West Texas Marketing Corp., Matter of

• Decision Date: 31 January 1994
• Docket Number: KELLOGG--T,No. 92-9061,92-9061
• Citation: 12 F.3d 497
• Parties: -889, 94-1 USTC P 50,064, 28 Fed.R.Serv.3d 325 In the Matter of WEST TEXAS MARKETING CORPORATION, Debtor. UNITED STATES Of America, Appellant, v. Walterrustee, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 497

12 F.3d 497

73 A.F.T.R.2d 94-889, 94-1 USTC P 50,064,

28 Fed.R.Serv.3d 325

In the Matter of WEST TEXAS MARKETING CORPORATION, Debtor UNITED STATES Of America, Appellant, v. Walter KELLOGG--Trustee, Appellee.

No. 92-9061.

United States Court of Appeals Fifth Circuit.

Jan. 31, 1994.

Joan I. Oppenheimer, Gary R. Allen, Chief Atty., William S. Estabrook, Appellate Section, Tax Div., Dept. of Justice, Washington, DC, for appellant.

Stacy R. Obenhaus, Brett Baker Flagg, Robin I. Krumme, Gardere & Wynne, Dallas, TX, for appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, JONES and DUHE, Circuit Judges.

GOLDBERG, Circuit Judge:

This case makes plain the proposition that Kellogg does not have a monopoly on flakes. Indeed, it is Kellogg's opponent, the United States Government acting through the Internal Revenue Service ("IRS") which has committed two scoops of errors, allowing a case which should have been a snap, to dissolve into a series of crackles and pops. In the serial antics of this case, the government has repeatedly failed to determine the actual tax refund owed to the debtor, West Texas Marketing Corporation, and has sugar frosted the refund, overpaying by a considerable amount.

The government appears today to ask that we correct its many mistakes and alter a settlement agreement reached by the parties over two years ago. The procedural devices available for such revisions have been limited by the considerable amount of time the government allowed to elapse before it sought relief. However, because the Federal Rules of Civil Procedure do provide opportunity to revisit clerical mistakes in a judgment without time limit, we vacate the decision of the lower court and remand this case to be reviewed in light of Rule 60(a), applicable to a bankruptcy adversary proceeding by incorporation in Bankruptcy Rule 9024.

I. FACTS

Defendant Walter Kellogg, the trustee for West Texas Marketing Corporation in its Chapter 7 bankruptcy proceedings, filed an adversary proceeding against the IRS in May of 1984 seeking to recover a tax refund in excess of $5 billion. The IRS responded by asserting priority tax claims of its own in the amount of $40,734,614.82.

In April of 1987, Kellogg submitted a letter to the government offering to settle West Texas' disputed tax liabilities. This offer was referred by the Tax Division of the Department of Justice to the Congressional Joint Committee on Taxation for review and approval. On May 5, 1988, the government agreed to the settlement and in its acceptance letter to Kellogg, notified the trustee that the IRS had been "authorized to schedule the proposed overpayment, plus interest according to law." The settlement included fifteen numbered paragraphs that detailed numerous adjustments, concessions, and disallowances agreed upon by the parties.

In July of 1988, Kellogg filed a motion with the bankruptcy court to approve the settlement, attaching copies of his offer and the government's acceptance. Kellogg's motion also contained an attachment, Exhibit A, which summarized the terms of the settlement. The first fifteen paragraphs of this attachment were identical to the paragraphs set out in the government's letter of acceptance. According to a second addendum, labeled Exhibit 1, a net refund including interest through June 30, 1988, of $12,928,955 was due to the bankrupt. ¹ This addendum also stated that from June 30, 1988 until the date of payment, "interest will continue to accrue on the $12,928,955 refund owed to debtor at the rate prescribed by Section 6621(a)(1) of Title 26 of The United States Code."

On August 5, 1988, the IRS Austin Service Center issued a check in the amount of $13,581,193.34. The payment was sent on August 15 to Kellogg who then deposited the refund check. On August 18, Kellogg and the government filed a stipulation for dismissal of the adversary proceeding with the bankruptcy court, requesting that the case be dismissed with prejudice.

On August 29, the bankruptcy court entered an order approving the terms of the settlement between Kellogg and the government. The bankruptcy court's order required the parties to submit an exhibit to the court within 20 days, "which shall be incorporated as part of this order, detailing the final figures agreed upon regarding the amount of refund owing to the estate." No such exhibit was ever presented to the bankruptcy court. The order also required the parties to submit stipulations of dismissal; an act they had already performed the previous week.

Soon thereafter, in September of 1988, Kellogg informed the IRS that the refund may have been overpaid by an amount in the range of $600,000. It was not until February of 1989 that the Department of Justice responded to this information, sending Kellogg a series of letters detailing the overpayments and requesting the trustee to return any money erroneously received. In August of 1990 the government commenced an adversary proceeding to recover the amount overpaid on the refund. Kellogg defended by claiming that the refund had in fact been underpaid by $11,726 plus statutory interest.

It may be helpful to spell out in greater detail the series of mistakes made by the government in this case in order to evaluate the possibility of granting relief for each one. The government claims that its first mistake was overpaying interest on a net operating loss carryback. It asserts that the interest was erroneously calculated from the carryback year rather than the overpayment year as required by 26 U.S.C. Sec. 6611(f). This resulted in the government issuing a refund check which, according to the government, exceeded the amount owed to the taxpayer by $928,326.28. It is this mistake which the government originally set out to correct when it initiated the present proceeding.

This error was compounded by a second miscalculation. Ignoring the erroneous carryback interest calculations and simply utilizing the figures employed by Kellogg in Exhibit 1 of the settlement, the total refund as of June 30, 1988 was $12,928,955. The interest accrual on that amount under 26 U.S.C. 6621(a)(1) would result in a total refund of $13,072,798.01. Because the government sent a refund check in the amount of $13,581,193.34, there was an overpayment of $508,395.33. The exact basis of the government's miscalculation in this instance is not clear from the record and on remand the lower court will have to determine how the miscalculation occurred in order to glean the exact amount owed and whether it is in fact correctable.

The government compounded these two miscalculations by failing to take prompt action to correct the mistakes, even after the trustee notified it of the possible existence of a significant overpayment. The government waited until two years had elapsed after the settlement became final before filing the present adversary proceeding to correct the multiple overpayments.

The bankruptcy court dismissed the adversary proceeding begun by the government on the grounds that the prior settlement had conclusively determined the refund owed to the trustee and the bankruptcy court therefore lacked jurisdiction to consider the complaint. On appeal, the district court ruled that there were no clearly erroneous factual findings nor reversible conclusions of law in the bankruptcy court's holding and affirmed.

The government appeals, arguing that the lower courts erred in deciding that the settlement represented a final judgment. The government contends that the settlement could not be final because it did not conclusively determine a final figure and because the agreement failed to include any arrangement as to interest. In the alternative, the government argues that even if the settlement is final the trustee's own calculations of the refund demonstrate that the check sent by the government overpaid the refund by over $500,000. We decide today that it is only this last mistake that may be amenable to correction and we vacate and remand on that basis alone.

II. ANALYSIS

In analyzing the issues of this case, we are presented with a series of questions: (1) Was there a final judgment? (2) Did it conclusively resolve the questions in dispute in this case? (3) Can other procedural methods for reforming the judgment be identified? We will analyze these questions in turn.

A. Final Judgment

The bankruptcy court and district court in this case assumed that the 1988 settlement agreement prevented the government from bringing the present action because a settlement agreement approved and embodied in a judgment by a court is "entitled to full res judicata effect." United States v. Shanbaum, 10 F.3d 305, 313 (5th Cir.1994). In Russell v. SunAmerica Sec., Inc., we wrote that, "this court has long recognized that a consent judgment is a judgment on the merits, and is normally 'given the finality accorded under the rules of claim preclusion.' " 962 F.2d 1169, 1173 (5th Cir.1992) (citing Kaspar Wire Works, Inc. v. Leco Engineering and Mach. Inc., 575 F.2d 530, 538 (5th Cir.1978)).

The effect of applying res judicata principles to the proceeding before us is to preclude subsequent litigation of issues which arise out of claims which were conclusively decided in the prior decision. Thus, if res judicata is found to apply, any problems or questions that a party might have with the calculations made in the earlier claim must be raised in the earlier decision or else be lost. The settlement agreement in this case will carry res judicata effects so long as the settlement satisfies the four part test we use in evaluating the applicability of res judicata.

We have articulated the requirements which must be met for res judicata to preclude a later action as follows: (1) the parties must be identical in both actions; (2) the prior judgment must have been rendered by a court of competent jurisdiction; (3) there must be a final judgment on the...