Lemaster v. U.S.

• Citation: 891 F.2d 115
• Decision Date: 02 November 1989
• Docket Number: No. 89-3021,89-3021
• Parties: -5858, 90-1 USTC P 50,032, 15 Fed.R.Serv.3d 599 James P. LEMASTER, Barbara Lemaster, Stephen Lemaster, Plaintiffs-Appellants, James R. Kingsley, Appellant, v. UNITED STATES of America, Harold Webb, Department of Internal Revenue, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 115

891 F.2d 115

64 A.F.T.R.2d 89-5858, 90-1 USTC P 50,032,

15 Fed.R.Serv.3d 599

James P. LEMASTER, Barbara Lemaster, Stephen Lemaster Plaintiffs-Appellants James R. Kingsley, Appellant, v. UNITED STATES of America, Harold Webb, Department of Internal Revenue, Defendants-Appellees.

No. 89-3021.

United States Court of Appeals Sixth Circuit.

Argued Oct. 6, 1989.

Decided Nov. 2, 1989.

James R. Kingsley, Circleville, Ohio, pro se and for plaintiffs-appellants.

Barbara L. Beran, Asst. U.S. Atty., Office of the U.S. Atty., Columbus, Ohio, Gary R. Allen, Acting Chief, Michael J. Roach, Debra L. Stefanik, Trial Atty., and Ann Belanger Durney, U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for defendants-appellees.

Before JONES, KEITH and GUY, Circuit Judges.

PER CURIAM.

Both plaintiffs and their attorney appeal from an award of sanctions under Federal Rule of Civil Procedure 11 and 28 U.S.C. § 1927. Plaintiffs filed suit against the United States and a revenue officer of the Internal Revenue Service after the officer (Webb) seized property ostensibly owned by Stephen Lemaster to pay the tax liabilities owed by his parents, James and Barbara Lemaster. The district court granted the defendants' motion for summary judgment as to all plaintiffs' claims except Stephen's claim under section 7426 of the Internal Revenue Code (26 U.S.C.), which was dismissed after a two-day trial. The court subsequently awarded the government sanctions against both the attorney (Kingsley) and the three plaintiffs, and all four persons now appeal. While Kingsley and the Lemasters raise a number of points on appeal, their basic argument is that this was not an appropriate case for sanctions and that, even if sanctions were allowable, the court did not compute the amount of the sanctions properly. Finding no abuse of discretion by the district court, we affirm the award of sanctions.

I.

The events relevant to this case began in 1980. At that time, the IRS determined that Barbara and James Lemaster owed substantial taxes, and the IRS commenced making assessments. Also in 1980, James and Barbara began transferring property to their son, Stephen, apparently in order to insulate the property from creditors. James and Barbara transferred their house, worth over $60,000, to Stephen in 1980, although Stephen was then a senior in high school with little or no money. The title was transferred to Stephen and there was a claim made that the purchase price was subsequently forgiven over three years as a gift, but James and Barbara continued to reside in the home, and James indicated in subsequent, unrelated legal proceedings that he, James, was the owner of the house.

Since the 1970s, James had operated a trucking business, B & L Leasing. In the 1980s, as a result of the IRS assessments and assorted other legal problems, James was forced to shut down his operation. At approximately the same time as B & L was encountering difficulties, the Lemaster family began operating a new trucking business. All of the property and assets of the new business, "S. Lemaster Trucking," were in Stephen's name. When B & L ceased operations, S. Lemaster Trucking acquired all of B & L's property by assuming B & L's mortgage obligations. As soon as S. Lemaster Trucking commenced operations, Stephen signed a form granting James his power of attorney. Thus, while all business was conducted in Stephen's or the company's name, James controlled all aspects of S. Lemaster Trucking's day-to-day operations. In fact, Stephen soon moved to Florida to pursue his own career as a hairdresser. While he was in Florida, Stephen rarely was consulted about the trucking business, and his approval was not required for major purchases. Stephen did receive some revenues from the trucking operation over the years. However, it is also clear that Barbara and James regarded the S. Lemaster Trucking checking account as their own personal checking account, using it to pay all of their household expenses.

In 1985, after years of unsuccessful collection attempts, the delinquent tax liabilities of Barbara and James were assigned to Agent Webb for collection. Webb was unable to locate any seizable assets in the name of Barbara or James, but he did discover that James was operating a trucking business with assets listed in Stephen's name. After an investigation, which included an interview with Stephen in Florida in which Stephen demonstrated almost no familiarity with the trucking business, Webb became convinced that Stephen Lemaster was simply a nominee for, or alter ego of, James Lemaster.

On August 14 and 15, 1986, Webb served notices of levy on a number of individuals and institutions doing business with S. Lemaster Trucking or with Stephen Lemaster. These levies produced little money, so on September 4, 1986, Webb and a number of other government officials seized a 1984 Lincoln Continental from the driveway of the house owned by Stephen but inhabited by Barbara and James. The agents also seized a number of items--trucks, engines, automobile parts, a forklift--from the business premises of S. Lemaster Trucking.

On the very day that the seizures occurred, James Lemaster tendered to Webb a check for $9,000 of the $25,820.18 tax liability. All property but the Lincoln was returned. One month later James presented Webb with a check for the balance of his outstanding tax obligation, and the Lincoln was returned.

On August 26, 1986, after the levies on individuals and institutions dealing with Stephen Lemaster, but before the seizure of the car and business properties, all three Lemasters filed suit against the United States and against Agent Webb personally. All three plaintiffs sought an injunction under 26 U.S.C. § 7426, ¹ alleging that the government should be prevented from illegally seizing property titled in the name of Stephen Lemaster to pay the tax debt of James and Barbara Lemaster. James Lemaster also sought to enjoin the government from interfering with the power of attorney granted him by Stephen. Finally, Stephen sued Agent Webb, seeking damages of one billion dollars for lost property and emotional distress.

After discovery proceeded, the government moved for summary judgment as to all claims. The court granted the motion as to the claims brought by James and Barbara. As taxpayers owing money they did not have standing under section 7426 to contest the seizures. James' power of attorney claim was likewise dismissed. However, the court refused to accept the government's position in respect to Stephen's section 7426 complaint, finding that a material question of fact existed as to whether James Lemaster was acting as a bona fide agent of Stephen (making the government's alter ego theory improper) or actually was the owner of the property.

The case proceeded to trial and, after a two-day bench trial, the court ruled in favor of the government. The district court found that Stephen's ownership of the property was undoubtedly a "sham" designed to insulate assets from the reach of James' and Barbara's creditors. In such a situation, the court ruled that the government had the right to seize assets held in the name of Stephen Lemaster or S. Lemaster Trucking to satisfy the tax obligations of the real owner, James Lemaster.

After announcing its decision, the court notified the parties that it was considering an award of sanctions. After both sides submitted materials relevant to the sanctions question, the court issued a memorandum opinion and order awarding the government $17,653.21 in attorney's fees and $1,919.50 in costs, for a total award of $19,572.71. The sanctions were awarded under both Fed.R.Civ.P. 11 and 28 U.S.C. § 1927. Of the total award, $4,893.17 was assessed against the attorney, Kingsley, while the three plaintiffs were made jointly and severally liable for the remainder. Plaintiffs and their counsel appeal solely from the awarding of sanctions. ²

II.

While the district court stated that its award was based upon violations of both Fed.R.Civ.P. 11 and 28 U.S.C. § 1927, the district court memorandum opinion only discusses standards applicable to Rule 11 questions. Following this lead, the plaintiffs and Kingsley (hereinafter referred to collectively as "plaintiffs") do not even discuss 28 U.S.C. § 1927 in their brief on appeal. It is thus clear that we are faced primarily with a dispute involving the appropriateness of sanctions issued under Rule 11.

Since the amendment of Rule 11 in 1983, this court has addressed an increasing number of appeals from Rule 11 sanctions. A set of clear standards to guide our review has thus developed:

[T]he test for the imposition of Rule 11 sanctions in this circuit, inspired by the Advisory Committee's Note to the 1983 Amendment, is whether the individual's conduct was reasonable under the circumstances. INVST [Financial Group, Inc. v. Chem-Nuclear Systems, Inc.], 815 F.2d at 401-02; Albright [v. Upjohn Co.], 788 F.2d [1217] at 1221. The question of whether an individual's conduct was reasonable under the circumstances is a mixed question of law and fact. In light of the district court's more intimate knowledge of the facts of these cases, this court has determined that an abuse of discretion standard of review of the district court's decision to grant Rule 11 sanctions is proper. INVST, 815 F.2d at 401-02; Albright, 788 F.2d at 1221.

Century Prods., Inc. v. Sutter, 837 F.2d 247, 253 (6th Cir.1988). On appeal, we look to see whether the district court judge abused his discretion in finding plaintiffs' conduct to have been unreasonable under the circumstances.

Plaintiffs suggest that their decision to push ahead with their case was not at all unreasonable under the circumstances. They maintain that the law relating to seizure under an alter ego theory was unsettled at the time they filed suit, and that their claim based on the impropriety of governmental seizure of property from the transferee of...