Internal Revenue Serv. v. Murphy, Civil No. 2:14–CV–340–DBH.

• Court: United States District Courts. 1st Circuit. United States District Court (Maine)
• Writing for the Court: D. BROCK HORNBY, District Judge.
• Citation: 554 B.R. 535
• Parties: INTERNAL REVENUE SERVICE, Appellant v. William Charles MURPHY, Appellee.
• Docket Number: Civil No. 2:14–CV–340–DBH.,Bankruptcy No. 09–2042.
• Decision Date: 24 February 2015

554 B.R. 535

INTERNAL REVENUE SERVICE, Appellant
v.
William Charles MURPHY, Appellee.

Civil No. 2:14–CV–340–DBH.
Bankruptcy No. 09–2042.

United States District Court, D. Maine.

Signed Feb. 24, 2015.

554 B.R. 539

Peter Sklarew, U.S. Department of Justice Tax Division Civil Trial Section Northern Region, Washington, DC, for Appellant.

John H. Branson, Law Office of John H. Branson, PA, Portland, ME, for Appellee.

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

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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 $49,050³ 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

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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 discovery⁵ 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).

554 B.R. 542

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...