In re Williams
| Decision Date | 05 November 1997 |
| Docket Number | No. CA 96-006ML.,CA 96-006ML. |
| Citation | 215 BR 289 |
| Parties | In re Lawrence G. WILLIAMS, Debtor. Lawrence G. WILLIAMS v. UNITED STATES of America. |
| Court | U.S. District Court — District of Rhode Island |
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Andrew S. Richardson, Boyajian, Harrington & Richardson, Providence, RI, Gerard Riso, Stein, Haspel, Riso & Jacobs, New York City, for Plaintiff.
Robert B. Mann, Mann & Mitchell, Providence, RI, Thomas J. Clark, U.S. Dept. of Justice, Tax Division, Washington, DC, for William L. Bragg and Charles J. Cannon.
Carter G. Phillips, Sidley & Austin, D. Patrick Mullarkey, Deborah S. Meland, Thomas J. Clark, U.S. Dept. of Justice, Tax Division, Washington, DC, for U.S.
This is an appeal of sanctions imposed on two government attorneys, Charles J. Cannon and William L. Blagg, by the United States Bankruptcy Court for the District of Rhode Island. In addition to levying a $750 monetary discovery sanction against each, the bankruptcy court published factual findings pertaining to the conduct of the two attorneys during the discovery process. Additionally, the bankruptcy court enjoined both from seeking reimbursement from their employer, the United States. On reconsideration, the bankruptcy court vacated the monetary sanction as to appellant Blagg, but affirmed the sanction against appellant Cannon, and refused to withdraw its adverse findings of fact. Both attorneys now appeal the bankruptcy court's judgment on due process grounds. They are accompanied in their appeals by the United States, the Attorney General, and the Secretary of the Treasury (hereafter collectively referred to as the government appellants), who separately argue that the nonreimbursement order violates the separation of powers. This court has taken jurisdiction pursuant to 28 U.S.C. § 158(a)(3).
Despite a complicated veneer, this case is not quite so mystifying as might first appear. It is the product of a set of inartfully drawn discovery requests, a series of broken promises, a pair of bruised egos, and the understandable frustration of a bankruptcy judge whose patience over the course of already protracted proceedings was exhaustively tested. It is now the duty of this court to set the record straight.
In 1991, Lawrence G. Williams, a debtor in bankruptcy, filed an adversary proceeding seeking a determination of his federal tax liability for the tax years 1978 through 1988 and 1990. Initially, the Internal Revenue Service (IRS) claimed a deficiency of nearly $6.6 million, including delinquent taxes, penalties, and interest. This figure was based, in significant part, on the disallowance of substantial deductions taken from losses in various partnerships in which the debtor invested. Of central importance in the adversary proceeding, now pending, are the validity of these deductions.
Apparently, Williams was one of thousands of limited partners in a group of fifteen tax shelters known as the Arbitrage Management Partnerships (AMPs). Through the acquisition of straddle positions in repurchase agreements and U.S. Treasury bill options, the AMPs aimed to pass substantial losses on to their investors. In time, however, the AMPs failed, and the Internal Revenue Service (IRS) sought to audit the AMPs and their respective general and limited partnership interests. However, because the streamlined auditing procedures pursuant to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub.L. 97-248, § 402(a), 96 Stat. 648, codified at 26 U.S.C. §§ 6221-31, were unavailable for the tax years preceding TEFRA's effective date, the United States Tax Court supervised an initiative to resolve all of the related tax deficiencies on a consolidated basis (hereafter, the tax court proceedings).1
In 1987, the tax court assigned a team of three negotiators to represent the various interests concerned in the hope that they could select one or more test cases for litigation and/or negotiating a settlement. Of some significance, appellant Blagg represented the IRS in those proceedings, and Dennis L. Stein, the debtor's counsel, represented one of the general partner's interests.2
Early in 1988, the negotiators informed the tax court that a tentative settlement had been reached. On February 7, 1989, the IRS wrote to the debtor advising him of the settlement offer and outlined the procedures by which he could accept it. The debtor has put in issue in the underlying adversary proceeding whether or not he accepted the government's offer to settle any tax liability arising out of his investments in the AMPs. From his point of view, this issue is of considerable importance, for if he effectively accepted an offer of settlement, he asserts that his potential exposure may be greatly reduced or eliminated by virtue of the applicable statute of limitations.
On or about April 30, 1991, the debtor served a request for the production of documents pursuant to Bankruptcy Rule 7034 and Rule 34 of the Federal Rules of Civil Procedure. Specifically, he sought four broad categories of documents:
The government did not timely serve its response to these requests.
Exactly five days after the government's response was due, that is to say, on June 7, 1991, the debtor moved to compel production of documents pursuant to Fed.R.Civ.P. 37(a).3 On June 18, 1991, the government served objections to the debtor's requests on the basis that they were overbroad, burdensome, and sought privileged material. Thereafter, the government filed a timely objection to the debtor's Rule 37(a) motion, the substance of which was that it served a response to the debtor's requests, which, albeit untimely, mooted the Rule 37(a) issue.
The bankruptcy court held two hearings on the debtor's motion to compel. The first was in 1991. A docket entry that July notes, "IRS needs more time to produce information." A second hearing was held the following January, 1992. There, the bankruptcy court considered the government's specific objections on their merits and overruled them. By order dated January 14, 1992, the bankruptcy court ordered that "the government produce all of the requested documents within forty-five days. . . ." This deadline was to expire on February 28, 1992.
On February 25, 1992, within the period prescribed by the court, the government sent the debtor a collection of documents. Delivered under two separate covers, the government stated its belief that "this . . . completes the production of documents as ordered by the court." Not included in this response, however, were certain consents to extend the statute of limitations executed by either the debtor or by the various partnerships in which he had invested (hereafter, "the consents"), or documents concerning audits of these partnerships (hereafter, "the partnership audit files"). The debtor complained about the government's failure to produce these documents for the first time in a motion for partial summary judgment filed in April, 1992.
In his motion, the debtor argued that for each year that the government did not produce a consent, it was time-barred from seeking a deficiency. He also argued that because the government had not produced the partnership audit files, it could not prove any tax deficiency in connection with his partnership investments. The government responded that it had, in fact, produced most of the requested consents.4 With respect to the partnership audit files, the government disputed that it failed to produce requested documents. However, it did argue, to the extent these files were not produced, that summary judgment was an inappropriate remedy. It suggested that the debtor could more properly find a remedy for nonproduction in a motion for preclusion. The bankruptcy court denied the debtor's motion on May 8, 1992.
On May 20, 1992, seemingly at the government's cue, the debtor filed a motion to preclude. This motion bore great similarity to the preceding summary judgment motion. In support thereof, attorney Stein filed an affidavit resembling a memorandum of law which stated that the government had not turned over the partnership audit files, which, "presumably . . . constitute the universe of documents responsive to the April 30, 1991 request." Ex. 3 at 2. Accordingly, Stein opined that the government should be precluded from introducing any materials contained within these files because they were not produced in accordance with the bankruptcy court's January 14, 1992 order.
The government timely responded to this motion on June 12, 1992. It explained that the reason why it did not produce any of the documentary materials contained in the partnership audit files was because, with the exception of those documents pertaining to the extension of the applicable statute of limitations, the debtor had never requested any partnership-related materials. This response sparked a supplemental affidavit from Stein which, for the first time, raised questions of fact regarding certain representations or admissions by the government's counsel, who, at that time, was appellant Charles J. Cannon. Thereafter, at the joint request of the parties, the bankruptcy court granted a series of extensions and continuances during which time, as this court understands it, the parties...
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