional admissions regarding his attempts to avoid his tax liabilities for the years at issue and stated as follows:

Throughout the period 1975 through 1979, Jack C. Ryals was converting substantial sums of currency he received from selling his share of the marijuana crop into domestic cashier's checks. The cashier's checks were mainly used to make investments into Solar Energy Products, Inc., so as to disguise and hide the true source of the investment from the government.

As a result of the above acts, the Internal Revenue Service was impeded and impaired from determination of Jack C Ryals' income for the years 1976 through the year 1979, and the determination of the resulting tax liability for the same years.

(United States' Ex. 1, Factual Basis p. 2.)

On May 20, 2003, the United States instituted an action against Ryals to reduce his 1977 and 1978 federal income taxes to judgment. US v. Jack Carl Ryals, Case No. 1:03-cv-0090-MP-AK (N.D.Fla.). On December 8, 2008, judgment was entered in favor of the United States in the amount of $1,678,065.01, plus interest thereafter as provided by law. The judgment remains unpaid.¹

CONCLUSIONS OF LAW

An individual debtor who files a petition under Chapter 7 of the Bankruptcy Code is generally granted a discharge from all debts that arose before the filing of the bankruptcy petition. See 11 U.S.C. § 727(b). This discharge, granted as a matter of legislative grace, is not intended to assist those who, "despite their own misconduct, are attempting to preserve a comfortable standard of living at the expense of their creditors." In re Zick, 931 F.2d 1124, 1129 (6th Cir.1991). Instead, the benefits of protection under the bankruptcy laws are limited to the "honest but unfortunate debtor" who, despite his best efforts, is unable to meet the demands of his creditors. In re Fretz, 244 F.3d 1323, 1326 (11th Cir.2001); see also Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Zick, 931 F.2d at 1129 (bankruptcy laws intended to give debtors a "fresh start," not a "head start"). As a result, Congress has enacted a number of exceptions to the bankruptcy discharge. See 11 U.S.C. § 523. Section 523(a)(1)(C) renders non-dischargeable any tax debt "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." The Eleventh Circuit has held that this language means that the government must prove both a conduct and a mental element by a preponderance of the evidence. In re Griffith, 206 F.3d 1389, 1396 (11th Cir.2000) (citing Garner, 498 U.S. at 287-88, 111 S.Ct. 654).

Conduct Requirement of § 523(a)(1)(C)

With regard to the conduct element, "the plain statutory language simply requires that the debtor have `attempted in any manner to evade or defeat tax.'" Fretz, 244 F.3d at 1329 (emphasis added) (internal citation omitted). While something more than simply failing to pay taxes is required, In re Haas, 48 F.3d 1153, 1155-1158 (11th Cir.1995), the government can satisfy the conduct requirement by showing that a debtor engaged either in acts of commission or culpable acts of omission to avoid payment or collection of taxes. In re Jacobs, 490 F.3d 913, 921 (11th Cir.2007). There are myriad fact patterns in which courts have concluded that acts or omissions, coupled with the failure to pay taxes, satisfy the conduct requirement of § 523(a)(1)(C).

Mental State Requirement of § 523(a)(1)(C)

In order to satisfy the mental state requirement, the government must prove that a debtor: (1) had a duty to file income tax returns and pay taxes; (2) knew he had such a duty; and (3) voluntarily and intentionally violated that duty. Fretz, 244 F.3d at 1330 (citing In re Griffith, 206 F.3d 1389, 1396 (11th Cir.2000)). "The third or willfulness component of the mental state requirement `prevents the application of the exception to debtors who make inadvertent mistakes, reserving non-dischargeability for those whose efforts to evade tax liability are knowing and deliberate.'" Fretz, 244 F.3d at 1330 (quoting In re Birkenstock, 87 F.3d 947, 952 (7th Cir.1996)). However, in order to show that a debtor voluntarily and intentionally violated his duty to pay, it is not necessary to establish fraudulent intent. In re Jacobs, 490 F.3d at 924.

Summary Judgment Standard

The standard for summary judgment is set forth in Rule 56 of the Federal Rules of Civil Procedure, made applicable to this contested matter by Rules 7056 and 9014 of the Federal Rules of Bankruptcy Procedure. Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Hyman v. Nationwide Mut. Fire Ins. Co., 304 F.3d 1179 (11th Cir.2002).

The evidence and all factual inferences therefrom must be viewed in the light most favorable to the party opposing the motion...