United States v. Clayton

• Decision Date: 13 December 2011
• Docket Number: No. 1:10CV198.,1:10CV198.
• Citation: 465 B.R. 72,108 A.F.T.R.2d 2011
• Court: U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: UNITED STATES of America, Plaintiff, v. Jerry B. CLAYTON, Deborah P. Clayton, Allene S. Clayton, Edwin L. Clayton, Maria D. Clayton, Ken A. Clayton, and Gail A. Clayton, Defendants.

108 A.F.T.R.2d 2011-7460

465 B.R. 72

UNITED STATES of America, Plaintiff,

v.Jerry B. CLAYTON, Deborah P. Clayton, Allene S. Clayton, Edwin L. Clayton, Maria D. Clayton, Ken A. Clayton, and Gail A. Clayton, Defendants.

No. 1:10CV198.

United States District Court, M.D. North Carolina.

Dec. 13, 2011.

Katherine M. Walker, Nicole M. Elliott, U.S. Department of Justice, Washington, DC, for Plaintiff.

Brian Henry Alligood, Sharpless & Stavola, P.A., Benjamin R. Norman, Brooks Pierce McLendon Humphrey & Leonard, Greensboro, NC, for Defendants.

MEMORANDUM OPINION AND ORDER

THOMAS D. SCHROEDER, District Judge.

This is a tax case in which the United States of America (or “Government”) seeks recovery of alleged unpaid taxes and penalties. Before the court is the motion of Defendant Jerry B. Clayton (“Clayton”) for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). (Doc. 43.) Clayton contends that a general discharge from his previous bankruptcy proceedings protects him from the complaint's allegations of mere nonpayment as a matter of law. For the reasons set forth below, Clayton's motion will be denied conditionally upon the Government's filing of an amended complaint; otherwise, in the absence of an amended complaint, the motion will be granted to the extent indicated.

I. BACKGROUND

The factual allegations of the complaint, which are taken as true for present purposes, along with any admissions contained in Clayton's answer as well as matters in the public record of which the court can take judicial notice, reveal the following factual history:

According to the Government, Clayton and his wife, Deborah, filed joint income tax returns for the years 2002 through 2007 that reported a total tax liability of over $1.8 million, yet they paid just a small fraction of that sum to the Government. (Doc. 1.) The Internal Revenue Service (“IRS”) levied a hefty tax bill against them for unpaid income taxes, and by February 16, 2009, had assessed their tax liability, including interest and penalties for late payment, at $1,964,889.¹ ( Id. ¶ 19.)

On March 11, 2010, the Government filed the present two-count complaint against Clayton and other members of his family to reduce Clayton's tax liability to a judgment (Count I) and to foreclose on property owned jointly by Clayton, his brothers, and their spouses to satisfy a tax lien undergirded by the tax liability in Count I (mislabeled as “Count III”). ( Id.) The Government's complaint contains no allegation of fraud or willful tax evasion and merely sets out facts indicating that Clayton “failed to pay the United States the full amount owed.” (Doc. 1 ¶ 18.) Before filing an answer, and faced with these and other debts (that Clayton argues were related to his wife's health and their children's education expenses), Clayton filed for Chapter 7 bankruptcy protection on May 22, 2010. (Doc. 44 at 2; Doc. 13.)

Clayton's bankruptcy filing automatically stayed this action. See 11 U.S.C. § 362. In the bankruptcy proceedings, Clayton listed the United States as a creditor, but neither Clayton nor the Government sought a determination from the bankruptcy court whether or not his tax liabilities were nondischargeable in bankruptcy based on any statutory exception. On September 2, 2010, the bankruptcy court entered a general discharge of Clayton's debts. Discharge of Debtor at 1, In re Clayton, No. 10–80899 (Bankr.M.D.N.C. Sept. 2, 2010), Doc. 31.

As Clayton's bankruptcy drew to a close, the United States moved to reopen this action (Doc. 19), which the court did on September 27, 2010 (Doc. 28). On October 15, 2010, Clayton answered the Government's complaint. (Doc. 30.) Clayton?s answer raised several defenses, including claims that “[s]ome or all of [his] debt(s)” had been discharged in bankruptcy, that “[s]ome or all of the income tax liability” had been paid, and that the Government's claims for equitable relief were barred by the doctrines of waiver, estoppel, and unclean hands. ( Id.) Thereafter, Clayton resisted the Government's discovery requests relating to his possible willful failure to pay his tax liability on the grounds that the Government's complaint alleged mere nonpayment rather than willfully evasive behavior on his part. (Doc. 39 at 5–6.) On June 10, 2011, however, the Magistrate Judge overruled Clayton's objections, finding good cause to compel discovery responses from him. (Doc. 42.)

On July 29, 2011, Clayton filed the present motion for judgment on the pleadings (Doc. 43), arguing that because the Government neither contested the dischargeability of his tax liabilities in the bankruptcy proceeding nor asserted their nondischargeability in its complaint in this proceeding, he is entitled to a judgment on the pleadings (Doc. 44). The Government contends that it had no obligation to contest dischargeability either during the bankruptcy proceedings or in its complaint in this action, and it urges the court to deny Clayton's motion. (Doc. 47.)

II. ANALYSIS

Courts apply the same standard for motions for judgment on the pleadings under Rule 12(c) as for motions to dismiss made under Rule 12(b)(6). Independence News, Inc. v. City of Charlotte, 568 F.3d 148, 154 (4th Cir.), cert. denied, ––– U.S. ––––, 130 S.Ct. 507, 175 L.Ed.2d 349 (2009). The court assumes the factual allegations in the complaint to be true and draws all reasonable factual inferences in the plaintiff's favor as the nonmoving party. Burbach Broad. Co. of Del. v. Elkins Radio Corp., 278 F.3d 401, 406 (4th Cir.2002). To survive a motion to dismiss under Rule 12(b)(6), a complaint must allege “enough facts to state a claim to relief that is plausible on its face.' ” Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir.2008) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). Unlike on a Rule 12(b)(6) motion, however, on a Rule 12(c) motion the court may consider the answer as well. Rinaldi v. CCX, Inc., No. 3:05–CV–108, 2008 WL 2622971, at *2 n. 3 (W.D.N.C. July 2, 2008). The factual allegations of the answer “are taken as true only where and to the extent they have not been denied or do not conflict with the complaint.” Jadoff v. Gleason, 140 F.R.D. 330, 331 (M.D.N.C.1991).

“The test applicable for judgment on the pleadings is whether or not, when viewed in the light most favorable to the party against whom the motion is made, genuine issues of material fact remain or whether the case can be decided as a matter of law.” Smith v. McDonald, 562 F.Supp. 829, 842 (M.D.N.C.1983), aff'd, 737 F.2d 427 (4th Cir.1984), aff'd, 472 U.S. 479, 105 S.Ct. 2787, 86 L.Ed.2d 384 (1985); see also 5C Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1368, at 223, 248 (3d ed. 2004).

Clayton contends that he is entitled to judgment on the pleadings because the United States failed to raise its claim as an exception to discharge during his bankruptcy proceeding and has not alleged grounds in the complaint to avoid the general discharge, now that it is entered. In support, Clayton raises several interrelated arguments. First, he argues that the Government's failure to contest the dischargeability of his tax debts in the bankruptcy proceedings prevents it from raising that theory now because of the Bankruptcy Code's design to give debtors a “fresh start.” (Doc. 44 at 10–11.) Second, Clayton contends that because the Government failed to plead fraud or willful tax evasion in its complaint, it should not be permitted to continue developing discovery related to that claim. (Doc. 44 at 11–12.) Third, he contends that the Government?s complaint fails to plead fraud with particularity as required by Federal Rule of Civil Procedure 9(b), and thus the Government's present assertion that he evaded his taxes fraudulently or willfully is fatally defective. (Doc. 44 at 8–9.) And fourth, he argues that the Government's failure to amend its pleadings, post-discharge, to allege an exception to his discharge on grounds of fraud or willfulness entitles him to judgment. (Doc. 44 at 6–8, 9–11.)

The Government opposes Clayton's motion. Preliminarily, it declares his Rule 9(b) fraud argument to be moot because it is not proceeding on a claim of fraud. (Doc. 47 at 5.) In addition, it contends that the Bankruptcy Code imposes no affirmative duty on it to contest the dischargeability of Clayton's tax debts during the bankruptcy proceedings. Rather, the Government argues, it may pursue claims under § 523(a)(1)(C) against individuals who willfully evaded paying their taxes prior to entering bankruptcy even though they have received a general discharge of debts. And it may do so, the Government argues, without having to specifically plead a willful evasion claim. As such, the Government concludes, Clayton is not entitled to judgment on the pleadings and the case should proceed to trial.

A brief overview of the United States Bankruptcy Code will put the parties' arguments in context. Generally, when a person files for Chapter 7 bankruptcy protection, the process culminates in a discharge order, which eliminates certain of the debtor's debts that existed at the time of filing. See 11 U.S.C. § 727. Once a discharge has been issued, it “operates as an injunction against the commencement or continuation of an action ... to collect, recover or offset any such debt as a personal liability of the debtor.” 11 U.S.C. § 524(a)(2). Some debts that existed at the time of the bankruptcy filing are unaffected by § 524(a)(2)'s injunction, however, and they include those set forth in 11 U.S.C. § 523(a). One such exception is for unpaid taxes “with respect to which the debtor made a fraudulent return or willfully...