Internal Revenue Serv. v. Murphy
| Decision Date | 07 September 2016 |
| Docket Number | CIVIL NO. 2:16-CV-08-DBH,BANKR. NO. 05-22363,BANKR. ADV. NO. 11-2020 |
| Citation | 564 B.R. 96 |
| Parties | INTERNAL REVENUE SERVICE, Appellant v. William Charles MURPHY, Appellee. |
| Court | U.S. District Court — District of Maine |
Peter Sklarew, U.S. Department of Justice, Washington, DC, for Appellant.
John H. Branson, Law Office of John H. Branson, PA, Portland, ME, for Appellee.
DECISION AND ORDER ON BANKRUPTCY APPEAL
This bankruptcy appeal presents two primary questions: (1) how to interpret the term "willfully" in a federal statute; (2) whether a lawyer's unrecognized cognitive impairment that comes to light only later can be used to upset an interlocutory ruling that may have resulted from the lawyer's inadequate representation during the cognitive impairment.
The appellant Internal Revenue Service ("IRS")1 argues that it should not be held liable for damages to a debtor-taxpayer under an Internal Revenue Code provision that allows a taxpayer to recover damages if the IRS "willfully violates" a bankruptcy court's discharge injunction under section 524 of the Bankruptcy Code. The IRS challenges the bankruptcy court's definition of "willfully" and the bankruptcy court's decision to use offensive collateral estoppel to establish the IRS violation. The IRS argues that the predicate judgment against the IRS confirming that the bankruptcy discharge wiped out the tax debts (thus generating the estoppel) resulted from an Assistant United States Attorney's (AUSA) then unknown cognitive impairment.
After oral argument on August 22, 2016, I conclude that the bankruptcy court applied the proper definition of "willfully," but that it acted contrary to law and abused its discretion in failing to consider the IRS's two motions for reconsideration under the interests-of-justice test that Federal Rule of Civil Procedure 54(b) requires.2
The debtor-taxpayer William C. Murphy ("Murphy") filed for Chapter 7 bankruptcy protection in October 2005. Voluntary Pet., In re Murphy , Ch. 7 Case No. 05–22363 (Oct. 13, 2005) (Bankr. ECF No. 1). The majority of the debts Murphy listed on his Petition were for outstanding federal income taxes for various years. Id. at 11–14. The bankruptcy court granted his discharge on February 14, 2006. Order Discharging Debtor, In re Murphy , Ch. 7 Case No. 05–22363 (Feb. 14, 2006) (Bankr. ECF No. 5).
Thereafter, the IRS informed Murphy that it considered his tax liabilities excepted from the 2006 discharge on the basis that Murphy had filed fraudulent returns or attempted to evade taxes. See 11 U.S.C.A. § 523(a)(1)(C). The IRS issued notices of levies to Murphy's bank and various clients.3 See Debtor's Statement of Material Facts at 2-3, Murphy v. I.R.S. , Adv. No. 09–2042 (May 4, 2010) (Bankr. ECF No. 41-1); Obj. and Resp. by IRS at 9-10, Murphy v. I.R.S. , Adv. No. 09–2042 (May 25, 2010) (Bankr. ECF No. 44).
In August 2009, Murphy reopened his bankruptcy case and began the first adversary proceeding in bankruptcy court seeking a declaration that his 2006 discharge covered taxes owing for 1993–1998, 2000, and 2001; challenging the IRS's 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. , Adv. No. 09–2042 (Aug. 14, 2009) (Bankr. ECF No. 1). Because the AUSA who handled 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 Federal Rule of Bankruptcy Procedure 7004(b)(5) would otherwise require. Therefore, the Tax Division of the Department of Justice and the Boston IRS Office of Chief Counsel were unaware of the adversary proceeding until long after an adverse judgment.4 U.S. Renewed Mot. to Recons. Order Granting Partial Summ. J. at 8-9, Murphy v. I.R.S. , Adv. No. 11–2020 (Nov. 16, 2015) (Bankr. ECF No. 265).
In this first adversary proceeding, Murphy bore the burden of proving that a bankruptcy discharge issued, but the IRS bore the burden of proving that Murphy's tax obligations were excepted from the 2006 discharge under Bankruptcy Code section 523 and therefore that the 2006 discharge did not prevent IRS collection efforts. See Pretrial Order at 6, Murphy v. I.R.S. , Adv. No. 09–2042 (Oct. 20, 2009) (Bankr. ECF No. 19).
Murphy moved for summary judgment in this adversary proceeding on May 4, 2010, seeking a final determination that his 2006 discharge embraced his tax debts. Pl.'s Mot. for Summ. J. at 5, Murphy v. I.R.S. , Adv. No. 09–2042 (May 4, 2010) (Bankr. ECF No. 41). The AUSA who had been handling bankruptcy proceedings in this District on behalf of the government for many years took only limited discovery to support the IRS's position; he served requests for production of documents but did not take Murphy's deposition. See Notice of Service of Disc., Murphy v. I.R.S. , Adv. No. 09–2042 (Dec. 3, 2009) (Bankr. ECF No. 26). In opposing the motion on May 25, 2010, the AUSA failed to present evidence that would raise a triable issue of fact as to whether Murphy's tax liabilities were excepted—an opposition that presiding Bankruptcy Judge Haines described as falling "far short of applicable substantive and procedural standards" under Federal Rule of Civil Procedure 56.5 Order Granting Summ. J. at 5, Murphy v. I.R.S. , Adv. No. 11–2020 (Dec. 20, 2013) (Bankr. ECF No. 94). In June 2010, Judge Haines granted Murphy's motion for summary judgment from the bench, stating:
I've looked at the summary judgment record very carefully and frankly, somewhat surprisingly, I'm not—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.
Tr. of Bench Ruling at 4-5, Murphy v. I.R.S. , Adv. No. 09–2042 (June 22, 2010)6 (Bankr. ECF No. 99).
In his ensuing order, Judge Haines declared Murphy's tax obligations for the years 1993-1998, 2000, and 2001 discharged by the 2006 bankruptcy discharge. Order Granting Mot. for Summ. J., Murphy v. I.R.S. , Adv. No. 09–2042 (June 22, 2010) (Bankr. ECF No. 48). The IRS did not appeal.
In February 2011, Murphy filed a second adversary Complaint against the IRS under Internal Revenue Code section 7433(e), which permits a taxpayer to recover damages if the IRS "willfully violates" a bankruptcy discharge under section 524 of the Bankruptcy Code.7 Compl., Murphy v. I.R.S. , Adv. No. 11–2020 (Feb. 28, 2011) (Bankr. ECF No. 1); see 26 U.S.C.A. § 7433(e). Murphy alleged that the IRS was liable under section 7433(e) of the Internal Revenue Code because the IRS had violated Bankruptcy Code section 524 by levying on his discharged tax liabilities. Compl., Murphy v. I.R.S. , Adv. No. 11–2020 (Feb. 28, 2011) (Bankr. ECF No. 1). The period for discovery in the second adversary proceeding expired without the AUSA taking any discovery. U.S. Request for a Status or Pretrial Conference in Chambers at 1, 3, Murphy v. I.R.S. , Adv. No. 11–2020 (Dec. 11, 2012) (Bankr. ECF No. 52).
In 2012, the AUSA who had been handling this and other bankruptcy matters in this District stated his intention to retire by year's end. See id. at 1. Around the same time, colleagues of the AUSA stated concerns about his physical demeanor and possible health problems. See R. Murphy Decl. at 2, Murphy v. I.R.S. , Adv. No. 11–2020 (Feb. 28, 2014) (Bankr. ECF No. 142-1) (sealed document). In October 2012, the United States Attorney's Office disclosed to the Department of Justice's Tax Division that the AUSA had been potentially diagnosed with amyotrophic lateral sclerosis
(ALS) and dementia. Id. at 6. Thereafter, the Tax Division informed the bankruptcy court that the AUSA was no longer assigned to Murphy's case due "to his imminent retirement and for personal reasons" and that the Tax Division would take over the defense of the second adversary proceeding. U.S. Request for a Status or Pretrial Conference in Chambers at 1, Murphy v. I.R.S. , Adv. No. 11–2020 (Dec. 11, 2012) (Bankr. ECF No. 52). In this same filing, Tax Division counsel said that the IRS planned to file a motion to reopen discovery on damages in the second adversary proceeding based on excusable neglect under Bankruptcy Rule 9006 and/or good cause under Federal Rule of Civil Procedure 16(b)(4). Id. at 3.
At that time, the parties agreed that the IRS would defer moving to reopen discovery pending cross motions for summary judgment on liability. See Parties' Am. Joint Pretrial Order at 5-6, Murphy v. I.R.S. , Adv. No. 11–2020 (Mar. 27, 2013) (Bankr. ECF No. 63). The principal argument that the IRS made in its motion for summary judgment was that the IRS should be able to escape liability under section 7433(e) for "willfully violat[ing]" the discharge injunction because it relied on a good faith belief that the statutory discharge injunction was inapplicable to the tax debts at issue. Br. in Support of Mot. for Summ. J. at 1-19, Murphy v. I.R.S. , Adv. No. 11–2020 (May 1, 2013) (Bankr. ECF No. 69). Murphy argued, in turn, that the IRS "willfully violate[d]" the discharge injunction under section 7433(e) because the tax debt was discharged, the IRS had notice of the discharge, and the IRS intended the acts that violated the discharge injunction. Murphy Opp'n to Summ. J. & Cross-Motion for Summ. J. at 4-8, Murphy v. I.R.S. , Adv. No. 11–2020 (June 28, 2013) (Bankr. ECF No. 80).
On December 20, 2013, Bankruptcy Judge Haines granted partial summary judgment on liability to taxpayer Murphy in the second adversary proceeding. Order Granting Summ. J., Murphy v. I.R.S. , Adv. No. 11–2020 (Dec. 20, 2013) (Bankr. ECF Nos. 94–95). Using the doctrine of offensive collateral estoppel, Judge Haines ruled that the preclusive effect of the June 2010 summary judgment order in the first adversary...
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