Court Grants Default Judgment for Taxes, Lien Foreclosure

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
MEDFORD DIVISION

FINDINGS & RECOMMENDATION

CLARKE, Magistrate Judge.

Pursuant to Fed. R. Civ. P. 55(b), the United States of America ("United States"), moves this Court to enter default judgment against Stephen L. Chapman and Jeannette A. Fry. The United States moves the Court to reduce outstanding income tax assessments against Stephen L. Chapman to judgment and foreclose its federal tax liens against the Subject Property of this action. For the reasons stated below, the court recommends that the motion for default judgment (#25) be GRANTED. However, the State of Oregon is currently experiencing a state of emergency due to the novel coronavirus COVID-19 pandemic. The president has also declared a national state of emergency for the same reason. Therefore, the Court recommends that that the foreclosure and sale of the subject property be stayed until the state of emergency designations for the state and the nation have been lifted, or until further order of the Court.

BACKGROUND

According to the allegations in the Complaint and the declarations submitted by the United States, defendant Stephen L. Chapman failed to timely file income tax returns for the taxable years 2004 through 2007, and the IRS made assessments pursuant to 26 U.S.C. § 6020(b). Subsequently, Chapman filed untimely income tax returns for the taxable years 2004 through 2007, the IRS accepted these returns as filed, and adjusted the assessments against Chapman accordingly. Humphrey Decl., at ¶ 6. Chapman filed untimely income tax returns for the taxable years 2008, 2010, and 2011, the returns were accepted as filed, and the IRS made assessments accordingly. Humphrey Decl., at ¶ 6.

A duly authorized delegate of the Secretary of Treasury made timely assessments against Chapman, for unpaid federal income taxes, for the taxable years 2004 through 2008 and 2010 through 2011 ("years at issue"). Dkt. No. 1, at ¶ 14; Humphrey Decl., at ¶ 5. All the assessments for the years at issue are based on Chapman’s self-reported filed returns. Humphrey Decl., at ¶ 6. Pursuant to 26 U.S.C. §§ 6321 and 6322, federal tax liens for unpaid tax liabilities have arisen against and attached to all property and rights to property of Defendant Chapman as of the dates of the assessments described in above. In addition, said liens immediately attached to all after-acquired property or rights to property.

Despite timely notice and demand for payment of the tax assessments described above, Chapman has neglected or refused to make full payment of the assessed amounts to the United States. Compl. at ¶ 15; Humphrey Decl., at ¶ 7. As of February 28, 2020, there remains due and owing $87,907.64, plus such additional amounts which continue to accrue as provided by law. Humphrey Decl., at ¶ 17.

The Subject Property is commonly referred to as 2210 Temple Drive, Medford, OR 97504, and legally described as:

Compl. (#1) at 1 ¶ 9.

On or about September 28, 2007, Jeannette A. Fry and Chapman acquired interest in the Subject Property through a Warranty Deed-Survivorship-Statutory Form. The Warranty Deed was recorded with Jackson County, Oregon on September 28, 2007. Compl. at ¶ 12; Exhibit A to Valdman Decl., at p. 4.

The IRS filed the following Notices with the Jackson County Recorder, against Chapman for his income tax liabilities:

a. On December 28, 2010, a Notice of Federal Tax Lien was filed with Jackson County, Oregon, against Defendant Stephen L. Chapman for his unpaid federal income tax liabilities for the taxable years 2004 through 2007.

b. On October 16, 2012, a Notice of Federal Tax Lien was filed with Jackson County, Oregon, against Defendant Stephen L. Chapman for his unpaid federal income tax liabilities for the taxable years 2008 and 2010 through 2011.

c. On July 23, 2019, a Notice of Federal Tax Lien Refile was filed with Jackson County, Oregon, against Defendant Stephen L. Chapman for his unpaid federal income tax liabilities for the taxable years 2004 through 2007.

Compl. at ¶ 20-22; Humphrey Decl., ¶ 8; Exhibit 2 to Humphrey Decl. The Notices attached to Chapman’s interest in the Subject Property.

LEGAL STANDARD

The decision to grant or deny a motion for default judgment is within the discretion of the court. Draper v. Coombs, 792 F.2d 915, 924 (9th Cir. 1986). In exercising its discretion, the court must consider seven factors: (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 favoring decisions on the merits. Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986).

Upon entry of default, plaintiff’s well-pleaded allegations of fact regarding liability, except allegations relating to the amount of damages, will be taken as true. Geddes v. United Fin-Group, 559 F.2d 557, 560 (9th Cir. 1978). Plaintiff must establish damages by proof, unless the amount is liquidated or otherwise susceptible of computation. Davis v. Fendler, 650 F.2d 1154, 1161 (9th Cir. 1981) (internal citation omitted). Relief for cases of default judgment "must not differ in kind from, or exceed in amount, what is demanded in the pleadings." Rule 54(c).

DISCUSSION

I. The Motion for Default Judgment should be granted.

The Eitel factors weigh in favor of entering default judgment against defendant Chapman and defendant Frye. First, if default judgment were not granted, The United States would suffer prejudice by being unable to collect unpaid taxes from a delinquent taxpayer.

In addition, Jeannette A. Fry was named as a party to this action because she may have claimed an interest in the Subject Property under 26 U.S.C. § 7403(b). Compl., at ¶ 7. First, Ms. Fry did not claim an interest in the Subject Property, even after default was entered against her, and as such she effectively disclaimed any interest in the Subject Property. Second, even if Ms. Fry had an interest in the Subject Property, the United States would be entitled to sell it in order to satisfy the outstanding liabilities of Mr. Chapman. Under 26 U.S.C. § 7403, once it is established that the United States has liens upon certain property, the United States may foreclose those liens, sell the property, and apply the proceeds toward the tax liens at issue. United States v. Craft, 535 U.S. 274 (2002); United States v. Rodgers, 461 U.S. 677, 693-94 (1983). This is true even if a third party, along with the delinquent taxpayer, holds an interest in the encumbered real property. 26 U.S.C. § 7403; Rodgers, 461 U.S. at 699-700. Ms. Fry had ample opportunity to appear and state any claim in this case, but she chose not to do so, and has not claimed any interest. Under these circumstances, if the United States is precluded from foreclosing on the Subject Property, it will not be able to collect on Mr. Chapman’s tax liabilities and will be prejudiced as a result. This factor weighs in favor of default judgment.

The next two Eitel factors consider the merits of plaintiff’s claim and the sufficiency of the complaint. These two Eitel factors require the plaintiff to "state a claim on which [it] may recover." Garcia v. Pacwest Contracting LLC, 2016 WL 526236, *3 (D. Or. Feb 9, 2016) (citing Banning v. Lavine, 572 F.2d 1386, 1388 (9th Cir. 1978)). Since the Clerk of the Court has entered default, the well-pleaded allegations of the complaint are taken as true and are binding against the defaulting party. Garcia, 2016 WL 526236 at *1 (citing Televideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917 (9th Cir. 1987). Thus, the question is whether the United States is entitled to recover on the facts set forth in the complaint.

As a matter of law, the United States has proven that its federal tax assessments against Mr. Chapman for the years at issue should be reduced to judgment. The Government may satisfy its initial burden by introducing proof of the tax assessments, which are entitled to a presumption of correctness. See Palmer v. Internal Revenue Service, 116 F.3d 1309, 1312 (9th Cir. 1997). As a matter of law, the United States has proven that its federal tax assessments against Mr. Chapman for the years at issue should be reduced to judgment. The Government may satisfy its initial burden by introducing proof of the tax assessments, which are entitled to a presumption of correctness. See Palmer v. Internal Revenue Service, 116 F.3d 1309, 1312 (9th Cir. 1997). The United States has met this burden through the introduction of Forms 4340 for the years at issue. See Ex. 1 to the Humphrey Decl.

Moreover, the Forms 4340 are supported by a minimal evidentiary foundation because the assessments made against Mr. Chapman for the years at issue are all based on his filed returns. See United States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983). Statements made in an income tax return constitute admissions. See Rankin v. Comm’r, 72 T.C.M. (CCH) 289 (T.C. 1996), aff’d, 138 F.3d 1286 (9th Cir. 1998); See also Waring v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969). The Statements in the Humphrey Decl., in addition to the Forms 4340, show that Mr. Chapman admitted to owing the assessed amounts of tax to the IRS during the years at issue. As such, the United States has met its burden.

After the United States establishes its prima facie case, the taxpayers must come forward and produce evidence to show that the assessment was incorrect. See United States v. Jones, 33 F.3d 1137, 1139 (9th Cir. 1994); see also Higginbotham v. United States, 556 F.2d 1173, 1176 (4th Cir. 1977). Mr. Chapman had ample opportunity to appear in this action and contest the assessments against him, but he has not done so.

The United States asserts a claim for collection of unpaid taxes owed by Mr. Chapman. Additionally, the Complaint, as supported by the Humphrey Decl. and Valdman Decl., and exhibits thereto, shows that Stephen L. Chapman is the owner of the Subject Property. It also shows that the United States has recorded Notices of Federal Tax Liens against Mr. Chapman, that attach to his interest in the Subject Property. Consequently, the United States has shown that the federal tax liens against Mr. Chapman should be foreclosed through the sale of the Subject Property. Further, Jeannette A. Fry had ample opportunity to claim an interest in the Subject Property, but she has not done so. As such, the United States should be able to sell the Subject Property free of any interests she may claim, and apply the proceeds towards Mr. Chapman’s tax liabilities.

Accepting all of these factual allegations as true, as the Court must in deciding a motion for default judgment, the United States has sufficiently pleaded a claim for the collection of unpaid taxes, as well as a claim for the foreclosure and sale of the subject property. Factors two and three therefore weigh in favor of default judgment.

Under the fourth Eitel factor, the Court must consider the sum of money at stake in the action. When addressing this factor in the context of a monetary damages claim, a Court typically considers "the sum of money in relation to the seriousness of [the defaulting party’s] conduct." Garcia, 2016 WL 526236 at *3 (citing PepsiCo, Inc. v. California Sec. Cans, 238 F.Supp.2d 1172, 1177 (C.D. Cal. 2002)).

The United States seeks to collect over $87,000 from Mr. Chapman, which it concedes is substantial. However, the United States has shown why the tax assessments against Mr. Chapman accurately state his income tax liabilities, thereby articulating a concrete basis for its claims. Cf. Penpower Tech. Ltd. v. S.P.C Tech., 627 F. Supp. 2d 1083, 1092 (N.D. Cal. 2008) (finding factor to weigh against entry of default judgment where amount of money sought was substantial and where plaintiff could not pinpoint actual losses). Further, Mr. Chapman should not be entitled to evade a judgment because he owes a great deal, rather than only a little. Jeannette A. Fry is also not entitled to evade a judgment simply because she chose not to appear in this action. Consequently, this factor is neutral.

Under the fifth factor cited in Eitel, the Court must consider the possibility of a dispute concerning material facts. When a party is in default, the well-pleaded allegations of the complaint, other than those as to the amount of damages, are taken as true. See Fathers & Daughters Nevada, LLC, 2017 WL 2378358 at *1; Garcia, 2016 WL 526236 at *4. In this case, as detailed above, Mr. Chapman and Ms. Fry both had ample opportunity to assert any claim in this proceeding and to provide testimony or evidence in support of any claim they may have. However, they chose not to do so. Therefore, this factor weighs in favor of default judgment.

Under the sixth factor cited in Eitel, the Court must consider whether the default is due to excusable neglect. This factor favors default judgment when the defendant has been properly served or the plaintiff demonstrates that the defendant is aware of the lawsuit. Id. (concluding that this factor favored default judgment and "possibility of excusable neglect is remote" where defendant had been properly served). Here, Mr. Chapman and Ms. Fry were both properly served with the Summons and Complaint. Further, they were kept apprised of the developments in this case, and the United States sent them copies of filed pleadings. See Dkt. No. 8-10, 13-16, 20-23. In this case, it is clear that Mr. Chapman’s and Ms. Fry’s default was not due to excusable neglect. This factor weight in favor of default judgment.

Under the final factor cited in Eitel, the Court must consider the strong policy favoring decisions on the merits. I Although, "[c]ases should be decided upon their merits whenever reasonably possible," Eitel, 782 F.2d at 1472, "Rule 55(a) allows a court to decide a case before the merits are heard if defendant fails to appear and defend." Landstar Ranger, 725 F.Supp.2d at 922. Notwithstanding the strong policy presumption in favor of a decision on the merits, where a defendant fails to appear and respond as occurred here, a decision on the merits is impossible and default judgment is appropriate. Thus, this factor weighs in favor of default judgment.

As indicated above, the seven Eitel factors weigh in favor of the Plaintiff and default judgment should be granted.

II. Damages

Although a party’s default conclusively establishes that party’s liability, it does not establish the amount of damages. U.S. ex rel Hajoca Corp. v. Aeroplate Corp., 2013 WL 3729692, *7 (E.D. Cal. 2013) (citing Geddes v. United Fin. Group, 559 F.2d 557, 560 (9th Cir. 1977)). Therefore, the question of damages must be considered separately. Id.

The filed Complaint seeks recovery of unpaid taxes against Stephen L. Chapman in the amount of $87,907.64, for the taxable years 2004 through 2008 and 2010 through 2011, as of February 28,2020, plus further accrued penalties and interest accruing after that date, pursuant to 26 U.S.C. §§ 6601, 6621, and 6622, and 28 U.S.C. § 1961(c). The tax liabilities by year sought by the United States are detailed in Plaintiff’s motion and the Court has determined they are both reasonable and supported by the record. Judgment should be entered in this amount.

RECOMMENDATION

For the reasons stated above, the Court recommends that the United States’ motion for default judgment be granted, and that the following relief be granted:

However, due to the COVID-19 Pandemic, execution of the relief recommended in (5), above, namely the foreclosure and sale of the subject property, should be stayed until the state of emergency designations for the state and the nation have been lifted, or until further order of the Court.

This recommendation is not an order that is immediately appealable to the Ninth Circuit Court of Appeals. Any notice of appeal pursuant to Federal Rule of Appellate Procedure Rule 4(a)(1) should not be filed until entry of the district court’s judgment or appealable order.

The Report and Recommendation will be referred to a district judge. Objections to this Report and Recommendation, if any, are due fourteen (14) days from today’s date. If objections are filed, any response to the objections is due fourteen (14) days from the date of the objections. See FED. R. CIV. P. 72, 6.

DATED this 2^nd day of April, 2020.

MARK D. CLARKE
United States Magistrate Judge