has been submitted to the Court since pointing to an opposite conclusion. Assuming the Formas defeat this presumption fully and prevail, dismissing the counterclaim would leave them in the exact incongruous position discussed in Freeman. Furthermore, their claim for a large portion of the moneys collected may very well be time-barred. The Government therefore could retain a significant amount of money to which it is not entitled, a result repugnant to the equitable principles set forth in the line of cases discussed above. See, e.g., Bull, 295 U.S. at 261-62; Lewis, 284 U.S. at 283.
The Government argues that the Formas should not be able to recover the previous payments made on the contested assessments even if the Formas prevail. However, the transactions at issue are indeed the tax years at issue. See 15 Mertens Law of Federal Income Taxation § 58.91, at 58-144 (1991). By placing the tax years at issue before the Court, the Government opened up the assessments at issue to the Court's jurisdiction, and now may not complain that the relief that may be granted is not what was expected when the suit was first filed. Accord Bull, 295 U.S. at 260 ("If that which the sovereign retains was unjustly taken in violation of its own statute, the withholding is wrongful. Restitution is owed the taxpayer."); Estate of Vitt v. United States, 706 F.2d 871, 874 (8th Cir. 1983) (upholding affirmative recovery of tax wrongfully held on equitable recoupment grounds). The Government's motion to vacate and dismiss the counterclaim for want of subject matter jurisdiction is therefore denied.
II. The Actions of the Special AUSA
The Government argues that the default judgment is void also because the Special AUSA lacked the authority to compromise its position. See Fed. R. Civ. P. 60(b)(4). In doing so, the Government principally relies on United States v. Beebe, 180 U.S. 343, 45 L. Ed. 563, 21 S. Ct. 371 (1901), and Land Mine Enterprises v. Sylvester Builders, Inc., 81 Civ. 931, slip op. (S.D.N.Y. July 31, 1985). Both of these cases are distinguishable from the present situation.
In Beebe, an attorney for the United States settled without authority a tax matter in favor of a taxpayer. The Supreme Court held that such a settlement could be vacated, not because the judgment was void, see 180 U.S. at 350-51, but because an attorney for any party, private or public, lacks the power to enter into a settlement on a party's behalf without the consent of that party. Id. at 351-52.
Likewise in Land Mine, an AUSA entered into a settlement that required the United States to pay out $ 1,800,000 in return for the dismissal of the claims against it. The settlement was never approved by a Deputy Attorney General, as required by regulation. Slip op. at 1-2. The court vacated the settlement, finding that the AUSA lacked the authority to enter into the settlement and rejecting the argument that the Government should be estopped from denying the acts of its agent. Id. at 5-7.
Once a tax matter is referred to the Department of Justice, only the Attorney General or a person to whom authority has been delegated by the Attorney General may settle the matter. 26 U.S.C. § 7122. Authority to settle matters of $ 200,000 or less is delegated to "the Chiefs of the Civil Trial, the Claims Court Section and the Office of Special Litigation," 28 C.F.R. pt. O, subpt. Y, app., tax div. direct. 82, § 2, while the authority to settle higher amounts is delegated to the Chief of the Office of Review and the Deputy Assistant Attorney Generals, id. §§ 6, 7. The Government asserts that the Special AUSA lacked authority to settle the matter and therefore lacked authority to consent to the entry of the default judgment.
Here, however, there was no settlement. It appears that all efforts at arriving at a settlement failed and that the Formas reinstated their claim to protect their interests. Only when the Government failed to respond was a default judgment entered. That the Special AUSA stated the Government would not oppose the default does not establish that the parties entered into a settlement. Furthermore, it appears from the record that others within the United States Attorney's Office and the Internal Revenue Service were aware of the status of the case. The Special AUSA's actions were part and parcel of his activities in defending against the counterclaim; as such, the Government is bound by them. See Heim v. Commissioner, 872 F.2d 245, 247-48 (8th Cir. 1989); A. Duda & Sons Cooperative Ass'n v. United States, 504 F.2d 970, 975-76 (5th Cir. 1974).
Additionally, the Court in Beebe did not state that settlements entered into without authority were void per se. It only stated that an action could be brought to set aside such a settlement. See 180 U.S. at 351. The Government needs to find some other provision of Rule 60(b) to rely on besides the fourth in arguing for the judgment to be set aside.
III. Mistake, Inadvertence, Surprise or Excusable Neglect
Under Rule 60(b)(1), a judgment may be vacated for "mistake, inadvertence, surprise, or excusable neglect." Fed. R. Civ. P. 60(b)(1). There are three requirements to consider when deciding whether to set aside the entry of a default: (1) whether the default was wilful; (2) whether the moving party has presented a meritorious defense; and (3) whether the opposing party would be prejudiced. Davis v. Musler, 713 F.2d 907, 915 (2d Cir. 1983); Sony Corp. v. S.W.I. Trading, Inc., 104 F.R.D. 535, 539 (S.D.N.Y. 1985); cf. Marziliano v. Heckler, 728 F.2d 151, 156 (2d Cir. 1984) (applying these factors to Rule 55(c)'s "good cause" provision).
Here, the Government did not oppose the entry of judgment, and its actions through the end of September 1991 indicate that this was a wilful act. Litigation of the matter had proceeded to an advanced stage. Motion practice was essentially complete and the case placed on the Court's Ready Trial Calendar. By motion of the parties, it was taken off that calendar and restored to active status only after the Formas made an unopposed motion. There appears to have been much deliberation by the Government over the course of the summer of 1991, but no substantive opposition to the default entered until September. The lack of opposition therefore appears to have been wilful.
Secondly, the Government has failed to indicate that it has a meritorious defense. The Government's principal defense is that the Court lacked subject matter jurisdiction over the counterclaim. This argument was rejected above. See supra. Another is that the Special AUSA lacked the authority to compromise the Government's position. This too was rejected. See supra. The Government also suggests that it "could demonstrate that the assessments were in fact properly made," and that "the Court has already considered the evidence put forth by the defendants on this issue and denied them summary judgment." Memorandum of Law 26 (Oct. 7, 1991); see also Reply Memorandum 23 (Nov. 26, 1991). This does not accord with Judge Walker's prior opinion in this matter. Judge Walker in fact denied the Formas' motion to dismiss on the pleadings. See Forma, slip op. at 5. As to the Government's summary judgment motion, Judge Walker expressed serious doubt about the Government's ability to ultimately prevail in this action in denying its motion, and the Government has not presented anything since then disproving this notion. See id. at 8-9.
Finally, it should be noted that the Formas have expended much energy in attempting to end this litigation. Vacating the judgment would seriously prejudice their efforts over the course of the past year. See Marziliano, 728 F.2d at 157.
Relief pursuant to Rule 60(b)(1) is not warranted.
Davis is distinguishable. There, the Second Circuit stated that "it has never hesitated to reverse the denial of a motion to vacate a default judgment where further factfinding was necessary to ensure that substantial justice was served." 713 F.2d at 916. Because the Government's motion for a hearing pursuant to Rule 55(e) is granted, see infra, and because the Government's claim was dismissed without prejudice, it is likely that the hearing on damages will be dispositive of all the claims at issue and provide the requisite factfinding to ensure that justice is served.
Nor does the Special AUSA's conduct rise to a level mandating vacatur under Rule 60(b)(6). In general, "neither ignorance nor carelessness on the part of an attorney will provide grounds for Rule 60(b) relief." C.K.S. Engineers, Inc. v. White Mountain Gypsum Co., 726 F.2d 1202, 1207 (7th Cir. 1984); United States v. Thompson, 438 F.2d 254, 256 (8th Cir. 1971); cf. Link v. Wabash R.R. Co., 370 U.S. 626, 633-34, 8 L. Ed. 2d 734, 82 S. Ct. 1386 . Even if an attorney's conduct can be characterized as "grossly negligent," such relief is not proper. See Heim, 872 F.2d at 248. Relief pursuant to Rule 60(b)(6) is not warranted.
IV. Rule 55(e)
Rule 55(e) requires a party to establish its claim against the Government by satisfactory evidence. Fed. R. Civ. P. 55(e); see Marziliano, 728 F.2d 151. "The Rule rests on the rationale that the taxpayers at large should not be subjected to the cost of a judgment entered as a penalty against a government official which comes as a windfall to the individual litigant." Campbell v. Eastland, 307 F.2d 478, 491 (5th Cir. 1962); accord Marziliano, 728 F.2d at 157-58. Although a hearing on the matter is preferred, one is not necessary if there is an adequate basis in the record for awarding the default. Id. at 158.
The Formas seek an award for the taxes they have paid to satisfy allegedly false assessments for the 1977, 1978, and 1982 tax years and for the damages allegedly suffered in the sale of their house. Whether the assessments were improper has not been factually established, and whether the Formas are entitled to damages from the sale of the house is a matter of contention that need not be resolved at this juncture. Rather, a hearing should be held to determine whether the Formas' are entitled to the damages sought.
The Court erred in failing to schedule this hearing, even though the provisions of Rule 55(e) were not pointed out nor was a hearing pursuant to the rule requested by the Government. Therefore, pursuant to Rule 60(a), the default judgment is vacated for the limited purpose of holding a hearing pursuant to Rule 55(e).
For the reasons set forth above, the Government's motion to vacate the default judgment entered against it pursuant to Rules 55 and 60(b) is denied. The judgment is vacated pursuant to Rule 60(a) for the limited purpose of holding a hearing pursuant to Rule 55(e).
It is so ordered.
New York, N. Y., February 26, 1992
ROBERT W. SWEET