The opinion of the court was delivered by: ROBERT W. SWEET
The United States of America (the "Government") has moved to vacate the prior judgment and order against it pursuant to Rule 55 or Rule 60 of the Federal Rules of Civil Procedure, and for an order dismissing the counterclaim brought against it by John and Patricia Forma (the "Formas") for lack of subject matter jurisdiction. Fed. R. Civ. P. 12(h)(3). In the alternative, the Government seeks to vacate the prior judgment and order against it for further proceedings or for a hearing pursuant to Rule 55(e).
For the reasons set forth below, the Government's motion to dismiss the Formas' counterclaim is denied. The motion to vacate the Court's previous order and for a hearing pursuant to Rule 55(e) is granted.
Prior Proceedings and Facts
The Government filed a complaint against the Formas in September 1988. The complaint alleges in its first two counts that John Forma owed the Government back taxes, interest, and penalties for 1977 and 1978, and in its third count that John and Patricia Forma both owed the same for 1982. In all three counts, the Government alleges that tax deficiency assessments were made and that notice of these assessments was duly served on the Defendants. Complaint PP8, 9, 13, 14, 18, 19. The Government also alleges in Counts 1 and 2 that John Forma executed a number of IRS Form 872's extending the statute of limitations period for assessing his income tax liability for 1977 and 1978. The assessments for 1977 and 1978 allegedly were made within the allowable period.
The Defendants first moved to dismiss the complaint for failure to state a claim pursuant to Rule 12(b)(6). The Government opposed this motion and filed its own motion for summary judgment. The Formas conceded the validity of the assessment for 1982 (the complaint's third count) and all but $ 29,804 of the 1978 assessment.
The Honorable John M. Walker denied both motions on the remaining claims in an opinion dated November 13, 1989. United States v. Forma, 88 Civ. 6458, slip op. (S.D.N.Y. Nov. 13, 1989).
As to the Defendants' motion, Judge Walker found that the Complaint facially stated a valid claim. Id. at 5. The Defendants argued that the Government had failed to comply with the statutory requirements by not filing a summary record of the assessment, known as a Form 23-C, and by not mailing a notice of deficiency to Forma. See 26 U.S.C. ("IRC") § 6213(a). Judge Walker noted that the Government was not obligated to plead compliance with the statute but would be obligated to produce these records if and when the Defendants moved for summary judgment.
In making its argument for summary judgment, the Government contended that Forma had waived the requirement that a notice of deficiency be sent to him by executing three IRS Forms 870 (Offer of Waiver of Restrictions on Assessment and Collection of Tax and of Acceptance of Overassessment). See IRC § 6213(d). Forma stated that he never signed the waivers
and the Government was unable to produce the disputed documents. Judge Walker thus found that there was a triable issue of fact and denied the Government's motion for summary judgment as well. Forma, slip op. at 8.
Judge Walker was elevated to the Second Circuit soon after issuing the opinion. The case was then transferred to this docket for further proceedings.
Settlement conferences were then held between the parties, but to no avail. The Formas moved on September 13, 1990, for leave to file an amended answer. The motion was unopposed by the Government and thus granted on September 28, 1990. The amended answer was filed on October 12, 1990, and included a counter-claim for $ 250,000 plus interests and costs. The $ 250,000 includes $ 149,282.52 allegedly paid toward satisfying the disputed assessments, and over $ 100,000 for damages suffered from the "forced" sale of the Formas' residence.
The action was soon placed on the Court's Ready Trial List. Before it was called, the Government and the Formas entered into a stipulation "suspending" the action for sixty days. The stipulation was signed on December 13, 1990, and provided that either party could move to reinstate the action upon notice.
The Chief of the Tax Unit ("Tax Unit Chief") contends that he first learned of the Formas' counterclaim and of the entry of the default judgment in June 1991. The Special AUSA allegedly lacked the authority to consent to the default judgment and was instructed to move for vacatur of the judgment.
The Formas, meanwhile, encountered difficulties in enforcing their judgment. The Internal Revenue Service (the "Service") told the Formas' counsel that the United States Attorney's Office was considering an appeal. At a conference held before the Honorable Sharon E. Grubin, to whom the matter had been referred for a determination on damages, on July 17, 1991, the Formas related their difficulties with the Service. The Special AUSA represented that there would be no appeal, and Magistrate Judge Grubin asked him to write a letter stating so on the Formas' behalf. The letter was written on July 25, 1991, and sent to the Service. The Government now contends that the letter was never approved and that it does not appear within its master file of letters.
The Formas were still unable to collect their judgment. They therefore brought an Order to Show Cause on September 10, 1991, seeking a mandatory injunction against the Service to heed the judgment and a contempt order. On September 16, the Special AUSA served a motion to vacate the judgment. The Government's principal argument was that the Special AUSA had exceeded his authority and ignored office policy in consenting to the entry of the default judgment. The Government now contends that the Special AUSA failed to notify his superiors of the Order to Show Cause, even though it was served upon the United States Attorney's Office, and that the memorandum of law and declaration submitted in support of the Government's motion were not approved by the Tax Unit Chief, as required by office policy.
Oral argument was heard on both parties' motions on September 20, 1991. That day, the Government's motion was denied and an order signed directing the Service to satisfy the Judgment of $ 158,262.90 signed in June, to vacate all liens filed against the Formas property and income with respect to the underlying claims in this action, and to cease all collection efforts against the Formas with respect to these claims. The motion for contempt was denied at that time, but a hearing was scheduled for October 7, 1991, on the contempt application provided the Service had not complied with the order by that date. The Government alleges that it did not learn of this order until it was faxed to the Service.
On October 1, 1991, another Assistant United States Attorney wrote the Court to inform it that he was replacing the Special AUSA as the Government's counsel and to seek an extension of time pursuant to Rule 6(b) within which it could conform with the order of September 20 and to file the motion presently under consideration. The Government's Rule 6(b) motion was granted on the condition that it file the motion by October 7, 1991, which it did. Oral argument was heard on December 26, 1991, and the motion considered submitted as of that date.
The default judgment which the Government seeks to vacate was entered pursuant to Rule 55(b)(2) of the Federal Rules of Civil Procedure. Rule 55 provides in pertinent part:
(a) Entry. When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by these rules and that fact is made to appear by affidavit or ...