Re Document No.: 25
MEMORANDUM OPINION
Granting Plaintiff’s Motion for Civil Contempt and Sanctions
RUDOLPH CONTRERAS, United States District Judge
I. INTRODUCTION
The United States (the “Government”) alleges that Latney’s Funeral Home, Inc. (“LFHI”) attempted to avoid its federal tax obligations for the better part of a decade by repeatedly failing to file tax returns and pay taxes owed to the Internal Revenue Service (“IRS”). On February 17, 2012, the Court granted by consent a Preliminary Injunctive Order (the “Injunction”) against LFHI that, among other things, precluded LFHI from committing further violations of the Internal Revenue Code. Order, ECF No. 18. The Court also granted the Government’s unopposed Motion for Partial Summary Judgment, finding that LFHI owes over $1 million in unpaid payroll taxes and civil penalties. Mem. Op., Apr. 10, 2013, ECF No. 23. After LFHI remained delinquent on its past and present federal tax obligations, the Government filed a Motioii for Civil Contempt and Sanctions and a Show Cause Order against LFHI and its cooperators, Carol E. Latney-Solomon (“Latney-Solomon”) and John W. Latney (“Latney”) (collectively, “Defendants”). PL’s Mot. for Civ. Contempt, June 21, 2013, ECF No. 25. On October 29, 2013, this Court ordered that Defendants show cause for why they should not be held in civil contempt of the Injunction. Order, ECF No. 34.
Upon consideration of the Government’s motion and Defendants’ opposition to that motion, as well as additional relevant filings in this matter, the Court concludes for the reasons discussed below that Defendants are in civil contempt of the Injunction. Further, to remedy Defendants’ continued noncompliance with the internal revenue laws and the Injunction, the Court orders that a limited receiver be appointed .to assume control of LFHI’s assets and ensure that Defendants’ past, present, and future federal tax obligations are met.
II. FACTUAL AND PROCEDURAL BACKGROUND
LFHI is a family-run funeral home in the District of Columbia operated by sib
Before filing the Complaint, the Government took several steps to move Defendants into compliance with the federal tax laws and to prevent Defendants from further compounding their tax liabilities. PL’s Mot. for Prelim. Inj., Nov. 23, 2011, ECF No. 2, at 5-6. For example, on May 21, 2008, the Government sent Defendants an “IRS Letter 903” imploring them to comply with the payment and deposit rules for federal employment taxes and advising' them of possible civil and criminal penalties for continued noncompliance. Decl. of Lisa A. Swope, ECF No. 1-1, at ¶¶ 20-21. Despite issuance of this warning, LFHI continued to incur additional employment tax liabilities on top of the taxes it already owed for prior periods. Order, ECF No. 18, at ¶ 8. The IRS also attempted conventional collection methods against LFHI to no avail. PL’s Mot. for Prelim. Inj., ECF No. 2, at 6. These actions included filing Notices of Federal Tax Lien against LFHI and issuing IRS levies to sixteen potential sources of collection regarding LFHI’s outstanding taxes. Decl. of Lisa A. Swope, ECF No. 1-1, at ¶¶ 23-24.
In addition to filing the Complaint against Defendants, the Government simultaneously moved for a preliminary injunction.
That brings us to the impetus for today’s ruling. On June 21, 2013, the Government filed a Motion for Civil Contempt and Sanctions and a Show Cause Order. PL’s Mot. for Civ. Contempt, ECF No. 25. In their opposition memorandum, Defendants argued that a show cause order is appropriate for only “willful violation[s]” of a court order, whereas in this instance Defendants were in “good faith eompli
The Court granted the Government’s motion and issued a Show Cause Order on October 29, 2013, which stated that Defendants were in violation of nearly all the requirements in the Injunction.
III. ANALYSIS
A. Legal Standard For Civil Contempt
“[C]ourts have the inherent power to enforce compliance with their lawful orders through civil contempt.” Shillitani v. United States,
As the party moving for a civil contempt finding, the Government bears the initial burden of demonstrating by clear and convincing evidence that: (1) there was a clear and unambiguous court order in place; (2) that order required
“Once the court determines that the movant has made the above three-part showing, the burden shifts to the defendant to justify the noncompliance by, for example, demonstrating its financial inability to pay the judgment or its good faith attempts to comply.” Int’l Painters & Allied Trades Indus. Pension Fund,
B. Whether Defendants Are In Civil Contempt Of The Injunction
On June 21, 2013, the Government asked this Court to issue a show cause order requiring Defendants to demonstrate why they are not in violation of the Injunction. Pl.’s Mot. for Civ. Contempt, ECF No. 25. The Court granted the Government’s motion and ordered that Defendants show cause for why they should not be held in civil contempt. Order, ECF No. 34. As the movant, the Government bears the initial burden of demonstrating by clear and convincing evidence that: (1) there was a clear and unambiguous court order in place; (2) that order required certain conduct by Defendants; and (3) Defendants failed to comply with that order. Int’l Painters & Allied Trades Indus. Pension Fund,
1. Clear And Unambiguous Court Order Requiring Certain Conduct
The Government first must demonstrate that there was a clear and unambiguous court order in place and that this order required certain conduct by Defendants. Id. The Injunction — the entry to which Defendants consented — required Defendants to, among other things:
• “immediately cease violating Internal Revenue Code Sections 3102, 3111, 3301, 3402, 6011(a) and 6041”;
• “withhold and to pay over to the Internal Revenue Service all employment taxes, including federal income, FICA, and FUTA taxes, as required by law”;
• “make timely (no later than the 15th day of the following month) deposits of federal payroll taxes, e.g., withheld federal income tax, withheld FICA tax as well as defendant’s share of FICA tax, as they become due in an appropriate federal depository bank in accordance with the federal deposit regulations”;
• “timely file with the Internal Revenue Service all federal employment (Form 941) and unemployment (Form 940) tax returns and to pay any balance due on those returns upon filing”;
• “file with the Internal Revenue Service and the United States Social Security Administration, and issue to any employee, accurate IRS Form W-2s”; and
• “file all unfiled and past-due federal tax returns with the Internal Revenue Service within 60 days of the entry of this preliminary injunction.”
Order, ECF No. 18. Further, the Court’s order enjoined LFHI “from transferring, disbursing, or assigning any money, property, or assets until the required federal tax deposits have been fully made for the given payroll period,” and demanded that “LFHI shall not pay other creditors before paying their current federal, employment and other tax liabilities.” Id.
It is clear and uncontested that the Injunction constitutes an unambiguous court order that required certain specified conduct by Defendants. See Phillips,
2. Failure To Comply With The Court Order
The Government next must establish the third and final element of the civil contempt standard: that Defendants failed to comply with the Injunction. See Int’l Painters & Allied Trades Indus. Pension Fund,
In resporise, Defendants address a few of the Government’s arguments but ignore many others. They claim that their employment taxes are current for all of 2013 and the first quarter of 2014 but make no representations about having fully or timely paid their delinquent taxes before 2013. Defs.’ Mem. in Opp’n, Mar. 31, 2014, ECF No. 44, at 4-26. Notably, in one filing Defendants revealed that as of December 1, 2012, they owed $23,314.03 in outstanding taxes for the year 2012, but they since have made no representations about if or when they paid that delinquency. Defs.’ Mem. in Opp’n, ECF No. 28-1, at 7.
The Government, however, offers evidence that not only did Defendants fail to pay their outstanding 2012 taxes, they also failed to pay fully their 2013 taxes. PL’s Reply, May 5, 2014, ECF No. 47, at 1. Indeed, the Government asserts that LFHI “owes taxes for every quarter since
Defendants have not provided evidence of progress toward filing their other missing federal tax returns, including the Form 941 federal employment tax returns for periods before 2012 and the Form 940 federal unemployment tax returns for 2009 and 2010. Defendants, moreover, have an outstanding court judgment against them for over $1 million in unpaid federal taxes and civil penalties as of August 1, 2011, plus interest and statutory additions. Order, Apr. 10, 2013, ECF No. 22. It is unclear if or how Defendants plan to address this balance and bring themselves into compliance with the internal revenue laws and the Injunction. Based on their own admissions, Defendants are struggling to pay their current employment tax obligations, let alone begin making a dent in their $1 million-plus judgment or fulfilling their other obligations to the IRS. Defs.’ Mem. in Opp’n, ECF No. 28, at 1. In the meantime, Defendants continue to incur additional tax liabilities every day they are in business.
Finally, the Government asserts that Defendants remain in violation of several other requirements in the Injunction, including the demands on Defendants: to file with the IRS and the United States Social Security Administration, and issue to any employee, accurate IRS Form W-2; not to pay other creditors and transferring, disbursing or assigning money, property or assets until the required federal tax deposits are fully made for the given tax period from the date of the [Injunction]; and not to pay other creditors unless LFHI is current on its federal employment tax obligations. Pl.’s Mot. for Civ. Contempt, ECF No. 25-1, at 6. Defendants do not address, or deny, these allegations. Indeed, Defendants appear to concede a violation of the latter two demands when they assert that since the Injunction, LFHI’s money was spent on overhead and staff salaries before fully paying outstanding taxes. Defs.’ Mem. in Opp’n, ECF No. 44, at 2. Accordingly, the Court finds that the Government has met its burden of demonstrating that Defendants are not in compliance with the Injunction.
For the reasons discussed above, the Court concludes that the Government has met its burden of establishing Defendants’ civil contempt of the Injunction.
C. Whether Defendants Have Justified Their Noncompliance
Defendants now bear the burden of justifying their civil contempt and noncompliance with the Injunction. See SEC v. Bilzerian,
Defendants appear to raise two justifications in their opposition documents: that they are financially unable to comply and that they have attempted to comply in good faith. Upon consideration of the parties’ arguments and for the reasons discussed below, the Court finds that Defendants’ claims are unpersuasive and concludes that Defendants have not adequately justified their noncompliance with the Injunction.
1. Financial Inability To Comply
Defendants assert that they are financially unable to comply with the Injunction and repay their substantial tax liability. Defs.’ Mem. in Opp’n, ECF No. 44, at 2. Defendants bear the burden of establishing this justification, and they must demonstrate it “categorically and in detail.” Current Fin. Servs., Inc.,
According to Defendants, “[t]heir past failure to pay their taxes was based on their inability to earn sufficient monies to pay staff, overhead, and taxes” without going out of business. Defs.’ Mem. in Opp’n, ECF No. 44, at 2. They similarly explain that these taxes went unpaid because they “wanted to keep [LFHI] operating, [and] keep people employed, rather than unemployed.” Id. Although LFHI’s financial hardship may be real, Defendants provide no specific factual details or documentation to support their assertions. Such threadbare and conclusory statements of financial distress, without supporting records or documentation, are insufficient to allow the Court to evaluate fully Defendants’ potential justification. See, e.g., Huber,
Defendants repeatedly maintain that they are attempting “in good faith” to comply and may be found in civil contempt only if they “intentionally, willfully, and wantonly” violate the Injunction. Defs.’ Mem. in Opp’n, ECF No. 44, at 2. In their defense, they assert that the “intention to pay the taxes negat[es] any intentional or willful refusal to pay their taxes.” Id. Defendants misunderstand what is required to justify noncompliance with a court order.
When evaluating a party’s offered justification, “intent is irrelevant; the Court need not find that [the party’s] failure to comply with the orders was willful or intentional.” Bilzerian,
Although “good faith alone is not sufficient to excuse contempt,” Walker v. Ctr. for Food Safety,
Defendants attempt to justify their extensive noncompliance by arguing that LFHI’s employment taxes are current for all of 2013 and the first quarter of 2014. Defs.’ Mem. in Opp’n, ECF No. 44, at 4-26. Even if true, however, Defendants still fail to assert facts demonstrating satisfaction of their unpaid taxes from before 2013, including the outstanding balance from 2012.
Further, Defendants do not contest the Government’s allegations regarding several other violations of the Injunction, including: Defendants’ failure to file with the IRS and the United States Social Security Administration, and issue to any employee, accurate IRS Form W-2; Defendants’ obligation not to pay other creditors and transferring, disbursing or assigning money, property or assets until the required federal tax deposits are fully made for the given tax period from the date of the [Injunction]; and Defendants’ obligation not to pay other creditors unless LFHI is current on its federal employment tax obligations. Pl.’s Mot. for Civ. Contempt, ECF No. 25-1, at 6. Instead, Defendants implicitly acknowledge a violation of the latter two requirements when they assert that after the Injunction, LFHI’s money was spent on overhead and staff salaries before paying all outstanding taxes. Defs.’ Mem. in Opp’n, ECF No. 44, at 2. This blatant disregard of the Injunction suggests a willful violation, not good faith compliance. In addition, the Government points out that Defendants still have failed to file “LFHI’s Form 940 federal unemployment tax return for the years 2009 and 2010.” PL’s Suppl. Mem.; ECF No. 41, at 3. Defendants make no attempt to dispute these claims, despite having the burden of proof, and their failure to satisfy these court-ordered obligations 'further demonstrates an overall inability to comply with the Injunction.
Although Defendants maintain that they are “aggressively working to find monies to pay [their] past due taxes,”
Accordingly, for the reasons discussed above, the Court concludes that Defendants have not justified their noncompliance with the Injunction.
D. Civil Contempt Sanctions
The Court next must determine which sanctions, if any, are appropriate for Defendants’ civil contempt. “The sole purpose of civil contempt sanctions is to ‘coerce compliance or compensate a complainant for losses sustained,’ not to punish.” Guantanamera Cigar Co. v. Corporation Habanos, S.A.,
The arsenal of sanctions available to a court for civil contempt includes compensatory and coercive fines, as well as imprisonment. See Pigford v. Veneman,
1. The Court’s Power To Appoint A Receiver
Federal courts have broad equitable powers to craft remedial sanctions for civil contempt. Levine,
In addition, federal district courts are granted specific statutory authority under 26 U.S.C. § 7402(a) to enforce the internal revenue laws. Included
2. Whether The Court Should Appoint A Receiver
The Court must determine whether appointing a limited receiver is an appropriate remedy for Defendants’ civil contempt. “Courts have wide discretion in fashioning remedial sanctions for civil contempt,” Levine,
The Government argues that Defendants have demonstrated a pattern and practice of noncompliance with the internal revenue laws by filing returns late (if they file at all), failing to submit their tax deposits, and largely disregarding their employment tax obligations. Pl.’s Suppl. Mem., ECF No. 41, at 5. A receiver, the Government explains, will ensure that LFHI files and pays its taxes on time in the future. Id. A receiver also will ensure that LFHI pays its taxes prior to any other operating expenses if there are insufficient funds to cover both. Id. And if the receiver uncovers that LFHI generates insufficient revenue to pay simultaneously its taxes and other expenses, the receiver has the ability to seek judicial authority to wind down LFHI’s affairs in an orderly fashion. Id. Overall, the Government argues that a receiver will ensure that Defendants are brought into compliance with the federal tax laws and the Injunction, as well as safeguard that Defendants expeditiously repay their outstanding judgment of more than $1 million in unpaid taxes and penalties.
This Court already exercised its power under § 7402(a) when it issued the Injunction against Defendants that forms the basis for the Government’s civil contempt motion. Order, ECF No. 18, at 1. Although Defendants consented to the Injunction, they now object to the appointment of a receiver under the same statutory provision. Defendants, however, do not argue that the Court lacks authority to appoint a receiver. Instead, they contend that a receiver will cause LFHI to “quickly close its doors and ... probably declare bankruptcy” because customers will take their business elsewhere once they “learn that the Government has tak
Defendants’ argument is unpersuasive and misconstrues the role 'of a receiver. As the Government rightly explains, a receiver will “examine, report on, and oversee LFHI’s finances, prevent LFHI from continuing to pyramid its employment taxes, and ensure [that] LFHI timely files Forms 940 and 941 with the IRS, as required by the Treasury Regulations and this Court’s [Preliminary] Injunction Order.” Pl.’s Suppl. Mem., ECF No. 41, at 7. Contrary to Defendants’ suggestion, the Government will not become a “funeral director” through the appointment of a receiver. Defs.’ Mem. in Opp’n, ECF No. 44, at 1. Rather, the Government only seeks a remedial mechanism through which it will recover Defendants’ years of unpaid taxes and guarantee compliance with the Injunction moving forward.
The Court appreciates that “[appointing a receiver is an extraordinary remedy, but this is an extraordinary situation.” SEC v. Universal Express, Inc., No. 04 CIV. 2322,
Other federal courts have appointed receivers under similar circumstances. For example, in SEC v. Universal Express, Inc., the United States District Court for the Southern District of New York appointed a receiver when the defendants continued to violate federal securities laws and court orders, and failed to demonstrate there was someone “responsible, willing, and able to manage” the company going forward.
For the reasons discussed above, the Court concludes that the appointment of a limited receiver is the appropriate remedial sanction for Defendants’ civil contempt.
IV. CONCLUSION
For the foregoing reasons, the Government’s Motion for Civil Contempt and Sanctions is granted and a limited receiver shall be appointed over LFHI. An order consistent with this Memorandum Opinion is separately and contemporaneously issued.
Notes
. The Government later also moved for a permanent injunction against Defendants. Pl.’s Mot. for Perm. Inj., July 25, 2013, ECF No. 31. The Court does not decide at this time whether a permanent injunction is appropriate.
. On July 18, 2013, Defendants filed a separate but similar memorandum in opposition to the Government's motion for civil contempt. Defs.' Mem. in Opp’n, ECF No. 29. The Court ruled that this document was untimely filed because Defendants failed to seek the necessary leave before filing. Order, July 19, 2013, ECF No. 30.
. In particular, the Show Cause Order noted that Defendants failed to comply with the Injunction's demands: “to withhold and to pay over to the Internal Revenue Service all employment taxes, including federal income, FICA, and FUTA taxes, as required by law”; “to timely make the federal tax deposits from the date of the Order”; “to timely file all federal employment (Form 941) and unemployment (Form 940) tax returns and to pay any balance due on those returns upon filing”; "to file with the Internal Revenue Service and the United States Social Security Administration, and issue to any employee, accurate IRS Form W-2”; "not to pay other creditors and transferring, disbursing or assigning money, property or assets until the required federal tax deposits are fully made for the given tax period from the date of the Order”; "not to pay other creditors unless LFHI is current on its federal employment tax obligations”; “to file all unfiled and past-due federal tax returns with the Internal Revenue Service”; and “to provide the proof to IRS Revenue Officer Lisa Swope of LFHI's federal tax deposit payments.” Order, ECF No. 34.
. In their supplemental briefs, Defendants provide additional explanations for their failure to comply, none of which the Court finds persuasive. See Bilzerian,
. As is discussed above, the Government rejects Defendants’ claim of being current on their 2013 and 2014 taxes. Rather, the Government provides evidence that LFHI still "owes taxes for every quarter since February of 2012.” Pl.’s Reply, ECF No. 47, at 1.
. As mentioned before, Defendants provide no information concerning any efforts to "aggressively” market the property for sale.
. The Government initially requested both coercive and compensatory fines as sanctions for Defendants’ contempt, namely "the imposition of a daily fine of $100 or more against each defendant until all tax payments required under the Order are made” and the awarding of "attorney’s fees incurred in preparation and litigation of [the] contempt proceeding.” Pl.'s Mot. for Civ. Contempt, ECF No. 25-1, at 8-9. In a supplemental filing, the Government revised its request and sought a receiver instead of fines. The Government explained, "[Although typically used as contempt sanctions, neither fines nor the threat of incarceration would seem likely to be effective in remedying the real harm being caused here.... Instead, the Court should appoint a receiver to operate LFHI since it is clear that the defendants cannot operate it in compliance with the internal revenue laws and this Court’s order.” Pl.'s Suppl. Mem., ECF No. 41, at 9-10 (internal citations omitted). The Court agrees that fines are not an effective remedy in this instance.
. This includes the receiver’s ability to oversee the prompt payment toward taxes of any money recovered from the alleged embezzlement, as well as the potential future sale of LFHI’s building. Defs.' Suppl. Mem., ECF No. 46, at 1-2.