Opinion
CIVIL ACTION NO. 6:95cv837
March 3, 2004
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The above styled case was tried on December 9, 2003, in Tyler, Texas, on remand from Gandy et al. v. United States, 318 F.3d 631, 631 (5th Cir. 2003) ("Gandy 1") before the undersigned United States Magistrate Judge. The sole issue tried was for damages, if any, from the unlawful filing of four federal tax liens in April and September of 1995.
An advisory jury heard the evidence and recommended damages of $9,000 for Dennis C. Gandy d/b/a Gandy Nursery from the filing of the April and September 1995 liens. The advisory jury also recommended damages of $388,500 for Gandy Marketing and Trucking, Inc. from the filing of the April and September 1995 liens. After due consideration, the Court makes the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
1. This case was tried before the Court and an advisory jury, and, on May 31, 2001, this Court entered Amended Findings of Fact and Conclusions of Law awarding tax refunds to plaintiff Dennis Gandy of $105.63. The Court also awarded plaintiff Gandy Marketing and Trucking, Inc. damages under 26 U.S.C. § 7432 of $16,800.00, and was without jurisdiction to consider plaintiffs 26 U.S.C. § 7433 claims. All parties appealed, but the United States subsequently withdrew its appeal.
2. On January 8, 2003, the Fifth Circuit Court of Appeals affirmed this Court's judgment as it relates to the refund actions and the claims under 26 U.S.C. § 7432. The appellate court, however, remanded this case "for further consideration regarding whether the filing of the April 1995 and September 1995 liens may constitute unauthorized collection actions under Section 7433," and if appropriate, to determine "damages with respect to the filing of these 1995 liens." Gandy Nursery, Inc. v. United States, 318 F.3d 631, 630-631 (5th Cir. 2003).
3. After extensive briefing by both parties on the remand issues, a telephone hearing was held in this Court on August 20, 2003. After due consideration of each parties' Briefs and Argument, this Court held that the United States is liable as a matter of law as to the issue of whether the filing of the April and September 1995 liens constituted unauthorized collection actions under 26 U.S.C. § 7433 (Doc. #213).
4. The Court finds that the evidence supports that "[c]ertain penalties that had been abated by the Austin IRS Service Center were again reassessed against the Plaintiffs without notice or demand as required under 26 U.S.C. § 6201, 6212, 6303." Amended Findings of Fact at ¶ 53.
5. The Court finds that the evidence supports that "[t]he IRS office in Tyler later reassessed penalties against the Plaintiffs and placed penalties and interest back on the transcripts without providing proper notice and demand." Amended Findings of Fact at ¶ 55.
6. The Court finds that the evidence supports that "[i]n order for an assessment and collection of taxes by the IRS to be valid under law, the IRS must provide notice and demand as required under 26 U.S.C. § 6201, 6212, 6303." Amended Conclusions of Law at ¶ 14.
7. The Court finds that the evidence supports that "[i]n order for a lien to be placed on a taxpayer, the IRS must first conduct a valid assessment." Amended Conclusions of Law at ¶ 13.
8. The Court's Scheduling Order required disclosures pursuant to FCRP 26(a)(1) for fact witnesses on October 8, 2003. The Court's Scheduling Order also required disclosures of expert witnesses pursuant to FCRP 26(a)(2) on October 15, 2003. The government did not timely disclose any fact or expert witness.
9. On December 9, 2003, this Court held a second trial, also with an advisory jury, on the sole issue, to determine damages, if any, from the unlawful filing of the four federal tax liens in April and September of 1995.
10. On December 4, 2003, plaintiffs filed a Motion In Limine to Prohibit Witnesses Not Disclosed During Discovery (Doc. #225). After due consideration, the Court granted the Motion (Doc. # 239).
11. On December 4, 2003, plaintiffs filed a Motion In Limine to Prohibit Evidence of Individual Tax Liability that arose after the time period involved in this matter (Doc. # 226). After due consideration, the Court granted the Motion (Doc, # 240).
12. On December 4, 2003, plaintiffs filed a Motion In Limine to Prohibit Evidence of Prior Criminal Record more than ten (10) years old (Doc. # 227). After due consideration, the Court granted the Motion (Doc. # 242).
13. On December 4, 2003, plaintiffs filed a Motion In Limine to Prohibit Defendant's Counsel from Disclosing Prior Jury Award (Doc. #228). After due consideration, the Court granted the Motion (Doc, #241).
14. No instructions were proposed by the United States as the United States' Proposed Jury Instructions were lodged out of time and without leave of the Court. (Doc. Filed on December 5, 2003). Neither party objected to the instructions given by the Court.
15. The parties stipulated at trial that four (4) liens were filed against plaintiffs Dennis C. Gandy d/b/a Gandy Nursery and Gandy Marketing and Trucking, Inc.
16. Testimony and evidence was limited to the period of April 15, 1995 to August 19, 1996 for damages under IRC § 7433.
17. At Special Interrogatory 1, the advisory jury recommended from a preponderance of the evidence that Dennis C. Gandy d/b/a Gandy Nursery be awarded damages of $9,000.00.
18. At Special Interrogatory 2, the advisory jury recommended that Gandy Marketing and Trucking, Inc. be awarded damages of $388,500.00.
19. Mr. Gandy testified that he began growing trees in 1971, and that in the early 1990s he reorganized his business under several corporations and limited partnerships for liability purposes (collectively "Gandy Nursery").
20. When doing business under various entities, lenders and creditors required Mr. Gandy individually, as well as each entity, to be liable for any loans.
21. Mr. Gandy individually guaranteed that all bank loans were cross collateralized between the various entities comprising Gandy Nursery.
22. In 1994, Gandy Nursery purchased the Prairie Springs Nursery at a sheriff's sale. Prior to the sheriff's sale, all the useful assets of the Prairie Springs Nursery had been removed by the bank.
23. In October of 1994, Gandy Nursery purchased 50 additional acres adjoining the Prairie Springs Nursery.
24. In order to make the Prairie Springs Nursery profitable, Gandy Nursery needed an additional $1,000,000.00 in working capital in order to purchase inventory, install irrigation and hire additional workers.
25. Gandy Nursery's historical return on capital was between 25% — 35%.
26. Gandy Nursery was approached by Mr. Larry Reed, a banker with Emory Bank, who offered to loan Gandy Marketing and Trucking, Inc. additional working capital of $1,000,000.00 for the Prairie Springs Nursery.
27. Mr. Reed also offered more favorable terms on an existing line of credit for a $1,000,000.00 loan than Gandy Nursery's current lender by a point percentage reduction in the interest rate charged.
28. The Emory Bank loan was to be secured by a $1,000,000.00 certificate of deposit and land owned by Gandy Real Estate, Limited. These assets were currently being used to secure the existing loan. A phase in period was anticipated as the original loan was repaid.
29. The additional $1,000,000.00 in working capital was for the Prairie Springs Nursery to make improvements such as additional green houses, irrigation for the greenhouses and acreage, and the purchase of inventory to bring the Prairie Springs Nursery into immediate production.
30. Emory Bank, however, turned down the loans when the April 1995 tax liens were discovered during due diligence by the bank's loan committee.
31. Due to these tax liens, Gandy Marketing and Trucking, Inc. was not able to borrow the additional working capital to bring the Prairie Springs Nursery into immediate production and had to slowly bring the nursery into production over three years based on his limited cash flow.
32. Mr. Gandy testified that had he received the additional working capital and refinanced his existing loans under more favorable terms, where Gandy Nursery would have saved two (2) to three (3) years in bringing the Prairie Spring Nursery on line, thereby generating an additional $5,000,000.00 to $6,000,000.00 in gross income.
33. Mr. Reed has over thirty (30) years experience as a banker. From 1973 to 1994, he worked for Production Credit Association ("PCA"), Gandy Nursery's original Bank, and was a senior vice-president for over fifteen (15) years.
34. Mr. Reed first solicited the banking business of Gandy Nursery in 1976 on behalf of PCA.
35. In 1994, Gandy Nursery had a letter of credit revolving loan account with PCA for $1,000,000.00 secured by $1,000,000.00 certificate of deposit.
36. PCA required all Gandy Nursery corporations and partnerships to be personally liable for the loan and required a personal guaranty from Gandy as well. All bank loans by PCA were cross collateralized between all the Gandy Nursery entities and PCA held a blanket lien as collateral on all Gandy assets.
37. In 1994, Mr. Reed left PCA and began working for Emory bank.
38. In the summer of 1995, Mr. Reed proposed more favorable lending terms for the Gandy Nursery letter of credit revolving loan. Mr. Reed offered Gandy Nursery a one point percentage reduction in the interest rate charged by PCA.
39. Mr. Reed offered to extend a $1,000,000.00 loan to Gandy Nursery for working capital related to a recent purchase by Gandy Nursery of the Prairie Springs Nursery which was purchased at a sheriff's sale.
40. Mr. Reed considered Gandy Nursery to be a good credit risk based on cash flow, character, credit, the purpose of the loan, and collateral.
41. Mr. Reed testified that Gandy Marketing and Trucking, Inc. requested the new loan which Mr. Gandy would guarantee.
42. Mr. Reed testified that Emory Bank required all the Gandy Nursery entities to personally guarantee the new loans and cross collateralize the loan under a blanket lien.
43. Mr. Reed testified that the bank loan committee refused to extend the financing to Mr. Gandy and Gandy Marketing and Trucking, Inc. when it discovered the April 1995 tax liens against Gandy Marketing and Trucking, Inc. and Mr. Gandy d/b/a Gandy Nursery.
44. Mr. Reed testified that after Emory Bank discovered the tax liens, it would not make any loans to Gandy Nursery, Gandy Marketing and Trucking, Inc. or to Mr. Gandy because the bank would not have priority over the tax liens, and thus would not be secured.
45. Mr. Reed testified that but for the tax liens, Emory Bank would have extended the financing on more favorable terms than the PCA loan by one percentage point and would have loaned an additional $1,000,000.00 as working capital to improve the Prairie Springs Nursery.
46. No witness or evidence was introduced by the government to contradict the damages that Mr. Reed testified occurred as a result of the filing of the April and September 1995 liens during the period from April 15, 1995 through August 1, 1996.
47. Mr. Tony Morgan testified as an expert witness on damages stating that he has been a Certified Public Accountant for over twenty-five (25) years and is an accredited forensic examiner and accredited business valuation expert.
48. Mr. Morgan has been an expert witness on accounting issues in over a hundred court cases.
49. Mr. Morgan testified that Dennis C. Gandy d/b/a/ Gandy Nursery and Gandy Marketing and Trucking, Inc. were damaged by the filing of the April and September tax liens.
50. Mr. Morgan testified that due to the tax liens, Dennis C. Gandy d/b/a Gandy Nursery and Gandy Marketing and Trucking, Inc. were required to pay a higher interest rate for borrowing funds. Mr. Morgan also testified that due to the filing of the April 1995 and September 1995 liens, Dennis C. Gandy d/b/a Gandy Nursery and Gandy Marketing and Trucking, Inc. were damaged by lost profits due to the loss of a business opportunity.
51. Mr. Morgan also testified that every Gandy Nursery entity was required to cross collateralize and personally guarantee any bank loans that Mr. Gandy was also required to personally guarantee bank loans.
52. Mr. Morgan testified that the damages from paying a higher interest rate were $9,000. This damages component was calculated for the sixteen (16) month period from April 1995 to August 1996.
53. Mr. Morgan testified that the damages for lost profits were $342,000.00, and that this was a conservative figure based on a one year growing cycle.
54. The government did not call an expert witness to rebut the damages calculations of Mr. Morgan.
55. No witness or evidence was introduced by the government to contradict the damages that Mr. Morgan testified occurred as a result of the filing of the April and September 1995 liens during the period from April 15, 1995 through August 19, 1996.
56. No witness or evidence was introduced by the Government to contradict the damages that Mr. Gandy testified occurred as a result of the filing of the April and September 1995 liens during the period from April 15, 1995 through August 19, 1996.
57. The Government called Brian Harris as a rebuttal witness.
58. Mr. Harris testified that he was a vice president with PCA and that Mr. Gandy signed a waiver allowing him to speak with the attorneys for the United States prior to trial.
59. Mr. Harris testified that he began working for PCA at the end of 1995.
60. From his review of the loan file, Mr. Harris testified that he was familiar with the various Gandy Nursery entities. He testified that from his review of the file, the interest rate on the Gandy Nursery loan was the same as other borrowers. He testified that he had no first hand knowledge prior to the end of 1995. 61. Mr. Harris did not rebut or contradict any testimony offered by Plaintiffs on damages.
CONCLUSIONS OF LAW
1. "Under the 'Law of the Case' Doctrine, 'a decision on an issue of law made at one stage of a case becomes binding precedent to be followed in successive stages of the same litigation." Federal Deposit Insurance Corp. v. McFarland, 243 F.3d 876, 884 (5th Cir. 2001). "Where a final judgment is entered, the case appealed, and the case remanded, a trial judge must adhere on remand to the rulings it made in the case before appeal, assuming that the appellate court has not overturned the rulings." Id. "The Doctrine applies regardless of whether the issue was decided expressly or by necessary implication." Id.
2. In the Court's Amended Findings of Fact and Conclusions of Law in Gandy 1, this Court stated, "[t]he tax liens filed in 1993 against Denis C. Gandy were levied without due process as required by the and in violation of the IRS operating policy requiring IRS officers to deal honestly with taxpayer." Docket No. 187 at 7.
3. This Court also found that:
a. "Certain penalties that had been abated by the Austin IRS Service Center were again reassessed against the Plaintiffs without notice or demand as required under 26 U.S.C. § 6201, 6212, 6303;" Id. At p. 8.
b. "The IRS office in Tyler later reassessed penalties against the Plaintiffs and placed penalties and interest back on the transcripts without providing proper notice and demand;" Id. At p. 8-9.
c. "In order for an assessment and collection of taxes by the IRS to be valid under law, the IRS must provide notice and demand as required under 26 U.S.C. § 6201, 6212, 6303;" Id. At p. 13. and
d. "In order for a lien to be placed on a taxpayer, the IRS must first conduct a valid assessment." Id.
4. The Court's findings on these issues were not challenged by any party on appeal.
5. The Court's findings on these issues are established under the Law of the Case Doctrine.
6. The IRS did not follow the proper notice procedure required by the Internal Revenue Code.
7. Without proper notice and demand, the assessment and the resulting April and September 1995 liens are illegal and unenforceable and constitute unauthorized collection actions for purposes of 26 U.S.C. § 7433. Thus, the filing of an unlawful and unenforceable lien in violation of the Internal Revenue Code is an unauthorized collection action. See Gandy, supra, 318 F.3d at 638-39 citing Tadych v. Rubin, 1999 WL 1090820, *8 (E.D. Wis. 1999) ("A notice and demand for payment constitutes a collection action, as does the filing of notice of a tax lien"); Snyder v. I.R.S., 1998 WL 796768, *1 (D.D.C. 1998) ("A notice and demand for payment constitutes a collection action, as does the filing of a notice of tax lien"); Caparaso v. C.I.R., 907 F. Supp. 1235, 1240 (N.D. Ind. 1995) ("Under Section 7433, a cause of action is established when a collection action occurs: 'a notice and demand for payment constitutes a collection action, as does the filing of a notice of tax lien"); Simmons v. United States, 875 F. Supp. 318, 320 (W.D.N.C. 1994) ("A notice and demand for payment constitutes a collection action, as does the filing of a notice of tax lien"); Gonsalves v. United States, 782 F. Supp. 164, 170 (D.Me. 1992) (material issue of fact existed as to whether taxpayer received notice and demand for cause of action under Section 7433); Miller v. United States, 763 F. Supp. 1534, 1543 (N.D.Cal. 1991) (filing of a notice of tax lien is a collection action).
8. A taxpayer is prevented from purchasing and selling assets when a tax line is placed upon that taxpayer's property.
9. The amendment to Section 7433 raising the damages cap from $100,000.00 to $1 million applies to actions and officers or employees after the date of enactment, July 30, 1996.
10. The filing of the April and September 1995 liens against Gandy Marketing and Trucking, Inc., occurred before the date of the cap amendment thus requiring damages associated with the April and September 1995 liens to be capped in the amount of $100,000.00.
Accordingly, it is
ORDERED that judgment be entered against the Defendant, the UNITED STATES OF AMERICA, in favor of Plaintiff, GANDY MARKETING AND TRUCKING, INC. in the total amount of $100,000.00 pursuant to IRC § 7433 for the unlawful filing of the April and September 1995 liens.