Opinion
No. CIV. S-98-0442 FCD DAD
December 13, 2001
FINDINGS AND RECOMMENDATIONS
This action came before the court on plaintiff's motion for entry of default judgment. Having considered all written materials submitted with respect to the motion, and after hearing oral argument, the undersigned recommends that the motion be granted.
BACKGROUND
The United States initiated this action to reduce to judgment federal tax assessments against defendants Lee D. Wight and Marjorie A. Wight, set aside fraudulent conveyances and transfers of real property, and to foreclose federal tax liens upon real property. The real property at issue is the Wight residence located at 2685 Plumbago Court in Rocklin, California and a dental office located at 3015 Grass Valley Street in Colfax, California. (Am. Compl. ¶¶ 5, 7.)
Lee D. Wight and Marjorie A. Wight are husband and wife.
The United States filed its complaint on March 13, 1998 and served it upon Lee D. Wight and Marjorie A. Wight as individuals and as agents for defendants Sky Island Group, W.A.G./N.C.E. Company, and Republique Trust Company, Ltd. The Wights did not answer the complaint, but instead challenged the service upon them as agents for the above entities. Their motion was granted in part and denied in part, and the United States was afforded an opportunity to file an amended complaint which sufficiently alleged the relationship between the Wights and Republique Trust Company, Ltd. such that the Wights were properly served on behalf of Republique Trust Company, Ltd. (See Mem. and Order filed March 10, 1999).
The United States filed an amended complaint on March 22, 1999, which again was served upon the Wights both as individuals and as agents for the above entities. The Wights did not answer or otherwise challenge the amended complaint. On December 20, 1999, the Clerk entered default against defendants Lee D. Wight, Marjorie A. Wight, Sky Island Group, W.A.G./N.C.E. Company, and Republique Trust Company, Ltd.
On February 10, 2000, plaintiff filed a Second Amended Complaint which raised no new claims against the defendants. (See Order filed February 10, 2000.) When such is the case, the pleading need not to be served on defendants in default as it does not affect them. See Fed.R.Civ. p. 5(a). Accordingly, plaintiff properly seeks default judgment against defendants on the Amended Complaint.
The United States initially noticed its motion for entry of default judgment on May 8, 2000. However, the hearing on the motion was continued numerous times over the course of more than one year pending the resolution of the dispute between the United States and a senior lien holder on the property at issue. The motion ultimately came on for hearing on June 29, 2001. There was no appearance at that hearing on behalf of defendants Lee D. Wight, Marjorie A. Wight, Sky Island Group, W.A.G./N.C.E. Company, or Republique Trust Company, Ltd. G. Patrick Jennings, Trial Attorney in the Tax Division of the United States Department of Justice, appeared on behalf of the United States.
The Wights were served with the plaintiff's motion and supporting papers, as well as the orders continuing the hearing on the motion. The last order continuing the hearing on the motion expressly provided that "[d]efendants Lee D. Wight, Marjorie A. Wight, Sky Island Group, W.A.G./N.C.E. Company, and Republique Trust Company, Ltd. shall file and serve written opposition to plaintiff's motion . . . if any, on or before June 4, 2001." (Order filed May 9, 2001.) On June 26, 2001 the Wights filed an untimely response entitled a "Judicial Notice By Visitation Notice of 'Counterclaim' Relative to 'Fraud' Respective of the Court Records of this Alleged 'Case'," which the undersigned has construed as their opposition to the motion. In addition to being untimely, the opposition sets forth no intelligible legal argument and the contentions raised therein are frivolous. For example, the Wights contend that the spelling of their names in all capital letters in the caption of this case (i.e. LEE D. WIGHT, MARJORIE A. WIGHT) is an improper use of a "trade name" for the purpose of fraudulently acquiring personal jurisdiction. They also contest the use of a zip code to identify their place of residence, arguing that they live in the "California Republic," not in any "federal area." The court rejects the Wights' frivolous contentions.See In re Becraft, 885 F.2d 547, 548 (9th Cir. 1989).
LEGAL STANDARD
Federal Rule of Civil Procedure 55(b)(2) governs applications to the court for entry of default judgment. Upon entry of default, the complaint's factual allegations regarding liability are taken as true, while allegations regarding the amount of damages must be proven. Dundee Cement Co. v. Howard Pipe Concrete Products, 722 F.2d 1319, 1323 (7th Cir. 1983) (citing Geddes v. United Fin. Group, 559 F.2d 557 (9th Cir. 1977)); see also TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917 (9th Cir. 1987). It is improper for the court to consider liability issues without first providing notice to plaintiff that the merits will be addressed. Black v. Lane, 22 F.3d 1395, 1398 (7th Cir. 1994). Where damages are liquidated (i.e., capable of ascertainment from definite figures contained in the documentary evidence or in detailed affidavits), judgment by default may be entered without a damages hearing. See Dundee, 722 F.2d at 1323. Unliquidated and punitive damages, however, require "proving up" at an evidentiary hearing or through other means. Dundee, 722 F.2d at 1323-24; see also James v. Frame, 6 F.3d 307, 310 (5th Cir. 1993). Granting or denying default judgment is within the court's sound discretion. See Draper v. Coombs, 792 F.2d 915, 924-25 (9th Cir. 1986) (citations omitted). The court is free to consider a variety of factors in exercising that discretion. See Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986).
The factors the court may consider include:
(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action, (5) the possibility of a dispute concerning material facts, (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.Eitel, 782 F.2d at 1471-72 (citing 6 Moore's Federal Practice, ¶ 55-05 [2], at 55-24 to 55-26)
APPLICATION
With the instant motion, the United States asks that the court enter money judgments against the Wights in favor of the United States for unpaid taxes; determine that the United States has valid liens against all property and rights to property of the Wights; set aside the fraudulent transfers and conveyances of the Wights' residence and dental office property; and order the Wights' real and personal property be foreclosed upon and the real property sold to satisfy the liens and taxes owed, making a determination as to the priority of legitimate liens on the property. The undersigned addresses each of these requests below.A. Recovery of Unpaid Taxes
The first and second causes of action in plaintiff's amended complaint seek to reduce to judgment federal tax assessments against Lee D. Wight and Marjorie A. Wight, respectively. The amended complaint alleges that the Wights failed to file tax returns for the tax years ending December 31, 1983, 1984, 1985 and 1986. (Am. Compl. ¶ 18.) It further alleges that despite receiving notice and demand for payment of assessments made by a delegate of the Secretary of the Treasury for unpaid federal income tax, the Wights have neglected, failed or refused to pay the assessments which therefore remain due and owing, plus interest, penalties, and fees and costs. (Id. ¶¶ 19-21, 23-25.)
The assessments made against the Wights are reflected on the Certificates of Assessments and Payments (Form 4340) submitted by the United States in support of its motion. (See Decl. of Patrick Jennings filed May 8, 2000, Exs. C (Mr. Wight) and E (Mrs. Wight).) A Certificate of Assessments and Payments is a proper means of establishing that assessments were properly made and that notices and demand for payment were sent. Koff v. United States, 3 F.3d 1297, 1298 (9th Cir. 1993);Hughes v. United States, 953 F.2d 531, 535 (9th Cir. 1992). An assessment for unpaid federal taxes, when properly certified, is presumptively correct evidence of a taxpayer's liability, and the taxpayer has the burden to overcome this presumption by countervailing proof. United States v. Janis, 428 U.S. 433, 440-41 (1976); Koff, 3 F.3d at 1298;Hughes, 953 F.2d at 540; United States v. Voorhies, 658 F.2d 710, 715 (9th Cir. 1981) Here, the Wights have made no attempt to rebut the tax assessments against them. Therefore, the Certificates of Assessments and Payments submitted by plaintiff establish that assessments were properly made, notice and demand for payment were sent, and that the Wights are presumptively liable for the unpaid taxes, penalties, and interest reflected on the Certificates.
Accordingly, the undersigned recommends that the court award judgment in favor of the United States and against Lee D. Wight for unpaid income tax assessments, plus penalties and interest, for the years 1983 through 1986 in the amount of $4,293,415.58 as of August 1, 2001, plus penalties and interest thereafter until paid pursuant to 26 U.S.C. § 6601, 6621, and 6622, and 28 U.S.C. § 1961 (c)
The tax assessments and calculations of penalties and interest are detailed in the Certificates of Assessments and Payments (see Decl. of Patrick Jennings filed May 8, 2000, Exs. C (Mr. Wight) and E (Mrs. Wight)), and further explained in the declaration of an Internal Revenue Service Revenue Officer submitted in support of the instant motion. (See Decl. of Richard Reynolds filed July 12, 2001). As of August 1, 2001, Lee D. Wight owed the following amounts, which represent the total individual income tax, interest and penalties unpaid to that date:
For the tax period ending December 31, 1983: $1,343,169.80 For the tax period ending December 31, 1984: $1,161,137.30 For the tax period ending December 31, 1985: $ 923,688.77 For the tax period ending December 31, 1986: $ 865,419.71
The undersigned also recommends that the court award judgment in favor of the United States and against Marjorie A. Wight for unpaid income tax assessments, plus penalties and interest, for the years 1983 through 1986 in the amount of $2,035,547.95 as of August 1, 2001, plus penalties and interest thereafter until paid pursuant to 26 U.S.C. § 6601, 6621, and 6622, and 28 U.S.C. § 1961 (c)
As of August 1, 2001, Marjorie A. Wight owed the following amounts, which represent the total individual income tax, interest and penalties unpaid to that date:
For the tax period ending December 31, 1983: $623,576.48 For the tax period ending December 31, 1984: $603,517.60 For the tax period ending December 31, 1985: $413,967.79 For the tax period ending December 31, 1986: $394,486.08
B. The United States' Valid Liens
The amended complaint also alleges that the United States has valid tax liens against all property belonging to the Wights, and that the Wights have notice of those liens. (Am. Compl. ¶¶ 27-28.) Indeed, 26 U.S.C. § 6321 provides that the amount of a delinquent taxpayer's liability shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to the taxpayer. Under 26 U.S.C. § 6322, a lien imposed under § 6321 arises at the time the assessment is made and continues until the liability is satisfied, or the lien is removed in accordance with federal law. A federal tax lien is perfected upon assessment and no further action need be taken. United States v. McDermott, 507 U.S. 447, 452-55 (1993); United States v. Vermont, 377 U.S. 351, 355 (1964); Glass City Bank of Jeanette. Pa. v. United States, 326 U.S. 265, 267 (1945)
Accordingly, the undersigned recommends that the court order that the United States has valid federal tax liens in the amount of $4,293,415.58 and $2,035,547.95, as of August 1, 2001 plus penalties and interest thereafter, against all property and rights to property of Lee D. Wight and Marjorie A. Wight, respectively, including but not limited to the interest in the Wight residence in Rocklin and the dental office property in Colfax.
C. Setting Aside the Fraudulent Transfers and Conveyances
According to the amended complaint, the Wights purchased their residence as joint tenants on or about September 20, 1965 and have occupied and resided there at all times pertinent hereto. (Am. Compl. ¶ 6.) They purchased the Colfax property as joint tenants on or about March 22, 1969 and Mr. Wight has used it as a dental office at all times pertinent hereto. (Id. ¶ 8.)
The legal description of the Rocklin residence is as follows:
Lot 108, Sunset Country Club Unit No. 6, as shown on the map thereof filed in Book H of Maps and page 22, Placer County Records.
(Am. Compl. ¶ 6.)
The legal description of the Colfax dental office property is as follows:
Commencing at the quarter corner on the North line of Section 3, Township 14 North, Range 9 East, MDBM., and running thence south 83° 43' 30" East 884.66 feet thence South 77° 51' 15" East 231.58 feet to a point on the North line of Grass Valley Street at the Southeast corner of the parcel to be described hereby, the point of beginning, from which point the Southeast corner of lot 12, block 3, of the original town of Colfax bears South 77° 51' 15" East 499.45 feet; and running thence along the North line of Grass Valley Street North 77° 51' 15" West 49.58 feet; thence North 12° 08' 45" East 100.00 feet; thence South 77° 51' 15" East 70.46 feet; thence South 12° 08' 45" West 100.00 feet; thence North 77° 51' 15" West 20.88 feet to the point of beginning.
(Am. Compl. ¶ 7.)
The amended complaint identifies Sky Island Group as a sham entity and fraudulent transferee of the Wight residence and dental office property, and as a nominee and alter ego of the Wights. (Id. ¶ 10.) It identifies W.A.G./N.C.E. Company as sham entity and beneficiary of trust deeds recorded against the Wight residence and dental office property, and as a nominee and alter ego of the Wights. (Id. ¶ 11.) Finally, it identifies Republique Trust Company, Ltd. as the trustee of the trust deeds mentioned above, and as a sham entity, nominee or transferee of the Wights. (Id. ¶ 12.)
The address of W.A.G./N.C.E. Company and Sky Island Group is a mailbox rented by the Wights. (Am. Compl. ¶ 37-38.)
The amended complaint alleges that the Wights fraudulently recorded deeds of trust on September 12, 1984 against their residence and dental office property, making W.A.G./N.C.E. Company and Republique Trust Company, Ltd. beneficiary and trustee of the deeds, respectively. (Id. ¶¶ 12, 33, 37.) It also alleges that on December 2, 1987 the Wights fraudulently recorded quitclaim deeds to the residence and dental office property to Sky Island Group for no consideration. (Id. ¶¶ 34, 38, 43-45.) It alleges that these fraudulent acts failed to transfer the subject properties to legally cognizable entities and that the Wights continue to own their residence and the dental office property. (Id. ¶ 40.)
Taking these allegations as true, the undersigned recommends that the purported transfers and conveyances described above be set aside as fraudulent, and that the Wights be declared the owners of their residence and the dental office property.
D. Foreclosure and Sale of Property, and the Priority of Legitimate Liens
When "there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof," the United States may bring an action in federal district court to enforce the lien created by 26 U.S.C. § 6321 or to subject any property held by the taxpayer to the payment of the tax. 26 U.S.C. § 7403 (a). After adjudicating the merits of the United States' claim to the subject property, the district court may decree a sale of the property and order distribution of the proceeds from that sale. 26 U.S.C. § 7403 (c). See also United States v. National Bank of Commerce, 472 U.S. 713, 719-720 (1985); United States v. Rodgers, 461 U.S. 677, 693-94 (1983)
Here, the Wights have refused to pay the tax deficiencies, interest and penalties assessed against them. They have failed to appear to contest the validity of those assessments, and default has been entered against them. Accordingly, the undersigned recommends that the district court enter judgment in favor of the United States and against the Wights foreclosing on the United States' tax liens upon their residence and dental office property in order to satisfy the unpaid tax assessments made against them.
In addition, by stipulations and orders filed May 8, 2000 and June 5, 2001 the United States and senior lien holders GMAC Corporation and Wells Fargo bank have resolved the competing priority of their respective liens. Therefore the undersigned also recommends that the district court's order of judgment provide that the proceeds from the sale of the Wights' property be distributed according to the terms of those stipulations after costs of sale have been paid.
CONCLUSION
For the reasons stated above, the court HEREBY RECOMMENDS that plaintiff's motion for entry of default judgment be granted, and that the district court enter default judgment as set forth above by signing the proposed judgment by default lodged by counsel for plaintiff on July 12, 2001.
These findings and recommendations are submitted to the United States District Judge assigned to the case pursuant to the provisions of 28 U.S.C. § 636 (b)(1). Within ten days after being served with these findings and recommendations, any party may file written objections with the court and serve a copy on all parties. Such a document should be captioned "Objections to Findings and Recommendations." Any reply to the objections shall be served and filed within ten days after service of the objections. The parties are advised that failure to file objections within the specified time may waive the right to appeal the District Court's order. Martinez v. Ylst, 951 F.2d 1153 (9th Cir. 1991)