United States v. Garrity

• Decision Date: 03 April 2018
• Docket Number: No. 3:15–CV–243(MPS),3:15–CV–243(MPS)
• Citation: 304 F.Supp.3d 267
• Parties: UNITED STATES of America, Plaintiff, v. Diane M. GARRITY, Paul G. Garrity, Jr., and Paul M. Sterczala, as fiduciaries of the Estate of Paul G. Garrity, Sr., Defendants.
• Court: U.S. District Court — District of Connecticut

304 F.Supp.3d 267

UNITED STATES of America, Plaintiff,

v.Diane M. GARRITY, Paul G. Garrity, Jr., and Paul M. Sterczala, as fiduciaries of the Estate of Paul G. Garrity, Sr., Defendants.

No. 3:15–CV–243(MPS)

United States District Court, D. Connecticut.

Signed April 3, 2018

Christine L. Sciarrino, U.S. Attorney's Office, New Haven, CT, Steven Marcus Dean, Carl Lewis Moore, Philip Leonard Bednar, U.S. Department of Justice, Tax Division, Washington, DC, for Plaintiff.

Daniel F. Brown, Pro Hac Vice, Heather L. Marello, Pro Hac Vice, Randall P. Andreozzi, Andreozzi Bluestein LLP, Clarence, NY, Michael Menapace, Wiggin & Dana, Hartford, CT, for Defendants.

MEMORANDUM AND ORDER

Michael P. Shea, U.S.D.J.

Plaintiff, the United States of America ("the Government"), filed this suit to reduce to judgment a civil penalty the Internal Revenue Service assessed against Paul G. Garrity, Sr., under 31 U.S.C. § 5321(a)(5), for his alleged willful failure to report his interest in a foreign account he held in 2005, in violation of 31 U.S.C. § 5314. In anticipation of trial, which is scheduled for June, the Court ordered the parties to submit briefs addressing the legal question of what standard of proof governs this case—preponderance of the evidence or clear and convincing evidence. (ECF No. 99.) The Government argues that the standard of proof is preponderance of the evidence. Defendants Diane M. Garrity, Paul G. Garrity, Jr., and Paul M. Sterczala (collectively, "Defendants"), as fiduciaries of the Estate of Paul G. Garrity, Sr., argue that the standard of proof is clear and convincing evidence. In addition, although not ordered by the Court to do so, the parties have also briefed the separate question of whether the Government must show that Mr. Garrity, Sr. intentionally violated a known legal duty to establish a "willful" violation of Section 5314 or whether the Government may satisfy its burden of proof by showing that Mr. Garrity, Sr. acted recklessly. Defendants urge the former standard, while the Government urges the latter.

For the reasons discussed below, I agree with the Government on both issues.

I. Background

A. Procedural Background

The Government filed this action on February 20, 2015 to collect an outstanding civil penalty, known as the Report of Foreign Bank and Financial Accounts ("FBAR") penalty, from the estate of Mr. Garrity, Sr., who died in 2008. The Government had assessed the penalty against Mr. Garrity, Sr. for his allegedly willful failure to timely report his financial interest in, and/or his authority over, a foreign bank account for the 2005 calendar year, as required by 31 U.S.C. § 5314 and its implementing regulations. (ECF No. 1.) The balance of the penalty as of February 20, 2015 was $1,061,181.09. Jury selection is currently scheduled for June 6, 2018.

B. Section 5321(a)(5)

The relevant portions of subsection (a)(5) of 31 U.S.C. § 5321, the statute under which the United States sues to recover a civil FBAR penalty, provide:

(A) Penalty authorized.—The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(B) Amount of penalty.—

(i) In general.—Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

(ii) Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—

(I) such violation was due to reasonable cause, and

(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

(C) Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314 —

(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—

(I) $100,000, or

(II) 50 percent of the amount determined under subparagraph (D), and

(ii) subparagraph (B)(ii) shall not apply.

(D) Amount.—The amount determined under this subparagraph is—

...

(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

31 U.S.C. § 5321(a)(5). Subsection (b)(2) of Section 5321 authorizes the Secretary to "commence a civil action to recover a civil penalty assessed under subsection (a) ...."

II. Discussion

A. Standard of Proof

As Congress did not specify the legal standard the Court should apply in a "civil action" brought by the Secretary under section 5321, I must determine what standard of proof applies. The starting point for this inquiry is the well-established principle that "[i]n a typical civil suit for money damages, plaintiffs must prove their case by a preponderance of the evidence." Herman & MacLean v. Huddleston , 459 U.S. 375, 387, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). See also United States v. Regan , 232 U.S. 37, 46–47, 34 S.Ct. 213, 58 L.Ed. 494 (1914) (holding that a civil action by the government to collect a monetary penalty "is to be conducted and determined according to the same rules and with the same incidents as are other civil actions").

The Supreme Court noted in Huddleston that where Congress has not specified a standard of proof, the Court has applied the clear and convincing evidence standard in civil matters only "where particularly important individual interests or rights are at stake," such as in cases involving termination of parental rights, involuntary commitment, and deportation. 459 U.S. at 389, 103 S.Ct. 683. Observing that "imposition of even severe civil sanctions that do not implicate such interests has been permitted after proof by a preponderance of the evidence," the Court held that the preponderance of the evidence standard applied to an action involving an alleged fraud in the sale or purchase of securities. Id. at 389–90, 103 S.Ct. 683. In doing so, the Court described the preponderance of the evidence standard as the one "generally applicable in civil actions." Id.

The Supreme Court has since rejected arguments that the higher standard of clear and convincing evidence applies to particular civil actions. See Grogan v. Garner , 498 U.S. 279, 288, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In Grogan , the Court held that the preponderance of the evidence standard applies to exceptions to debt dischargeability for fraud in certain bankruptcy actions. The bankruptcy code was silent on the issue, and the Court found that such silence weighed in favor of applying the preponderance standard: "[S]ilence is inconsistent with the view that Congress intended to require a special, heightened standard of proof." Id. at 286, 111 S.Ct. 654. The Court further treated the preponderance standard as the presumptive one in civil cases: "[B]ecause the preponderance-of-the-evidence standard results in a roughly equal allocation of the risk of error between litigants, we presume that this standard is applicable in civil actions between private litigants unless particularly important individual interests or rights are at stake." Id. (internal quotation marks omitted).

Using these principles, every court that has answered the question before me has held that the preponderance of the evidence standard governs suits by the government to recover civil FBAR penalties. See Bedrosian v. United States , No. CV 15-5853, 2017 WL 3887520, at *1 (E.D. Pa. Sept. 5, 2017) ; United States v. Bohanec , 263 F.Supp.3d 881, 889 (C.D. Cal. 2016) ; United States v. McBride , 908 F.Supp.2d 1186, 1201–02 (D. Utah 2012) ; United States v. Williams , No. 1:09-cv-437, 2010 WL 3473311, at *1, *5 (E.D. Va. Sept. 1, 2010) (holding, as a matter of first impression, that preponderance of the evidence standard in a civil FBAR action), rev'd on other grounds, United States v. Williams , 489 Fed.Appx. 655 (4th Cir. 2012).

Defendants do not point to case law holding that the clear and convincing evidence standard applies to civil FBAR penalty cases. Rather, Defendants argue that the civil FBAR statute is analogous to the civil tax fraud statute, which requires proof by clear and convincing evidence. Defendants also argue that an internal memo by the Office of Chief Counsel of the IRS, written before any court appears to have considered this question, and opining that willfulness requires a higher standard of proof, should guide my ruling.¹ I find Defendants' arguments unpersuasive for the following reasons.

1. The civil FBAR penalty does not implicate "important individual interests or rights"

Defendants argue that the clear and convincing evidence standard applies because the penalty for willful FBAR violations is "far more draconian" than the civil tax fraud penalty (ECF No. 106 at 3) and will involve proving allegations that could tarnish Mr. Garrity's reputation. (ECF No. 108 at 5.) Defendants thus suggest that the civil FBAR penalty implicates "important individual interests or rights" under Huddleston . I disagree.

That Defendants may be liable for a substantially larger sum of money for a willful FBAR violation than if the Government had pursued a civil tax fraud action does not warrant a higher standard of proof.² As Huddleston and Grogan indicate, it is the type of interest or right involved that triggers a higher standard of proof, not the amount in controversy; courts have not viewed cases involving "even severe civil sanctions" to implicate "important individual interests or rights" to warrant a higher standard of proof. Huddleston , 459 U.S. at 389–90, 103 S.Ct. 683. See also Halo Electronics, Inc. v. Pulse Electronics, Inc. , ––– U.S. ––––, 136 S.Ct. 1923, 1934, 195 L.Ed.2d 278 (2016) (rejecting requirement that willful patent infringement behavior warranting enhanced damages be proved by clear and convincing evidence); Ramirez v. T & H Lemont, Inc. , 845 F.3d 772, 777–81 (7th Cir. 2016) (holding that preponderance of the evidence standard applies to...