Government Argues FBAR Penalty Decision Was Correct

UNITED STATES,
Plaintiff-Appellee
v.
MONICA TOTH,
Defendant-Appellant

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

ON APPEAL FROM THE JUDGMENT OF THE
UNITED STATES DISTRICT COURT FOR
THE DISTRICT OF MASSACHUSETTS

BRIEF FOR THE APPELLEE

DAVID A. HUBBERT
Acting Assistant Attorney General

FRANCESCA UGOLINI
(202) 514-1882
Court of Appeals Bar No. 1162474
BRUCE R. ELLISEN
(202) 514-2929
Court of Appeals Bar No. 21957
JENNIFER M. RUBIN
(202) 307-0524
Court of Appeals Bar No. 77022
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
NATHANIEL R. MENDELL
Acting United States Attorney

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TABLE OF CONTENTS

Table of contents

Table of authorities

Glossary

Reasons why oral argument should be heard

Jurisdictional statement

Statement of the issues

Statement of the case

Summary of argument

Argument:

Conclusion

Certificate of compliance

TABLE OF AUTHORITIES

Cases:

Alexsam Inc. v. IDT Corp., 715 F.3d 1336 (Fed. Cir. 2013)

AngioDynamics, Inc. v. Biolitec AG, 780 F.3d 429 (1st Cir. 2015)

Austin v. United States, 509 U.S. 602 (1993)

B&T Masonry Constr. Co. v. Pub. Serv. Mut. Ins. Co., 382 F.3d 36 (1st Cir. 2004)

Bedrosian v. United States, 912 F.3d 144 (3d Cir. 2018)

Bifulco v. United States, 447 U.S. 381 (1980)

BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996)

Cankat v. Café Iguana, Inc., 2016 WL 1383490 (E.D.N.Y. 2016)

Carinci v. 7-Eleven, Inc., 2016 WL 1319724 (W.D. Pa. 2016)

Chapman v. United States, 500 U.S. 453 (1991)

Chilcutt v. United States, 4 F.3d 1313 (5th Cir. 1993)

Claudio-De Leon v. Sistema Univeritario Ana G. Mendez, 775 F.3d 41 (1st Cir. 2014)

Crandon v. United States, 494 U.S. 152 (1990)

Crawford v. U.S. Dept. of Treas., 2015 WL 5697552 (S.D. Ohio 2015)

D'Amario v. Russo, 750 F. Supp. 560 (D.R.I. 1990)

Dickow v. United States, 654 F.3d 144 (1st Cir. 2011)

Eagle Eye Fishing Corp. v. U.S. Dept. of Com., 20 F.3d 503 (1st Cir. 1994)

Espinoza v. United States, 52 F.3d 838 (10th Cir. 1995)

Faretta v. California, 422 U.S. 806 (1975)

Farrell v. United States, 313 F.3d 1214 (9th Cir. 2002)

Freeman v. United States, 166 F. Supp. 3d 215 (D. Conn. 2016)

Fryer v. A.S.A.P. Fire & Safety Corp., 658 F.3d 85 (1st Cir. 2011)

Garner v. U.S. Dep't of Lab., 221 F.3d 822 (5th Cir. 2000)

Gomez v. Stop & Shop Supermarket Co., 670 F.3d 395 (1st Cir. 2012)

Helvering v. Mitchell, 303 U.S. 391 (1938)

Hendry v. Schneider, 116 F.3d 446 (10th Cir. 1997)

Hibernia Nat'l Bank v. Carner, 758 F. Supp. 382 (M.D. La. 1991)

Hinton v. Virginia Union Univ., 185 F. Supp. 3d 807 (E.D. Va. 2016)

Hooper-Haas v. Ziegler Holdings, LLC, 690 F.3d 34 (1st Cir. 2012)

Hudson v. United States, 522 U.S. 93 (1997)

Jardin De Las Catalinas Ltd. P'ship v. Joyner, 766 F.3d 127 (1st Cir. 2014)

Karney v. City of Naperville, 2016 WL 6082354 (N.D. Ill. 2016)

Kimble v. United States, 141 Fed. Cl. 373 (2018), aff'd, 991 F.3d 1238 (Fed. Cir. 2021)

Kimble v. United States, 991 F.3d 1238 (Fed. Cir. 2021)

Landa v. United States, __ Fed. Cl. __, 2021 WL 1526511 (2021)

Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012), rev'd on other grounds and remanded, 571 U.S. 429 (2014)

Lemoge v. United States, 587 F.3d 1188 (9th Cir. 2009)

Louis v. Commissioner, 170 F.3d 1232 (9th Cir. 1999)

Mach Mining, LLC v. EEOC, 575 U.S. 480 (2015)

Martinez v. R.I. Hous. & Mtge. Fin. Corp., 738 F.2d 21 (1st Cir. 1984)

Mason v. Commissioner, T.C. Memo. 2001-58, 2001 WL 235434

McNichols v. Commissioner, 13 F.3d 432 (1st Cir. 1993)

Mulero-Abreu v. Puerto Rico P.D., 675 F.3d 88 (1st Cir. 2012)

Norman v. United States, 942 F.3d 1111 (Fed. Cir. 2019)

Palmer v. Hoffman, 318 U.S. 109 (1943)

Pharaon v. Bd. of Governors of Fed. Reserve Sys., 135 F.3d 148 (D.C. Cir. 1998)

Pimentel v. L.A., 974 F.3d 917 (9th Cir. 2020)

Ratzlaf v. United States, 510 U.S. 135 (1994)

Ruiz Varela v. Sanchez Velez, 814 F.2d 821 (1st Cir. 1987)

Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007)

Shinseki v. Sanders, 556 U.S. 396 (2009)

Sony BMG Music Entertainment v. Tenenbaum, 719 F.3d 67 (1st Cir. 2013)

Thomsen v. United States, 887 F.2d 12 (1st Cir. 1989)

Timbs v. Indiana, 139 S. Ct. 682 (2019)

Torres-Vargas v. Pereira, 431 F.3d 389 (1st Cir. 2005)

Tower Ventures, Inc. v. City of Westfield, 296 F.3d 43 (1st Cir. 2002)

Towers v. City of Chicago, 173 F.3d 619 (7th Cir. 1999)

Umbach v. Commissioner, 357 F.3d 1108 (10th Cir. 2003)

United Am. Ins. Co. v. Bell, 2009 WL 1084486 (D. Col. 2009)

United Dominion Indus., Inc. v. United States, 532 U.S. 822 (2001)

United States v. 2008 33' Contender Model Tournament Vessel, 990 F.3d 725 (1st Cir. 2021)

United States v. Ayer, 857 F.2d 881 (1st Cir. 1988)

United States v. Bajakajian, 524 U.S. 321 (1998)

United States v. Bussell, 2015 WL 9957826 (C.D. Cal. 2015), aff'd, 699 F. App'x 695 (9th Cir. 2017)

United States v. Bussell, 699 F. App'x 695, 696 (9th Cir. 2017)

United States v. Chaplin's, Inc., 646 F.3d 846 (11th Cir. 2011)

United States v. Cohen, 2019 WL 4605709 (C.D. Cal. 2019)

United States v. Collins, 2021 WL 456962 (W.D. Pa. 2021)

United States v. Colliot, 2018 WL 2271381 (W.D. Tex. 2018)

United States v. Correa, 362 F.3d 1306 (11th Cir. 2004), abrogated on other grounds by Eberhart v. United States, 546 U.S. 12 (2005)

United States v. Emerson, 107 F.3d 77 (1st Cir. 1997)

United States v. Estate of Schoenfeld, 344 F. Supp. 3d 1354 (M.D. Fla. 2018)

United States v. Garrity, 2019 WL 1004584 (D. Conn.), appeal withdrawn, No. 19-1145 (2d Cir. 2019)

United States v. Horowitz, 978 F.3d 80 (4th Cir. 2020)

United States v. Ill. Cent. R.R., 303 U.S. 239 (1938)

United States v. Jose, 499 F.3d 105 (1st Cir. 2007)

United States v. Kahn, 2019 WL 8587295 (E.D.N.Y. 2019)

United States v. Mojica-Rivera, 435 F.3d 28 (1st Cir. 2006)

United States v. Nat'l Dairy Prods. Corp., 372 U.S. 29 (1963)

United States v. Pilgrim Market Corp., 944 F.2d 14 (1st Cir. 1991)

United States v. Pomerantz, 2017 WL 4418572 (W.D. Wash. 2017)

United States v. Ristovski, 312 F.3d 206 (6th Cir. 2002)

United States v. Rum, 995 F.3d 882 (11th Cir. 2021)

United States v. Schropp, 829 F.3d 998 (8th Cir. 2016)

United States v. Schwarzbaum, 2020 WL 2526500 (S.D. Fla. 2020)

United States v. Thompson/Center Arms Co., 504 U.S. 505 (1992)

United States v. Viloski, 814 F.3d 104 (2d Cir. 2016)

United States v. Wahdan, 325 F. Supp. 3d 1136 (D. Colo. 2018)

United States v. Zwerner, 2014 WL 11878430 (S.D. Fla. 2014)

Vela v. City of Austin, Texas, 2016 WL 1583676 (W.D. Tex. 2016)

Statutes:

5 U.S.C.:

21 U.S.C. § 881

Internal Revenue Code (26 U.S.C.):

28 U.S.C.:

31 U.S.C.:

American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (2004)

Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114 (1970)

Rules:

Federal Rule of Appellate Procedure:

Federal Rule of Civil Procedure:

Federal Rule of Criminal Procedure

Proposed Rules, 146 F.R.D. 401 (1993)

Proposed Rules, 305 F.R.D. 457 (2015)

Regulations & Regulatory Materials:

31. C.F.R.:

52 Fed. Reg. 11436 (Apr. 8, 1987)

Fed. Reg. 8844-01 (Feb. 26, 2010)

CCA 200603026, 2006 WL 148700

Constitutional Provisions:

U.S. Const., Fifth Amendment

U.S. Const., Eighth Amendment

Legislative Materials:

H.R. Conf. Rep. No. 108-755. reprinted in 2004 U.S.C.C.A.N. 1341

H.R. Rep. No. 91-975 (1970), reprinted in 1970 U.S.C.C.A.N. 4394

S. Rep. No. 108-192 (2003)

Treatises:

4A Wright & Miller, Fed. Prac. & Proc. Civ. § 1083 (4th ed. 2021)

4B Wright & Miller, Fed. Prac. & Proc. Civ. § 1137 (4th ed. April 2021)

GLOSSARY

Account	Toth's Swiss bank account at UBS AG
Add-	Addendum, as filed by appellant
APA	Administrative Procedure Act
Br-	Opening brief, as filed by appellant
BSA	Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114 (1970)
Doc.	Documents as numbered by the clerk for District Court in No. 1:15-cv-13367-ADB (D. Mass)
FBAR	Report of Foreign Bank and Financial Report
I.R.C.	Internal Revenue Code (26 U.S.C.)
IRS	Internal Revenue Service
Jobs Act	American Jobs Creation Act of 2004, Pub. L. No. 108-357, §821, 118 Stat. 1418 (2004) (“Jobs Act”)
RA	Record Appendix, as filed by appellant
Secretary	Secretary of the Treasury
Toth	Appellant Monica Toth

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REASONS WHY ORAL ARGUMENT SHOULD BE HEARD

Counsel for the Government submit that oral argument may be beneficial because the substantive issues and legal defenses here raise issues of first impression in this Court.

JURISDICTIONAL STATEMENT

On September 16, 2015, the United States filed a complaint seeking to recover a civil penalty assessed against Monica Toth for willfully violating her statutory duty to report ownership of a foreign bank account on a timely filed Report of Foreign Bank and Financial Accounts (“FBAR”) for 2007. (RA23-27.) The District Court had jurisdiction under 28 U.S.C. §§1331, 1345, and 1355.

On January 25, 2021, the District Court entered a final amended judgment in favor of the Government, disposing of all claims of all parties. (Add-61-62.) Toth timely filed an amended notice of appeal on February 23, 2021. (RA3218-19.) Fed. R. App. P. 4(a)(4)(B). This Court has jurisdiction under 28 U.S.C. §1291.

STATEMENT OF THE ISSUES

1. Whether the District Court correctly refused to dismiss the Government's complaint for insufficient service.

2. Whether the District Court abused its discretion in sanctioning Toth by ordering several facts deemed established.

3. Whether the District Court erred in concluding that Toth's FBAR violation was willful.

4. Whether Congress's 2004 amendment to 31 U.S.C. §5321(a)(5)(C) superseded a prior inconsistent regulation.

5. Whether the rule of lenity applies to the civil FBAR penalty.

6. Whether Toth's penalty here violates the Excessive Fines Clause of the Eighth Amendment.

7. Whether the FBAR penalty structure violates the Due Process Clause of the Fifth Amendment.

STATEMENT OF THE CASE

A. Overview of FBAR requirement

In the Bank Secrecy Act (“BSA”), Pub. L. No. 91-508, 84 Stat. 1114 (1970), Congress confronted the “serious and widespread use,” for the “purpose of violating American law,” of “foreign financial facilities located in” jurisdictions providing secrecy to accountholders. H.R. Rep. No. 91-975, at 13 (1970), reprinted in 1970 U.S.C.C.A.N. 4394, 4397. To combat use of secret accounts, Congress required U.S. persons with relationships with foreign financial agencies to file the FBAR annually. 31 U.S.C. §5314(a). The FBAR requirement applies to any U.S. citizen holding an interest in foreign bank accounts with aggregate value exceeding $10,000. 31 C.F.R. §1010.306(c). For 2007, the FBAR filing deadline was June 30, 2008.

Congress authorized the Secretary of the Treasury to impose “a civil money penalty on any person” who fails to file a required FBAR. 31 U.S.C. §5321(a)(5)(A). From 1986 until 2004, the Secretary could impose penalties only on “any person who willfully violates” the FBAR requirement. Id. §5321(a)(5)(A) (2003). In 2004, Congress amended the civil FBAR penalties to allow penalties for nonwillful violations and to increase the penalties for willful violations. See American Jobs Creation Act of 2004, Pub. L. No. 108-357, §821, 118 Stat. 1418 (2004) (“Jobs Act”).

B. Background regarding Toth and her Swiss bank account

Since 1988 or 1989, and including 2007, Toth has been a U.S. citizen. (RA25 ¶18; RA60; RA878; RA3001-02 ¶1; RA3083 ¶1.)

A bank account was opened in Toth's name at UBS AG in Zurich, Switzerland (“Account”) in 1999. (RA24 ¶4; RA60; RA995-96; RA3002 ¶2.) Toth's brother and father told her not to “tell anybody about the Account.” (RA996; RA3002 ¶3; RA3041.) At all times during 2007, Toth had a financial interest in, and signatory or other authority over, the Account. (RA24 ¶¶5-6; RA60; RA3003 ¶9; RA3087-88 ¶9.) Throughout 2007, the Account's balance exceeded $10,000. (RA24 ¶8; RA60; RA3003 ¶10; RA3088 ¶10.)

Effective in 2001, the U.S. government and UBS Switzerland agreed that UBS accountholders must either disclose their identities to U.S. authorities by completing a Form W-9 or authorizing UBS to sell their U.S. securities. (RA3002 ¶4.) On July 11, 2000, UBS records note the need to inform Toth that she “[s]hould sell all U.S. securities” because of “the problems regarding IRS 2001.” (RA2996.) On October 4, 2000, a UBS representative spoke to Toth by telephone and confirmed that Toth “has known for quite some time that she has to sell the U.S. securities because of the IRS form, since she is a U.S. citizen.” (RA2995.) Toth did not complete a W-9 and instructed UBS officials that she did not want to purchase U.S. securities. (RA1338; RA3002 ¶5.)

Before 2004, it was possible for money to be sent from a Swiss bank account to a U.S. account without revealing the sender's identity. (RA1368 ¶67; RA1372 ¶82.) By June 30, 2004, Swiss banks were required to begin identifying accountholder names on payments made abroad. (RA1353 ¶4(iv); RA1369-70 ¶¶69-72.) In 2004, UBS officials notified Toth that they “would no longer send her the monthly USD $15,000” from the Account to her U.S. account without listing her name. (RA3002 ¶6; RA594.) In response, Toth informed UBS that she no longer wanted to receive these payments. (RA3002 ¶6; RA594.) Instead, Toth requested that UBS make transfers from the Account, some for as much as $95,000, to her relatives in South America, and they sent money to her U.S. account. (RA3002 ¶¶7-8; RA595; RA1320-33.) As Toth admitted: “In order to protect my name, my siblings offered to send me money, and shortly afterwards, I returned the same amount to them.” (RA1333.)

On August 31, 2009, the IRS requested information from UBS regarding a category of accounts. (RA1363 ¶43.) On March 9, 2010, UBS notified Toth that this request appeared to cover her Account and (if so) UBS would produce information regarding it to the IRS. (RA3101 ¶24; RA3136 ¶24.) In response, Toth demanded that UBS maintain her account's secrecy “before the whole world.” (RA1334.) She stated that “[t]he main reason why my father and I chose your organization is the contemplation that you would adhere to the privacy laws of your country,” and complained that UBS had “decide[d] that my account is not worthy of the privacy laws of Switzerland.” (RA1333.)

As of the penalty calculation date, the Account (and any sub-accounts) contained $4,347,407. (RA1056-57.)

C. Administrative proceedings

On April 10, 2008, Toth filed her 2007 Form 1040 federal income tax return, which she prepared and signed under penalty of perjury. (RA60; RA282-93; RA3003 ¶12; RA3089 ¶12.) Form 1040, Schedule B, Part III required Toth to identify if she had a foreign financial account (e.g., a bank account) and instructed her to determine whether she was required to file an FBAR. (RA285; see also RA308 (instructions).) Toth left that question unanswered. (RA3003 ¶13; RA285; RA3089 ¶13.) In her interrogatory responses, Toth stated that she “[c]oncluded” that she could skip Schedule B, Part III because she believed UBS was answering those questions on her behalf. (RA474; RA3003 ¶15.) Toth agreed that she had a duty to read her tax forms and associated instructions in preparing her return. (RA1056.) Despite Toth's purported belief that UBS was taking care of her tax obligations, Toth received certain statements showing that UBS was not deducting funds to pay taxes to the IRS. (RA3003 ¶16; RA262; RA272.) Toth admitted that her omissions on Schedule B of her 2007 return caused her to underreport and underpay her tax liabilities. (RA526; RA1060; RA3003-04 ¶17.)

Toth did not file FBARs for several years, including 2007. (RA60; RA526; RA1056; RA1058; RA3003 ¶11; RA3088 ¶11.) On November 4, 2010, Toth filed an incomplete FBAR not assigned to any particular year. (RA433-34.) In November 2011, the IRS Revenue Agent handling Toth's FBAR penalty case added FBARs (dated November 30, 2010) for Toth for calendar years 2005 to 2009 to the IRS's files. (RA437-41.) Toth told the agent that she sent the forms to the wrong agency by mistake but provided no proof of mailing. (RA437.) Toth's belated 2007 FBAR stated that she had $4,977,987.45 in a Swiss UBS account. (RA438.)

On May 11, 2011, Toth filed an amended Form 1040X return for tax year 2007, stating she owed “previously unknown” taxes. (RA309-15.) Toth again did not complete Schedule B, Part III. (RA1051.)

In a letter dated May 3, 2012 (RA3011-26), the IRS proposed assessing a penalty against Toth under 31 U.S.C. §5321(a)(5) for the maximum amount (50% of the Account's balance) for willful failure to file an FBAR for 2007. (RA3005 ¶22; RA3011; RA3094 ¶22.) In the “FBAR Penalty Write-up” (RA3005 ¶24; RA3022-26), the IRS explained that it proposed the 50% penalty because Toth did not disclose the Account on her original returns for 2005-2009 or on her amended tax returns for 2007-2009, and filed delinquent FBAR forms for 2005-2009. (RA3005 ¶24; RA3024-25; RA3095 ¶24.) The letter noted that when confronted with her non-disclosures, Toth expressed concern that the Account would be disclosed to third parties and stated that her father instructed her to keep it secret. (RA3005 ¶24; RA3024-25.) On September 19, 2013, a civil willful FBAR penalty was assessed against Toth in the amount of $2,173,703. (RA26 ¶25; RA3005 ¶25; RA3007; RA3096 ¶25.)¹

D. District Court proceedings

1. Complaint and service

On September 16, 2015, the Government filed a complaint seeking judgment against Toth for the full penalty, plus statutory accruals. (RA23-27.) The Government hired two process servers to attempt to serve Toth. (RA351 ¶29.) After the first process server concluded that Toth was evading service, the Government hired a second process server “to try to do everything possible to ensure that she was served in hand with summons and complaint.” (RA351 ¶29.) Toth was served on January 11, 2016, by leaving a summons and copy of the complaint at Toth's residence. (RA28 ¶3; RA32 ¶8.) Another copy of the complaint and summons were sent to Toth by certified mail on January 14, 2016. (RA28 ¶4.) Prior to completing service, the second process server “made a significant number of trips” to Toth's residence, “on different days of the week, different times of the day,” sometimes making “multiple trips to that address each day.” (RA30 ¶2.) On multiple visits to Toth's residence, the process server saw a man, whom he informed of his intention to serve Toth; the man said he had told Toth. (RA30-31 ¶¶3-4.) The process server sometimes saw a vehicle belonging to Toth at her residence. (RA31 ¶5; RA43 ¶¶3-4.) He stated: “I relied on my professional experience to conclude that Monica Toth knew I was trying to serve her with legal process and made a deliberate effort to avoid service of process.” (RA31 ¶7.)

2. Default proceedings

After Toth failed to answer the complaint, the District Court issued a notice of default. (RA33.) After the Government moved for default judgment, Toth began making filings in the case. At an April 29, 2016 hearing (RA3220-44), the court told Toth that she “need[ed] to start showing up or you need to hire a lawyer” (RA3228). Toth acknowledged that she had a copy of the complaint. (RA3236.) The court advised Toth to hire an attorney to explain why the judge should vacate the default. (RA3237.) Because Toth said she did not know how to hire a lawyer (RA3230-31), the court ordered the Government to provide a list of lawyers, emphasizing that Toth could hire a different attorney. (RA3238-42.) The Government sent Toth the required list on May 4, 2016. (RA41.) Nevertheless, Toth continued to appear pro se.

On August 17, 2016, the District Court vacated the default and denied the Government's motion. (Add-1; RA6.) The court ordered Toth to respond to the complaint by September 2, 2016. (RA6.) It granted Toth an extension of time but warned that it would not grant further extensions. (RA6.)

3. Motion to dismiss proceedings and answers

On October 13, 2016, Toth moved to dismiss the case for, inter alia, untimely service, pursuant to the amended version of Fed. R. Civ. P. 4(m) (effective date, December 1, 2015). (RA6.) On May 2, 2017, the District Court denied the motion. (Add-2-10.) In particular, it held that the 120-day service period from the pre-amendment Rule 4(m) applied. (Add-4 n.1.) Because Toth was served within that 120-day period, service was timely. (Add-4.)

After the Government moved to require Toth to answer the complaint, the District Court ordered Toth to answer on July 10, 2017. (RA7.) Toth filed an answer on July 11, 2017, and subsequently an amended answer. (RA54-63.)

4. Discovery prior to motion for sanctions

On September 13, 2017, the Government filed the joint discovery plan required by the local rules, solely detailing its positions, because Toth had refused to confer. (RA64-70.) The Government moved to excuse its counsel from further efforts to confer. (RA71-79.)

At a September 20, 2017 hearing (RA8; RA3245-63), the court told Toth: “I know exactly why the government is frustrated here because I'm frustrated myself. This has gone on for way too long. First you avoided service. And then you said you were going to get a lawyer, and we gave a big time for that. And it's just dragged on and on.” (RA3250-51.) The court stated that it was “going to set deadlines, and we're all going to live by those deadlines” and that Toth needed to be responsive or hire an attorney to respond. (RA3251.) The court set deadlines for initial disclosures and told Toth, “I cannot emphasize this enough. You must be responsive to these things. Okay? If you can't be responsive to these things, you need to hire a lawyer.” (RA3256.) The court warned Toth: “You have to adhere to court deadlines” and “[t]here is not an excuse that I will accept for not adhering to court deadlines from this point forward.” (RA3256.) Toth said that she understood. (RA3257.) In its minute order regarding the hearing, the court reminded Toth “that she cannot ignore Plaintiff's counsel attempts to communicate with her, nor any deadlines set by this Court.” (RA8.)

On September 22, 2017, the District Court entered a scheduling order, requiring Toth to serve initial disclosures by October 6, 2017, and setting a discovery closing date of March 21, 2018. (RA9.) The court ordered Toth to “confer with Plaintiff when the rules require, or arrange for legal counsel to do so on her behalf.” (RA9.)

On November 27, 2017, after the Government sought permission to move to compel, the District Court ordered Toth to supplement her written discovery and document production within two weeks. (RA9-10.) The court warned Toth “that a failure to make adequate responses may result in the imposition of sanctions” and told her to consult the rules or hire an attorney to ensure that she satisfied her obligations. (RA9-10.)

On December 22, 2017, the Government moved to compel, impose sanctions, and relieve its counsel of the conferral requirement. (RA10.) Toth did not respond. On January 19, 2018, the District Court granted the motion. (RA80-82.) It ordered Toth to respond to written discovery and provide amended initial disclosures within 21 days, no extensions permitted, and held that Toth had “waived all objections other than those based on privilege, and must provide full, complete, and accurate answers to this discovery.” (RA80; RA81.) The court warned: “If Ms. Toth fails to comply with the foregoing, the Court may enter strong sanctions against her,” potentially including “accepting certain facts as established, including that Ms. Toth acted 'willfully' when she failed to file an FBAR.” (RA81.) The court ordered Toth to be deposed. (RA81.)

At a March 12, 2018 hearing (RA10; RA3264-82), the court told Toth: “what you are doing is not okay. It is not okay. I've given you chance after chance after chance to comply with these discovery requests. You're ignoring my orders. You won't hire a lawyer. What do you suggest I do here?” (RA3266.) At the hearing, Toth served the Government with written discovery responses in which she refused to produce documents, citing various objections. (RA3269-70.) The court reiterated that, regardless of objections, Toth was required to produce responsive documents. (RA3270.)² The court warned Toth that she was at risk of serious sanctions, including critical facts being deemed established. (RA3279.) It reiterated: “You must comply with discovery” and warned: “This case is going to move forward. I've already imposed sanctions on you, and I'm going to impose more sanctions on you until this thing starts moving forward.” (RA3279-80.)

At her March 21 and 26, 2018 depositions (RA870-1309), Toth repeatedly refused to provide information, such as the identity of the person who interacted with the process server. (RA1274-78.) Toth admitted that she received and read the January 19, 2018 order but “did not do anything different than I had done before.” (RA180.) Toth acknowledged that she had told the court that she would hire an attorney but chose not to do so. (RA1172-77.) Toth admitted that someone was helping with her case but refused to identify or provide information about the person. (RA1178-97.) Toth relied on that person's advice to refuse to answer questions that made her “feel uncomfortable” or “would disclose information about other people.” (RA1195.) The Government attorney warned that he would move for sanctions if she did not respond. (RA1280-81.) Toth said she did not care because “I feel very strongly about not answering questions about other people's information.” (RA1281.)

5. Sanctions proceedings

After moving for sanctions (RA83-99), the Government subsequently moved to compel further testimony from Toth (RA10) and filed an amended sanctions motion. (RA100-242.) In the amended motion, the Government noted that Toth had provided late written discovery responses, which were “replete with omissions and information improperly withheld on the basis of objections” that were deemed waived in the January 19, 2018 order. (RA102; see also RA105-13 (detailing deficiencies); RA129-62 (copies of discovery responses dated March 8, 2018).)

Toth did not respond to any of these motions. On August 27, 2018, the District Court granted the motion to compel, and also ordered Toth to show cause why sanctions should not be imposed. (RA11.) “Given the gravity of the proposed sanctions,” the court provided Toth an additional opportunity to respond. (RA11.)

The Government re-deposed Toth. (RA366-419.) Toth continued to refuse to answer questions based on non-privilege objections. (See, e.g., RA377-84.) Toth did not dispute that the court had ordered her to respond but refused to do so because it violated her “sense of morality” to answer questions regarding “innocent” people. (RA396-97; RA401.)

Toth filed four responses to the order to show cause. First, Toth disagreed with the Government's assertions in its amended motion. (RA326-28.) Second, Toth admitted three of the facts that the Government sought established, but disputed the fourth fact (willfulness). (RA329-31.) Third, Toth challenged a particular sentence and footnote in the Government's brief. (RA338-41.) Finally, Toth asserted that her use of anonymity with the Account was not willful. (RA342-45.)

On October 15, 2018, the District Court granted the amended sanctions motion and deemed established the following four facts:

(RA12; Add-22; see generally Add-11-22.) The court outlined the litigation history (Add-11-13), including that it had warned Toth that she was required to meet the discovery schedule's deadlines because Toth “had already demonstrated a pattern of dilatory conduct by evading service, submitting untimely requests for extensions of time, and filing an untimely answer.” (Add-18.) The court found that Toth violated the scheduling order and the court's November 27, 2017 order by not timely responding to the Government's requests or supplementing her initial disclosures. (Add-13-14.)

The District Court detailed the requirements and sanctions imposed by its January 19, 2018 order and its warning that continued violation of court orders would result in “additional strong sanctions.” (Add-14.) The court found that Toth violated the January 19, 2018 order by providing late discovery responses that “failed to comply with the requirements of [Fed. R. Civ. P.] 26,” “were replete with non-privilege objections,” and “withheld documents and information based on these objections.” (Add-13-15.) The court found that Toth “produced just three single-page documents of dubious relevance, although she identified 32 categories of responsive documents which were withheld based on non-privilege objections.” (Add-15.)³ The court found that Toth failed to respond to the motion to compel and sanctions motions, and that her order-to-show-cause responses neither remedied her discovery flaws nor provided adequate justifications for her non-compliance. (Add-16.)

Based on these findings, the District Court determined that it had “no choice” but to sanction Toth by deeming facts established, because Toth's “persistent violations of the Court's discovery orders are severe, repeated, and deliberate.” (Add-18.) The court concluded that the sanctions were not the equivalent of a default judgment, as Toth could still argue an affirmative defense. (Add-19-20.) “Moreover, the Court has attempted warnings and lesser sanctions to no avail, leaving it with no other option, particularly recognizing the burden to the Government of having to continue to litigate discovery issues in a case that was filed more than three years ago.” (Add-20.) The court concluded that “[l]ess severe sanctions would be unfair to the Government and undermine this Court's efforts to manage efficiently its docket.” (Add-20.)

Toth then hired attorneys. (RA13.) After granting several extensions of time to Toth's new counsel to complete discovery, the court entered a new scheduling order, stating that “it was not inclined to allow further extensions” and that certain “bank documents are within [Toth's] control and the court sees no reason why she shouldn't be able to procure the necessary documents within the allotted time frame.” (RA14.)

In November 2018, the Government's attorney requested that Toth sign a waiver form enabling the Government to get all of UBS's records for the Account. (RA353-57.) Toth's attorneys denied the request, although they did produce certain documents not previously produced. (RA358.) Toth's attorneys requested limited subsets of documents from UBS on February 7, 2019. (RA360-61.)

On March 15, 2019, Toth moved to vacate the sanctions order. (RA14; Doc. 130.) On May 17, 2019, the Government informed Toth's attorneys that the limited request and partial production of UBS documents was inconsistent with its requests and the court's orders. (RA362.) On June 19, 2019, Toth's counsel stated that “a request to UBS for all documents related to our client without limitation has been made to UBS.” (RA364.) On approximately August 5, 2019, Toth produced about 2,500 pages of bank records. (RA2998 ¶2.)

On December 20, 2019, the District Court denied the motion to vacate. (Add-23-38.) The court noted that the Government accomplished service “[a]fter repeated attempts to serve Defendant were met with Defendant's seemingly deliberate efforts to evade service.” (Add-23.) The court found: “Throughout the two years during which Defendant represented herself pro se, Defendant repeatedly missed deadlines, refused to comply with discovery rules, and failed to observe this Court's explicit orders regarding her discovery obligations.” (Add-24.)

The court treated Toth's motion as a motion for reconsideration. (Add-25.) Because Toth had not established most of the grounds for reconsideration, the court solely considered whether its sanction order “was 'clearly unjust.'” (Add-27 (citation omitted).) First, the court rejected Toth's attempt to downplay the seriousness of her violations because it “did not rely on Defendant's motives for her conduct.” (Add-29.) Second, the District Court rejected Toth's claim that it would be unjust to deem established that her FBAR violation was willful. (Add-29-38.)⁴ It found that Toth's frequent violations of court orders justified the sanctions. (Add-32.) The court further found that, even after hiring counsel, Toth continued to violate the January 18, 2018 order by attempting to limit her UBS document waiver, which delayed production of 2,500 responsive pages to August 5, 2019. (Add-31-32.)

As an alternative ground, the District Court also determined that the Government had provided “more than sufficient evidence” of willfulness to establish that the sanction was not unjust. (Add-37.) Based on Toth's testimony, the court determined that Toth deliberately failed to complete the relevant portion of her 2007 income tax return; had access to some account statements that would have allowed her to determine that UBS was not paying U.S. taxes on her behalf; and took affirmative steps to maintain the Account's secrecy, including from the IRS. (Add-34-36.)

6. Summary judgment and initial entry of judgment

After briefing, the District Court granted summary judgment to the Government. (Add-39-57.) First, the court concluded that the 2004 amendment to 31 U.S.C. §5321, which increased the maximum willful FBAR penalty, superseded an older regulation capping willful penalties at a lower, pre-amendment amount. (Add-45-48.) Second, the court rejected Toth's argument regarding willfulness. (Add-48-50.) Finally, the court rejected Toth's challenges to the penalty amount, concluding that the rule of lenity did not apply and that neither the Eighth Amendment's Excessive Fines Clause nor the Fifth Amendment's Due Process Clause barred the penalty. (Add-50-57.)

The District Court entered judgment in favor of the Government. (Add-58.) Toth appealed. (RA3187-88.)

7. Post-judgment proceedings

The Government moved to alter the judgment. (RA18.) On January 25, 2021, the District Court granted the Government's motion to provide the amount due and entered an amended judgment. (Add-59; Add-61-62.) Toth filed a supplemental notice of appeal. (RA3218-19.)

SUMMARY OF ARGUMENT

By ignoring most of the relevant facts, Monica Toth seeks to portray herself as a victim of government overreach. But the full facts regarding the litigation show that the District Court acted well within its discretion in sanctioning Toth for serious, repeated violations of court orders. And, considering the full, undisputed facts regarding Toth's actions in hiding her Swiss bank account, the District Court correctly sustained the FBAR penalty assessed against Toth for her willful failure to report her interest in that account.

1. Toth asserts that the entire case should be dismissed because the Government served her 118 days after the complaint was filed. The District Court correctly concluded that the service was timely based on the 120-day presumptive service period set by the version of Fed. R. Civ. P. 4(m) that applied when the complaint was filed. Even if the District Court erred in that conclusion and should have applied the shorter service period set by amended Rule 4(m), that error would be harmless under 28 U.S.C. §2111, both because of the lack of prejudice to Toth and in light of Toth's evasion of service.

2. The District Court acted well within its discretion in sanctioning Toth by finding certain facts (including willfulness) established as a matter of law. The District Court set clear orders, explained the orders to Toth in writing and during hearings, warned Toth of the importance of obeying orders and complying with discovery obligations, and first imposed lesser sanctions. But Toth repeatedly violated the court's orders, and never provided an adequate explanation for her failures. As the District Court concluded in imposing sanctions, months after the close of discovery, Toth had still not satisfied her basic discovery obligations, prejudicing the Government and undermining the court's ability to manage its docket.

3. This Court need not address Toth's arguments regarding willfulness if it affirms the sanctions order. In all events, the District Court correctly applied the civil willfulness standard to the civil willful FBAR penalty, to include reckless conduct. And, under the undisputed facts, Toth was at least reckless in failing to file an FBAR for the 2007 calendar year reporting her ownership of a Swiss bank account at UBS.

Toth repeatedly signed and filed tax returns that failed to disclose her ownership of the Account. She claims that she skipped the relevant section of her returns because she believed UBS was handling her federal tax obligations. But Toth apparently did nothing to confirm that her assumption was correct; in fact, she received bank statements from which she could have determined that UBS was not deducting taxes. Toth also ignores her long history of seeking to prevent UBS from disclosing the account to the IRS, including a 2010 letter ordering UBS not to provide information about her account in response to an IRS request.

4. The District Court correctly rejected Toth's argument that her willful FBAR penalty was limited to $100,000. To be sure, from 1986 until 2004, both the governing statute and a 1987 regulation, which reiterated that statute's text, set a $100,000 maximum penalty. In 2004, however, Congress amended the statute to mandate that the maximum willful FBAR penalty “shall be” the greater of $100,000 or 50% of the account balance at the time of the violation. As several circuits have held, this 2004 amendment superseded both the older statute and the 1987 regulation, mandating a new, higher maximum penalty.

5. The rule of lenity does not apply here, because the statute, as amended in 2004, is neither a criminal statute nor ambiguous. Contrary to Toth's arguments, the existence of a superseded regulation cannot create statutory ambiguity.

6. The penalty at issue does not violate the Eighth Amendment's Excessive Fines Clause both because it is not a “fine” within the meaning of that clause and because it is not excessive under the factors enunciated by the Supreme Court and this Court.

7. The penalty here also does not violate the Due Process Clause. Because the statute clearly stated the maximum penalty, there is no notice problem for due process purposes. And the amount of the penalty is sufficiently reasonable to satisfy due process.

ARGUMENT

I. The District Court correctly denied Toth's motion to dismiss for insufficient service of process

Standard of review

This Court reviews de novo the legal standard applied by the District Court. United States v. Mojica-Rivera, 435 F.3d 28, 31-32 (1st Cir. 2006). Courts of appeals conduct a case-by-case analysis to determine whether applying an amended rule to a pending case is 'just and practicable.'” United States v. Schropp, 829 F.3d 998, 1004 (8th Cir. 2016) (citation omitted).

A. Legal background

Fed. R. Civ. P. 4(m) sets a presumptive period for serving a complaint. When the complaint in this case was filed on September 16, 2015, Rule 4(m) stated:

If a defendant is not served within 120 days after the complaint is filed, the court — on motion or on its own after notice to the plaintiff — must dismiss the action without prejudice against that defendant or order that service be made within a specified time. But if the plaintiff shows good cause for the failure, the court must extend the time for service for an appropriate period.

“[T]he provisions of Federal Rule 4 should be liberally construed in the interest of doing substantial justice,” and “propriety of service in each case should turn on its own facts within the limits of the flexibility provided by the rule itself.” 4A Wright & Miller, Fed. Prac. & Proc. Civ. §1083 (4th ed. 2021).

On April 29, 2015, the Supreme Court adopted several amendments to the Federal Rules of Civil Procedure, which “shall take effect on December 1, 2015, and shall govern in all proceedings in civil cases thereafter commenced and, insofar as just and practicable, all proceedings then pending.” Proposed Rules, 305 F.R.D. 457, 460 (2015). One amendment reduced the Rule 4(m) presumptive period to 90 days. Id. at 463. The Advisory Committee Notes state that this reduction “will reduce delay at the beginning of litigation” but “will increase the frequency of occasions to extend the time for good cause. More time may be needed, for example, when a request to waive service fails, a defendant is difficult to serve, or a marshal is to make service in an in forma pauperis action.” Id. at 535.

B. The District Court properly found service to be timely

The District Court, like other district courts, held that the 120-day service period applies to complaints filed before the amendment's effective date. (Add-4 n.1.) See Hinton v. Virginia Union Univ., 185 F. Supp. 3d 807, 842 (E.D. Va. 2016); Vela v. City of Austin, Texas, 2016 WL 1583676, *3 (W.D. Tex. 2016); Cankat v. Café Iguana, Inc., 2016 WL 1383490, *1 n.1 (E.D.N.Y. 2016); Carinci v. 7-Eleven, Inc., 2016 WL 1319724, *1 (W.D. Pa. 2016); Freeman v. United States, 166 F. Supp. 3d 215, 218 (D. Conn. 2016).

Toth cites no cases — and we have found none — applying amended Rule 4(m) to dismiss a complaint filed before the amendment's effective date and served within 120 days. Indeed, “it is unjust to expect parties to abide by deadline-setting rules that were not in effect when the clock began ticking on a particular activity.” Hinton, 185 F. Supp. 3d at 843. Further, the cases cited above illustrate that “federal judges tend to believe the old Fed. R. Civ. P. 4(m) applies to cases filed before December 1, 2015,” making it “reasonable” for a plaintiff to also believe that. Id. No court of appeals has held that an amendment reducing the time for service applied to complaints filed before the amendment's effective date.⁵

Toth (Br-13-14) misreads cases holding that a 1998 amendment of Fed. R. Crim. P. 33 (which altered the timing for motions for new trial) could be applied to pending cases. In each of those cases, the criminal defendant had at least 18 months to file his motion after the effective date of the amendment. Mojica-Rivera, 435 F.3d at 33; United States v. Correa, 362 F.3d 1306, 1309 (11th Cir. 2004), abrogated on other grounds by Eberhart v. United States, 546 U.S. 12, 19 (2005); United States v. Ristovski, 312 F.3d 206, 212 (6th Cir. 2002).⁶ If amended Rule 4(m) applied here, the Government would have had only 14 days after its effective date to accomplish service.

Even if the District Court did err in applying pre-amendment Rule 4(m), that error would be harmless. 28 U.S.C §2111 bars courts of appeals from reversing based on “errors or defects which do not affect the substantial rights of the parties.” To justify reversal, Toth bears “the burden of showing that prejudice resulted.” Palmer v. Hoffman, 318 U.S. 109, 116 (1943); Shinseki v. Sanders, 556 U.S. 396, 409 (2009) (same).

Toth has not claimed prejudice. Because Rule 4(m) is a procedural rule adopted as “a useful tool for docket management, not an instrument of oppression,” United States v. Ayer, 857 F.2d 881, 885-86 (1st Cir. 1988), it is doubtful that Toth could show that her substantial rights were violated by applying the 120-day period (which had applied for years). And where service occurred relatively soon after the presumptive period, “actual harm to [the defendant's] ability to defend” cannot be inferred. Karney v. City of Naperville, 2016 WL 6082354, *3 (N.D. Ill. 2016) (citation omitted).

Moreover, Toth was not prejudiced because her evasion of service would have required the District Court to extend the service period. A district court must extend the period if a plaintiff had good cause for untimely service. See, e.g., Lemoge v. United States, 587 F.3d 1188, 1198 (9th Cir. 2009); Espinoza, 52 F.3d at 841; 4B Wright & Miller, Fed. Prac. & Proc. Civ. §1137 (4th ed. April 2021). Evasion of service constitutes good cause. See, e.g., Ruiz Varela v. Sanchez Velez, 814 F.2d 821, 823 (1st Cir. 1987); Hendry v. Schneider, 116 F.3d 446, 449 (10th Cir. 1997); 4B Fed. Prac. & Proc. Civ. §1137. Indeed, where a defendant evaded service and then moves to dismiss for late service under Rule 4(m), “the motion should be denied. The purpose of Rule 4(m) is to prod the slow-footed plaintiff, not to reward the crafty or evasive defendant.” 4B Fed. Prac. & Proc. Civ. §1137. Even without evasion, the plaintiff taking sufficient steps to attempt service during the presumptive period likewise establishes good cause. See, e.g., Ayer, 857 F.2d at 886; Hibernia Nat'l Bank v. Carner, 758 F. Supp. 382, 386 (M.D. La. 1991).

The District Court found evasion based on the process server's declaration showing numerous service attempts, his conversations with a man at her residence, and his belief that Toth was evading service. (Add-11-12, 18; Add-23; RA28-31.) Another process server was unable to serve Toth after multiple tries. (RA351 ¶29.) Toth does not challenge (or even acknowledge) these facts, which amply establish evasion.⁷ See, e.g., Hendry, 116 F.3d at 449; United Am. Ins. Co. v. Bell, 2009 WL 1084486, *2 (D. Col. 2009); D'Amario v. Russo, 750 F. Supp. 560, 563 (D.R.I. 1990).⁸

II. The District Court acted well within its discretion in imposing serious sanctions on Toth

Standard of review

“The choice of sanction lies in the purview of the district court, and we review for abuse of discretion.” AngioDynamics, Inc. v. Biolitec AG, 780 F.3d 429, 435 (1st Cir. 2015). “[T]his standard of review is not appellant-friendly — and a disgruntled litigant bears a heavy burden in attempting to show an abuse occurred.” Tower Ventures, Inc. v. City of Westfield, 296 F.3d 43, 46 (1st Cir. 2002). Factual findings underlying sanctions orders are reviewed for clear error. Id. at 83.⁹

A. Legal background

“[A] party who flouts a court order does so at its own peril.” Hooper-Haas v. Ziegler Holdings, LLC, 690 F.3d 34, 37 (1st Cir. 2012). The District Court “has wide latitude” to select a sanction. Id. Under Fed. R. Civ. P. 37, “the district court maintains a variety of tools at its disposal to sanction a party who violates discovery orders,” and may impose penalties “with an eye both to penalize the particular noncompliance and to deter others from engaging in the same tactics.” AngioDynamics, 780 F.3d at 435. This Court “set out a non-exhaustive list of factors for consideration when reviewing a Rule 37 motion for sanctions.” Id. Substantively, a court should “weigh the severity of the discovery violations, legitimacy of the party's excuse for failing to comply, repetition of violations, deliberateness of the misconduct, mitigating excuses, prejudice to the other party and to the operations of the court, and adequacy of lesser sanctions.” Id. Procedurally, a court should give “the offending party notice of the possibility of sanctions and the opportunity to explain its misconduct and argue against the imposition of such a penalty.” Id.

This Court has upheld sanctions of default judgment or dismissal where a party's conduct “was severe, repeated, and deliberate, with no legitimate or mitigating explanation for noncompliance.” See, e.g., id.; United States v. 2008 33' Contender Model Tournament Vessel, 990 F.3d 725, 727 (1st Cir. 2021); Hooper-Haas, 690 F.3d at 37-39; Mulero-Abreu v. Puerto Rico P.D., 675 F.3d 88, 92-95 (1st Cir. 2012); Torres-Vargas v. Pereira, 431 F.3d 389, 392-93 (1st Cir. 2005); Tower Ventures, 296 F.3d at 46-47. Courts have likewise upheld the sanction of deeming facts established. See, e.g., Alexsam Inc. v. IDT Corp., 715 F.3d 1336, 1344-45 (Fed. Cir. 2013); Chilcutt v. United States, 4 F.3d 1313, 1320-25 (5th Cir. 1993).

B. The District Court did not abuse its discretion in sanctioning Toth

1. The sanctions were substantively justified

Toth repeatedly and deliberately violated court orders. “[A] party's disregard of a court order is a paradigmatic example of extreme misconduct.” Torres-Vargas, 431 F.3d at 393. As in Hooper-Haas, 690 F.3d at 38, Toth repeatedly violated court orders, despite repeated warnings. The District Court found (Add-13-14) that Toth violated at least three orders:

Each order warned Toth that she needed to comply, and the latter two orders warned of the risk of sanctions. The court also warned Toth that she must comply with orders during the September 20, 2017 (RA3251, 3256-57) and March 12, 2018 hearings (RA3266, 3279). Yet Toth continually refused to comply, relied on non-privilege objections, provided inadequate discovery responses, and produced only three nonresponsive documents. (Supra, 11-17.) As in Hooper-Haas, 690 F.3d at 38, the District Court reasonably found “that the appellant had acted willfully in ignoring a series of deadlines.” (See Add-19.)

Toth largely does not deny that she violated these orders. She instead asserts that her violations were limited to what she characterizes as a short time period. (Br-16-17.) But Toth failed to produce adequate discovery responses or documents during the entire discovery period (from September 22, 2017, to March 21, 2018), with the Court finding in its October 15, 2018 sanctions order that Toth still had not remedied her failures — almost seven months after the scheduled close of discovery. (Add-16.) Toth also does not deny that she continued to rely on non-privilege objections to withhold information or documents after the January 19, 2018 order. And Toth's violations continued after sanctions were imposed, when her attorneys limited their request to UBS for its records. (RA358; Add-31-32.) After they finally made an unlimited request, the Government received approximately 2,500 pages of documents on August 5, 2019. (RA2998 ¶2.)

Toth challenges the District Court's finding regarding her failure to produce responsive documents (Add-15), claiming that her responses showed that she did not possess additional documents. (Br-19-20.) But she solely cites her initial disclosures (RA243-44), which state that she believed that she had destroyed certain bank documents and that she did not “possess any other recorded evidence which I expect might be used to support my claims or defenses.” (RA244.) Her disclosures do not assert that Toth lacked or was unable to procure documents that the Government had requested or might want to use to support its claims.¹⁰ Meanwhile, Toth's document-request responses identify numerous categories of documents that she declined to produce based on claims of relevance, materiality, futility, privacy, or her belief that the Government possessed the documents or could get them through another means. (RA257-67.)

Finally, Toth asserts that the District Court's findings were “overly influenced by the government's mischaracterizations of Ms. Toth's conduct.” (Br-15; see Br-19-20.) But the court rejected that assertion, stating that it imposed sanctions based “on Defendant's persistent and egregious failures to comply with the Court's orders, despite many opportunities to correct those failures.” (Add-29 n.4.)

Toth had no legitimate or mitigating excuse. Unexcused violation of court orders “places the choice of sanction (up to, and including, dismissal) within the sound discretion of the district court.” Tower Ventures, 296 F.3d at 46. As the District Court explained (Add-16), Toth failed to oppose the sanctions motions, and when given an additional opportunity to respond, provided no adequate justification. (RA326-45.) “When, as in this case, a non-complying party has been afforded an opportunity to explain its failure to abide by a court order, we give a wide berth to the presider's judgment that, under all the circumstances, the proffered justification is insufficient.” Tower Ventures, 296 F.3d at 47. And, if Toth had a “legitimate reason” for failing to comply, “it was not communicated to the district court.” Id.

Acting pro se (Br-19-20) is not a legitimate excuse for violating court orders. “The right of self-representation is not a license to abuse the dignity of the courtroom. Neither is it a license not to comply with relevant rules of procedural and substantive law.” Faretta v. California, 422 U.S. 806, 834 n.46 (1975) (criminal case). That principle holds equally true in civil cases and is particularly apt where the litigant “knowingly chose to handle [her] own defense, forsaking professional assistance.” Eagle Eye Fishing Corp. v. U.S. Dept. of Com., 20 F.3d 503, 506 (1st Cir. 1994).

Toth's behavior was prejudicial. It is a “black-letter principle” that “'[r]epeated disobedience of a scheduling order is inherently prejudicial, because disruption of the court's schedule and the preparation of other parties nearly always results.” Hooper-Haas, 690 F.3d at 39 (citation omitted); Mulero-Abreu, 675 F.3d at 94. Here, after Toth delayed the case by evading service, filing untimely pleadings, and failing to confer, the District Court issued a scheduling order requiring Toth to serve initial disclosures by October 6, 2017, and discovery to close by March 21, 2018. (RA9.) Despite subsequent orders, warnings, and lesser sanctions, Toth still had not produced adequate discovery responses or documents when sanctions were imposed on October 15, 2018. (RA9-10; RA80-82; Add-15; RA163-65; supra, 11-19.)

Toth asserts that there was no prejudice because the Government was able, through her deposition, to prove three of the facts ordered established. (Br-20-21.) But the Government also sought information to establish willfulness and to respond to Toth's affirmative defenses.

Lesser sanctions had proven inadequate. Although a district court need not attempt lesser sanctions before imposing a severe one, Hooper-Haas, 690 F.3d at 38-39, the District Court did first impose lesser sanctions. (RA81.) Toth still did not comply. (Supra, 13-17.)

2. The District Court provided notice and opportunity to be heard

As in AngioDynamics, 780 F.3d at 435, the District Court provided Toth with “numerous opportunities to explain [herself], both on paper and in person, and had warned [her] that” it might impose the sanction of deeming facts, including willfulness, established if Toth “continued to flout discovery orders.” The court repeatedly warned Toth to comply with court deadlines and orders; several of the warnings also noted the risk of sanctions. (RA8; RA9-10; RA81; RA3251, 3256-57; RA3266, 3279-80.)

And as in AngioDynamics, 780 F.3d at 436 (citation omitted), despite those warnings, Toth “continued to engage in a 'deliberate pattern of stonewalling with the aim of frustrating effective discovery and the progress of the case.” (See Add-13-16, 19.) As the District Court found in denying her motion to vacate, Toth's recalcitrance continued even after sanctions were imposed. (Add-31-32.)

3. The sanctions imposed on Toth were appropriate

The District Court reasonably determined that it had “no choice” but to issue the strong sanction of deeming facts (including willfulness) established, because Toth's “persistent violations of the Court's discovery orders are severe, repeated, and deliberate,” despite frequent warnings and application of lesser sanctions. (Add-18.) No lesser sanction would protect the Government's right to litigate its case, vindicate the District Court's right to manage its docket, and deter other parties from similar misconduct. Chilcutt, 4 F.3d at 1325. Strong sanctions are necessary “to punish the noncompliant litigant” and also to “act[ ] as a deterrent to those who might be tempted to emulate a bad example.” Torres-Vargas, 431 F.3d at 393.

Toth's claim that the sanctions imposed were the equivalent of a default judgment (Br-21-22) is incorrect, because she could still argue affirmative defenses. Chilcutt, 4 F.3d at 1320 (citation omitted). Further, given the evidence, (infra, 48-51), the Government's case for willfulness was far from frivolous. Id. at 1322. In all events, the District Court reasonably could have imposed a default judgment as a sanction, given Toth's repeated violation of court orders. See, e.g., 2008 33' Contender Model Tournament Vessel, 990 F.3d at 727; AngioDynamics, 780 F.3d at 435; Hooper-Haas, 690 F.3d at 37-39.

III. The District Court correctly granted summary judgment to the Government

Standard of review

This Court reviews grants of summary judgment de novo. Gomez v. Stop & Shop Supermarket Co., 670 F.3d 395, 396 (1st Cir. 2012).

A. Toth acted willfully as a matter of law

While acknowledging that she failed to file her required 2007 FBAR for over two years, Toth argues that summary judgment was inappropriate on willfulness. (Br-24-29.) This Court need not address Toth's willfulness challenge if it affirms the sanctions order (RA12), in which Toth's willfulness was established. In any event, the District Court applied the correct standard to find that Toth acted willfully as a matter of law.

1. Willfulness includes reckless violations of the FBAR requirement

Section 5321(a)(5)(C) established a civil willful penalty but did not define “willful.” See 31 U.S.C. §5321(a)(5)(C). “[W]here willfulness is a statutory condition of civil liability,” the term generally covers “not only knowing violations of a standard, but reckless ones as well.” Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007); see also United States v. Ill. Cent. R.R., 303 U.S. 239, 242-43 (1938). Civil recklessness refers to “conduct violating an objective standard: action entailing 'an unjustifiably high risk of harm that is either known or so obvious that it should be known.'” Safeco, 551 U.S. at 68 (citation omitted). Thus, an objectively “reckless disregard of statutory duty” establishes willfulness for purposes of civil liability. Id. at 57. This Court has held that, under Safeco and similar Supreme Court decisions, “the term 'willfulness' generally imports a reckless disregard standard.” Fryer v. A.S.A.P. Fire & Safety Corp., 658 F.3d 85, 91 (1st Cir. 2011); Thomsen v. United States, 887 F.2d 12, 17-18 (1st Cir. 1989) (reckless disregard establishes “willfulness” under I.R.C. §6672).

Every court of appeals to address the question has held that the Safeco standard applies, such that willfulness under §5321 includes recklessness. United States v. Rum, 995 F.3d 882, 889 (11th Cir. 2021); United States v. Horowitz, 978 F.3d 80, 88 (4th Cir. 2020); Norman v. United States, 942 F.3d 1111, 1115 (Fed. Cir. 2019); Bedrosian v. United States, 912 F.3d 144, 152-53 (3d Cir. 2018). Indeed, nothing in §5321 counsels against that result.

Thus, Toth is liable for a “willful” FBAR penalty if she “clearly ought to have known” that “there was a grave risk that an accurate FBAR was not being filed” and “was in a position to find out for certain very easily.” Bedrosian, 912 F.3d at 153 (cleaned up). Subjective knowledge or intent is unnecessary to establish willfulness if Toth's conduct was objectively reckless.

Toth argues (Br-24-25) that this Court should apply the standard for criminal willfulness. She relies on Ratzlaf v. United States, 510 U.S. 135, 154 n.5 (1994), which holds that criminal willfulness under the BSA, 31 U.S.C. §5322, requires “an intentional violation of a known legal duty.” But Safeco expressly distinguished criminal willfulness cases — including Ratzlaf — because criminal law is “different,” and “[c]ivil use of the term ['willful' or 'willfully'] typically presents neither the textual nor the substantive reasons for pegging the threshold of liability at knowledge of wrongdoing.” Safeco, 551 U.S. at 57 n.9 (citations omitted); see also id. at 68 n.18 (“Unlike civil recklessness, criminal recklessness also requires subjective knowledge on the part of the offender.”); Horowitz, 978 F.3d at 87-88 (discussing Safeco and Ratzlaf).

Toth relies (Br-25) on a handful of unhelpful items to argue that the Ratzlaf standard should apply to civil FBAR penalties. United States v. Zwerner, 2014 WL 11878430, *3 (S.D. Fla. 2014), deferred the question of the proper standard — which the Eleventh Circuit has now decided in Rum, 995 F.3d at 889. Neither United States v. Pomerantz, 2017 WL 4418572, *3 (W.D. Wash. 2017), nor the non-precedential CCA 200603026, 2006 WL 148700, cited or discussed Safeco. The Internal Revenue Manual is likewise not legally binding and confers no rights on taxpayers. Norman, 942 F.3d at 1115; see Dickow v. United States, 654 F.3d 144, 153 n.8 (1st Cir. 2011). In all events, while the 2008 version of the manual provides that willfulness can be shown by voluntary and intentional violation of “a known legal duty,” I.R.M. 4.26.16.4.5.3(1) (2008), it also “acknowledges that actual knowledge may not be required.” Norman, 942 F.3d at 1115.

2. The undisputed facts establish civil willfulness

As the District Court correctly concluded (Add-34-37; Add-49-50), even apart from the sanction establishing willfulness, the record establishes civil willfulness as a matter of law. Toth did not file an FBAR for 2007 until 2010 (RA3088 ¶11), and filed no FBARs until after UBS informed her that it would identify her account to the IRS. (RA3145-46 ¶32 (November 2010 incomplete FBAR); RA343-44 (March 2010 UBS notice).) Toth did not complete Schedule B, Part III of her 2007 tax return, failing to report her Account. (RA60; RA285; RA3003 ¶¶12-13; RA3089 ¶¶12-13.) Toth agreed that she had a duty to read her tax forms and associated instructions in preparing her return. (RA1056.) And both Schedule B, Part III and its instructions (RA285; RA308) told taxpayers to complete that section, and (if they had a foreign account) to determine whether an FBAR was required. Toth completed her 2007 return and signed it under penalty of perjury. (RA60; RA292-93; RA3089 ¶12.) As such, she is “deemed to be aware of the contents of [her] tax filings.” Jardin De Las Catalinas Ltd. P'ship v. Joyner, 766 F.3d 127, 134 (1st Cir. 2014).

In her interrogatory responses, Toth stated that she “[c]oncluded” that she could skip Schedule B, Part III because she believed UBS was answering those questions on her behalf. (RA474; RA3003 ¶15.) But Toth cited nothing to support this alleged belief and admitted receiving certain statements from UBS from which she could have determined that UBS was not deducting federal taxes for her. (RA3003 ¶16; RA262; RA272.) Even if UBS had reported her account in some way, that would not have absolved Toth of her duty to truthfully answer Schedule B of her tax return. (RA285; RA308.) Toth identified no step that she took to ensure that her account was reported to the IRS.¹¹

Indeed, Toth sought to stop UBS from reporting the Account to the IRS. First, in 2000, a UBS representative informed Toth that she must either complete a W-9 or authorize UBS to sell U.S. securities in her account. (RA2995-96.) Toth chose not to complete a W-9 and told UBS not to hold U.S. securities in the Account. (RA1338; RA3002 ¶5.) Second, in 2010, UBS informed Toth that it would likely be required to report her Account to the IRS. (RA3101 ¶24; RA3136 ¶24.) In response, Toth demanded that UBS maintain her account's secrecy “before the whole world” and stated that the primary reason why she and her father had chosen to UBS was to obtain Swiss privacy protections for the account. (RA1334.)

Toth took other steps to try to maintain her account's secrecy, consistent with her brother's and father's instructions not to “tell anybody about the Account.” (RA996; RA3002 ¶3; RA3041.) In 2004, upon learning that UBS would no longer send money to her U.S. account without identifying her as the Account's owner, she told UBS to stop sending money to her U.S. account. (RA3002 ¶6; RA594.) Instead, Toth routed money from UBS to South American relatives, who sent money to her U.S. account, specifically to avoid her name being identified. (RA3002 ¶¶7-8; RA595; RA1320-33.)

These undisputed facts establish that Toth maintained “a secret foreign account, she had constructive knowledge of the requirement to disclose that account, and she falsely represented that she had no such accounts.” Kimble v. United States, 991 F.3d 1238, 1243 (Fed. Cir. 2021). Those facts establish civil willfulness as a matter of law. Rum, 995. F.3d at 890-982; Horowitz, 978 F.3d at 89-90; Kimble v. United States, 141 Fed. Cl. 373, 385-86 (2018), aff'd, 991 F.3d 1238 (Fed. Cir. 2021); Landa v. United States, __ Fed. Cl. __, 2021 WL 1526511, *11-13 (2021); see also Norman, 942 F.3d at 1115-17 (affirming willfulness holding after trial under similar facts).

B. The District Court correctly refused to rely on a superseded regulation to limit the maximum penalty

1. Background

From 1986 until 2004, the maximum penalty for willful FBAR violations was “the greater of” $25,000 or “an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation.” 31 U.S.C. §5321(a)(5)(B)(ii) (2003). In 1987, the Treasury Department issued a regulation reflecting that statutory maximum. 31 C.F.R. §103.47(g)(2) (1987), renumbered as 31 C.F.R. §103.57(g)(2) (1999), renumbered as 31 C.F.R. §1010.820(g) (2010). In 2004, Congress amended the statute to state that “the maximum penalty” for willful FBAR violations “shall be increased to the greater of” $100,000 or 50% of “the balance in the account at the time of the violation.” 31 U.S.C. §5321(a)(5)(C) & (D)(ii).

2. The 2004 statutory amendment increased the maximum willful penalty, superseding the prior inconsistent regulation

Toth seeks to rely on the pre-amendment regulation to cap her penalty at $100,000 (Br-29-35), but Congress superseded that regulation in 2004. Under the 2004 statute, “the maximum penalty” for a willful violator “shall be increased to the greater of” either $100,000 or 50% of “the balance in the account at the time of the violation.” 31 U.S.C. §§5321(a)(5)(C), (D)(ii).

“[I]t is axiomatic that the word 'shall' has a mandatory connotation.” Claudio-De Leon v. Sistema Univeritario Ana G. Mendez, 775 F.3d 41, 46 (1st Cir. 2014); Mach Mining, LLC v. EEOC, 575 U.S. 480, 486 (2015) (“shall” is “mandatory, not precatory,” and “admits of no discretion”) (citation omitted). Congress thus set a new, mandatory maximum penalty for willful FBAR penalties — replacing the pre-amendment maximum penalty of $100,000. Legislative history confirms that Congress deliberately raised the maximum penalty. See H.R. Conf. Rep. No. 108-755, at 615, reprinted in 2004 U.S.C.C.A.N. 1341, 1667-68.

The 2004 amendment necessarily superseded the pre-amendment regulation, which reiterated the 1987 version of §5321(a)(5)(B)(ii). See 31 C.F.R. §1010.820(g)(2). “Since 'a rule out of harmony with the statute, is a mere nullity,'” Toth cannot “find refuge” in a “regulation that, while not officially rescinded, appears now to be totally at odds with current statutory law.” Martinez v. R.I. Hous. & Mtge. Fin. Corp., 738 F.2d 21, 26 (1st Cir. 1984) (citation omitted); Farrell v. United States, 313 F.3d 1214, 1219 (9th Cir. 2002) (same).

Applying these principles, the Federal, Fourth, and Eleventh Circuits and various district courts have held that the 2004 amendment superseded the 1987 regulation. See, e.g., Rum, 995 F.3d at 891-92; Horowitz, 978 F.3d at 90-91; Norman, 942 F.3d at 1117-18; United States v. Kahn, 2019 WL 8587295, *8-12 (E.D.N.Y. 2019); United States v. Garrity, 2019 WL 1004584, *2-5 (D. Conn.), appeal withdrawn, No. 19-1145 (2d Cir. 2019); United States v. Cohen, 2019 WL 4605709, *4-5 (C.D. Cal. 2019). The regulatory cap on willful FBAR penalties in 31 C.F.R. §1010.820(g)(2) is obsolete and invalid.

3. Toth's contrary arguments fail

Toth argues that the 2004 amendment gave the Secretary discretion to choose a lower maximum penalty and that the Secretary used that discretion to adopt the $100,000 regulatory cap. (Br-34-35.) She misreads the statute and the regulatory history. First, the 2004 amendment mandated a new maximum willful FBAR penalty — leaving the Secretary no authority to set a different maximum penalty. Horowitz, 978 F.3d at 91; Norman, 942 F.3d at 1117-18.

Even if the statute granted discretion to reduce the maximum penalty, the Secretary did not do so. The 1987 regulation reiterated the then-current statute. Horowitz, 978 F.3d at 91. The preamble to the 1987 regulation further “stated that Treasury intended to enforce the BSA 'to the fullest extent possible.'” Garrity, 2019 WL 1004584, at *3 (quoting 52 Fed. Reg. 11436, 11440 (Apr. 8, 1987)). Thus, Treasury did not signal an intent to limit the Secretary's discretion to impose otherwise lawful penalties.

Nor does the regulation interpret the current version of §5321(a)(5)(C). The agencies that enforce the FBAR statute (the IRS and the Financial Crimes Enforcement Network) recognize that the new statutory maximum penalty applies. See I.R.M. 4.26.16.4.5.1(4) (2008); 75 Fed. Reg. 8844-01, 8854 (Feb. 26, 2010). Toth incorrectly suggests (Br-35) that periodic updates to 31 C.F.R. §1010.821, which lists the inflation-adjusted amounts of various penalties, somehow repromulgated the $100,000 maximum in §1010.820(g)(2). As required by 28 U.S.C. §2461, the Secretary periodically issues rules adjusting penalties in §1010.821 for inflation. But that does not imply that the Secretary believes $100,000 (adjusted for inflation) is the maximum penalty. Garrity, 2019 WL 1004584, at *4.

“The Treasury's relaxed approach to amending its regulations to track Code changes is well documented.” United Dominion Indus., Inc. v. United States, 532 U.S. 822, 836 (2001). Courts thus read no “affirmative intention” into failure to amend a regulation. Id. at 837; see Umbach v. Commissioner, 357 F.3d 1108, 1112 (10th Cir. 2003).

Finally, Toth relies on United States v. Colliot, 2018 WL 2271381 (W.D. Tex. 2018), and United States v. Wahdan, 325 F. Supp. 3d 1136 (D. Colo. 2018) — the only cases holding that the regulation caps the willful penalty. But both cases, like Toth, misread the statute's plain, mandatory language and the regulatory history to assert that the Secretary retained and exercised discretion to adopt a different maximum willful penalty. (See, supra, 52-55.) This Court should follow its sister circuits in rejecting these district courts' faulty reasoning.

C. The rule of lenity does not apply to the willful FBAR penalty

Toth argues that the rule of lenity requires this Court to apply the 1987 regulation's maximum penalty, rather than penalty stated in the 2004 amendment. (Br-36-40.) Under the rule of lenity, a court will not “'interpret a federal criminal statute so as to increase the penalty that it places on an individual when such an interpretation can be based on no more than a guess as to what Congress intended.'” Bifulco v. United States, 447 U.S. 381, 387 (1980) (citation omitted). “[T]he 'touchstone' of the rule of lenity 'is statutory ambiguity,'” and a court “may not manufacture ambiguity in order to defeat that intent.” Id. (citation omitted).Thus, the rule of lenity only applies to (1) interpretation of a criminal statute (2) that is sufficiently ambiguous. Lawson v. FMR LLC, 670 F.3d 61, 76 (1st Cir. 2012), rev'd on other grounds and remanded, 571 U.S. 429 (2014). Neither element applies here.

First, the willful FBAR penalty is civil. Toth cites cases (Br-37) in which the rule of lenity was applied to a civil violation defined by reference to a criminal provision. United States v. Thompson/Center Arms Co., 504 U.S. 505, 517-18 (1992); Crandon v. United States, 494 U.S. 152, 158 (1990). But determining the maximum civil penalty here does not require interpreting a criminal provision.

Second, there is no “'grievous ambiguity or uncertainty in the language and structure of the Act,'” such that it remains ambiguous even after considering all means of statutory construction. Chapman v. United States, 500 U.S. 453, 463 (1991) (citation omitted). Indeed, the statute unambiguously mandates a maximum penalty. (Supra, 52-53.) Toth cites nothing supporting her claim that the rule of lenity permits her to rely on a superseded regulation to reduce the maximum penalty below the level set by the unambiguous 2004 statute. Notably, the cases cited by Toth (Br-38) for the proposition that strict construction applies to penal or tax provisions do not hold that a superseded regulation can be used to limit a penal or tax statute's plain language.

On appeal, Toth cites the Administrative Procedure Act (“APA”), 5 U.S.C. §552(a) to claim that, because no repeal of the 1987 regulation was published in the Federal Register, she may rely on the superseded regulation. (Br. 39-40.) Toth waived this argument by not making it in her summary judgment briefs (Docs. 167, 174). B&T Masonry Constr. Co. v. Pub. Serv. Mut. Ins. Co., 382 F.3d 36, 40 (1st Cir. 2004). Further, §552(a) addresses publication of agency actions. But the 1987 regulation was superseded by an act of Congress. The APA excludes Congress from its definition of “agency.” 5 U.S.C. §551(1)(A). And Congress provides notice by enacting public laws — here in the 2004 Jobs Act.

D. The Eighth Amendment's Excessive Fines Clause does not prohibit the penalty here

Toth asserts that the penalty violated the Eighth Amendment's Excessive Fines Clause. (Br-40-52.) As the District Court correctly held (Add-51-56), however, the penalty is neither a fine nor excessive.

1. Civil FBAR penalties are not “fines” under the Eighth Amendment

A civil penalty is not a “fine” covered by the Eighth Amendment if it is not “punishment for some offense.” United States v. Bajakajian, 524 U.S. 321, 328 (1998) (quotation marks omitted). A sanction is a punishment if it is “imposed at the culmination of a criminal proceeding” and requires “conviction of an underlying” crime. Id. at 328. The FBAR penalty, however, is civil and can be imposed without criminal prosecution. Rather, in 31 U.S.C. §5322, Congress separately provided criminal penalties, described (unlike with civil penalties) as “fine[s].” 31 U.S.C. §§5322(a) & (b).

A civil penalty is not a punishment if it “serve[s] the remedial purpose of compensating the Government for a loss.” Bajakajian, 524 U.S. at 329. In enacting the BSA, Congress contemplated that the use of “secret foreign bank account[s]” was the “largest single tax loophole permitted by American law,” causing the “debilitating effect[ ]” of “hundreds of millions” of dollars in lost tax revenues. H.R. Rep. No. 91-975, at 12-13. Investigating secret bank accounts is time-consuming and expensive. See id. at 12. All courts to address the question have determined that §5321 civil penalties offset these losses and, therefore, are remedial and not subject to the Excessive Fines Clause. See Landa, 2021 WL 1526511 at *16; United States v. Collins, 2021 WL 456962, *8-9 (W.D. Pa. 2021); United States v. Schwarzbaum, 2020 WL 2526500, *5-8 (S.D. Fla. 2020); United States v. Estate of Schoenfeld, 344 F. Supp. 3d 1354, 1369-73 (M.D. Fla. 2018).¹²

Toth's contrary argument (Br-41-43) turns on Timbs v. Indiana, 139 S. Ct. 682, 689-90 (2019), and Austin v. United States, 509 U.S. 602 (1993). But “Austin does not directly or impliedly suggest that either its holding or statements to the effect that a forfeiture can be an excessive fine under the Eighth Amendment are or should be applicable to any actions other than forfeitures under 21 U.S.C. §§881(a)(4) and (a)(7).” McNichols v. Commissioner, 13 F.3d 432, 434 (1st Cir. 1993). Toth attempts to distinguish McNichols on the grounds that it involved a plea agreement and was a tax case. (Br-44-45.) But this Court did not rely on the plea agreement, and addressed the Excessive Fines argument on the merits. McNichols, 13 F.3d at 434. And McNichols made two distinct holdings: (1) that “an insurmountable wall of tax cases” authorized the tax assessments at issue and (2) that Austin “does not directly or impliedly suggest” that its holding should be applied outside the specific context of forfeitures. Id.

Further, Toth's claim that any deterrence constitutes punishment (Br-42-43) is irreconcilable with Helvering v. Mitchell, 303 U.S. 391, 401-05 (1938), which holds that civil tax penalties, including penalties for fraud with intent to evade tax, are remedial.¹³ Even substantial civil tax penalties are not fines under the Eighth Amendment. See, e.g., McNichols, 13 F.3d at 434; Louis v. Commissioner, 170 F.3d 1232, 1236 (9th Cir. 1999). Although the civil FBAR penalty is not a Title 26 “tax” penalty, it is more analogous to a nonpunitive tax penalty than to the forfeitures tied to criminal convictions addressed in Bajakajian, Timbs, and Austin.

Toth's remaining arguments are unpersuasive. Hudson v. United States, 522 U.S. 93 (1997) (Br-45) involves a different analysis under the Fifth Amendment's Double Jeopardy Clause. Toth asserts that the reasonable-cause defense to nonwillful FBAR penalties (§5321(a)(5)(B)(ii)) and the willfulness requirement for her penalty (§5321(a)(5)(C)) establish that the FBAR penalty is subject to the Excessive Fines Clause. (Br-42-43.) Yet the failure-to-pay-tax penalty under I.R.C. § 6651 is not subject to the Excessive Fines Clause. See Mason v. Commissioner, T.C. Memo. 2001-58, 2001 WL 235434, *3-4. And the statutory defense to that penalty requires a taxpayer to show both reasonable cause and a lack of “willful neglect.” I.R.C. §6651(a)(2) & (3).

2. The penalty here is not constitutionally excessive

Toth's penalty is not excessive, or grossly disproportionate, under the factors cited in Bajakajian: (1) the class of persons targeted by the statute; (2) a comparison with other penalties set by Congress; and (3) the seriousness of the offense and the harm it caused. United States v. Jose, 499 F.3d 105, 111 (1st Cir. 2007); United States v. Emerson, 107 F.3d 77, 81 (1st Cir. 1997). Toth bears the burden of establishing excessiveness. Jose, 499 F.3d at 108. Toth cannot carry that burden.

Acts of Congress are entitled to a strong presumption of constitutionality. United States v. Nat'l Dairy Prods. Corp., 372 U.S. 29, 32 (1963). This Court should give substantial deference to Congress's judgment regarding appropriate penalties. See Bajakajian, 524 U.S. at 336; Jose, 499 F.3d at 111; United States v. Chaplin's, Inc., 646 F.3d 846, 851 (11th Cir. 2011).

The sole court of appeals to consider an Eighth Amendment challenge to a willful FBAR penalty held that the penalty was not excessive. See United States v. Bussell, 699 F. App'x 695, 696 (9th Cir. 2017) (willful FBAR penalty of “approximately $1.2 million” was “not grossly disproportional to the harm she caused because Bussell defrauded the government and reduced public revenues”). Numerous district courts have likewise upheld FBAR penalties against Eighth Amendment challenges. See, e.g., Collins, 2021 WL at 456962 *9-11; Garrity, 2019 WL 1004584, at *1, *6-*9 (50% penalty); Schoenfeld, 344 F. Supp. 3d at 1359, 1375 (same); Crawford v. U.S. Dept. of Treas., 2015 WL 5697552, at *16 (S.D. Ohio 2015) (rejecting facial challenge).

The District Court correctly held that the Bajakajian factors lead to the same conclusion here. (Add-53-56.) First, Toth falls squarely within a class of individuals targeted by the BSA: Americans who avoided tax obligations by hiding assets in undisclosed foreign accounts. See H.R. Rep. No. 91-975, at 12-13; S. Rep. No. 108-192, at 108 (2003).

Second, Toth's penalty falls within the range of FBAR penalties set in §5321(a)(5)(C). Although the IRS assessed the maximum penalty for 2007, the statute authorizes a penalty for every year Toth held, but failed to disclose, the Account — i.e., the IRS could have imposed a penalty on Toth for each year from 1988 through 2009. The penalty imposed by the IRS therefore represents a fraction of the overall maximum statutory penalty. This Court has found penalties constitutional where they fell below the maximum statutory penalty. See, e.g., Emerson, 107 F.3d at 81; United States v. Pilgrim Market Corp., 944 F.2d 14, 22 (1st Cir. 1991); see also Pharaon v. Bd. of Governors of Fed. Reserve Sys., 135 F.3d 148, 157 (D.C. Cir. 1998). The penalty here is also not excessive when compared with potential criminal sanctions — including imprisonment of up to five years and a fine of up to $250,000 for an FBAR offense standing alone (and double that if there are other violations or a pattern of illegal activity). 31 U.S.C. §5322(a)-(b); Garrity, 2019 WL 1004584, at *7-8.

Third, although Toth seeks to downplay the seriousness of her actions and attendant harm (Br-48-50), those factors weigh against a finding of excessiveness.¹⁴ Congress enacted the BSA to combat crimes, including tax evasion, securities violations, and fraud (H.R. Rep. No. 91-975, at 12), and increased the maximum FBAR penalty because improving compliance was “vitally important” (S. Rep. No. 108-192, at 108). See Pimentel v. L.A., 974 F.3d 917, 924 (9th Cir. 2020) (harms other than monetary effect are relevant to assessing proportionality). In addition, because Toth acted willfully, her actions fall into the more serious category of FBAR violations. And Toth admits (Br-49; see also RA1060; RA3003-04 ¶17) that her failure to disclose her UBS account “reduced public revenues.” Bussell, 699 F. App'x at 696.

Congress based the willful FBAR penalty on the account balance and not the tax loss, reflecting a judgment that the harm to the tax system increases with larger balances. See Chaplin's, Inc., 646 F.3d at 852 (Congress “can distill the monetary value society places on harmful conduct”). Even if it were appropriate to correlate the FBAR penalty amount with the sustained tax loss for Eighth Amendment purposes, Toth has not shown that the penalty is disproportionate to many years of unpaid taxes and interest. Garrity, 2019 WL 1004585, at *9. Contrary to Toth's assertion, there is no basis to assume that the income tax deficiency assessed against her served to sanction her “in a manner consistent with her culpability and the amount of tax deficiency.” (Br-51.)¹⁵ Recognizing that the full harm to the Government from hidden accounts — including the costs of uncovering them — may be difficult to ascertain, Congress reasonably chose to use a formula based on the account's balance.

The Bajakajian factors therefore weigh heavily against Toth's Eighth Amendment claim. Toth asserts that a trial is necessary to decide her claim, but cites no case supporting that assertion. (Br-51-52.) Indeed, multiple cases have rejected Eighth Amendment claims without a trial. See, e.g., United States v. Viloski, 814 F.3d 104, 108 (2d Cir. 2016); Towers v. City of Chicago, 173 F.3d 619, 623-24 (7th Cir. 1999).

E. The 50% penalty does not violate the Due Process Clause

Toth asserts (Br-52-53) that her 50% penalty violated the Due Process Clause, citing BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996). However, the BMW test applies only to punitive damages, and not to amounts set by statute. Sony BMG Music Entertainment v. Tenenbaum, 719 F.3d 67, 70 (1st Cir. 2013) (statutory damages).

To the extent that Toth argues (Br-36) that she lacked adequate notice of her maximum penalty because of the superseded regulation, that claim fails because the 2004 statute, mandating a higher maximum penalty, clearly overrode that regulation. (Supra, 52-53.) §5321(a)(5)(C) provides notice of the maximum willful FBAR penalty: 50% of the account's balance for each year it was not reported. Toth was assessed a 50% penalty for only one year that the Account was not reported. “Because the assessed penalty falls far below the statutory maximum, [Toth] cannot claim that [s]he lacked constitutionally adequate notice.” Pharaon, 135 F.3d at 157. To the extent that Toth seeks to argue that the amount of the penalty violated due process (Br-52-53), the District Court is correct (Add-56-57) that the penalty satisfies due process for the same reasons that it survives Toth's Eighth Amendment excessiveness challenge. Cf. Sony BMG, 719 F.3d at 70 (statutory damages only violate due process if “'so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable'”) (citation omitted).

CONCLUSION

For the reasons discussed above, the judgment of the District Court should be affirmed.

Respectfully submitted,

DAVID A. HUBBERT
Acting Assistant Attorney General

FRANCESCA UGOLINI (202) 514-1882
Court of Appeals Bar. No. 1162474
BRUCE R. ELLISEN (202) 514-2929
Court of Appeals Bar. No. 21957
JENNIFER M. RUBIN (202) 307-0524
Court of Appeals Bar No.77022
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:
NATHANIEL R. MENDELL
Acting United States Attorney

JULY 7, 2021