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United States v. Garrity

United States District Court, D. Connecticut

May 20, 2016

UNITED STATES OF AMERICA, Plaintiff,
v.
DIANE M. GARRITY, PAUL G. GARRITY, JR., and PAUL M. STERCZALA, as fiduciaries of the Estate of Paul G. Garrity, Sr., deceased, Defendants.

          MEMORANDUM AND ORDER

          Michael P. Shea, U.S.D.J.

         Plaintiff, the U.S. Government (the “Government”), brought this action to collect an outstanding civil penalty from the Estate of Paul G. Garrity, Sr. (the “Estate”). (ECF No. 1.) Defendants Diane M. Garrity, Paul G. Garrity, Jr., and Paul M. Sterczala, fiduciaries of the Estate, move to amend the scheduling order in this case to extend the deadline to amend pleadings and allow them to assert a counterclaim. (ECF No. 40.) Because the Court finds that the Estate cannot, under the circumstances of this case, invoke the damages remedy created by Congress for the type of counterclaim it seeks to bring, the Court DENIES Defendants’ motion to amend the scheduling order and add their proposed counterclaim.

         I. BACKGROUND

         On February 20, 2015, the Government filed a complaint seeking to collect an outstanding civil penalty from the Estate. (ECF No. 1 at 1.) Specifically, the Internal Revenue Service (the “IRS”) had assessed a penalty against Paul G. Garrity, Sr., “for his failure to timely report his financial interest in, and/or his signatory or other authority over, a foreign bank account for the 2005 calendar year, as required by 31 U.S.C. § 5314 and its implementing regulations.” (Id.) Section 5314 requires certain individuals to keep records or file reports on foreign financial agency transactions, and Section 5321 authorizes the Secretary of the Treasury to impose a civil penalty, known as an FBAR penalty, “on any person who violates, or causes a violation of any provision of section 5314.” 31 U.S.C. § 5321(a)(5). Defendants filed their answer and affirmative defenses on April 24, 2015 (ECF No. 9), and the Court entered a scheduling order on June 17, 2015, setting the deadline for filing motions to amend the pleadings for July 24, 2015, and a discovery deadline of June 10, 2016. (ECF No. 20.)

         After the July 24 deadline for amending the pleadings passed, Defendants’ counsel discovered that certain publicly-available IRS training materials contained information about the IRS’s investigation of Paul G. Garrity, Sr. (ECF No. 40 at 1-2.) Specifically, Defendants allege that Dennis Brager of the Brager Tax Law Group submitted a Freedom of Information Act (“FOIA”) request to the IRS by letter dated April 3, 2014. (ECF No. 40-2 at 16.) On September 30, 2014, the IRS produced 6, 601 pages of documents in response to the FOIA request, including “unredacted PowerPoint slides from an IRS training program” that “included a case study discussing the IRS investigation of Paul G. Garrity, Sr. that was the genesis of the Title 31 and 26 penalties and proposed income tax deficiencies against” Paul G. Garrity, Sr. (the “Case Study Materials”). (Id. at 16-17.) The Brager Tax Law Group posted the Case Study Materials on its website, where Defendants later found it and immediately recognized that it contained Paul G. Garrity, Sr.’s return information. (Id.) On June 29, 2015, Defendants served their First Request for Production of Documents on the Government in this action. (Id.) Defendants argue that the Case Study Materials are responsive to this request, but the Government disagrees, and did not produce the Case Study Materials. (ECF No. 44 at 3 n.1; ECF No. 40 at 3.)

         Defendants have now filed a motion to amend the scheduling order to extend the deadline to amend pleadings and allow them to file an amended answer and assert a counterclaim. (ECF No. 40 at 4.) In their proposed counterclaim, Defendants allege that the Government violated 26 U.S.C. § 6103(a) by disclosing the Case Study Materials to IRS agents not directly concerned with the investigation and the law firm, which disclosed the information to the public through its website.[1] (ECF No. 40-2 at 15-16.) Section 6103(a)(1) provides, in relevant part, that “no officer or employee of the United States . . . shall disclose any return or return information obtained by him in any manner in connection with his service as such an officer or an employee or otherwise or under the provisions of this section.” Section 7431(a) provides a private right of action for damages against the Government for such unauthorized disclosures.

         II.STANDARD

         Rule 15(a)(2) of the Federal Rules of Civil Procedure provides that “a party may amend its pleading only with the opposing party’s written consent or the court’s leave. The court should freely give leave when justice so requires.” Fed.R.Civ.P. 15(a)(2). Despite this liberal standard, “[a] district court has discretion to deny leave for good reason, including futility, bad faith, undue delay, or undue prejudice to the opposing party.” McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)). “In this Circuit, it is well settled that an amendment is considered futile if the amended pleading fails to state a claim or would be subject to a motion to dismiss on some other basis.” Gilbert, Segall & Young v. Bank of Montreal, 785 F.Supp. 453, 457 (S.D.N.Y. 1992) (internal citations omitted).

         III.DISCUSSION

         The Government argues that Defendants should not be allowed to bring their proposed counterclaim because they lack standing, making the amendment futile. (ECF No. 44 at 4-5.) Although the parties have treated this issue as one involving “standing, ” recent case law suggests that it is more properly considered as a question of whether the proposed counterclaim would state a claim under the relevant statute, 26 U.S.C. § 7431. “[A] plaintiff must have a cause of action under the applicable statute. This was formerly called ‘statutory standing.’” Am. Psychiatric Ass'n v. Anthem Health Plans, Inc., No. 14-3993-CV, 2016 WL 2772853, at *4 (2d Cir. May 13, 2016). “The Supreme Court has recently clarified, however, that what has been called ‘statutory standing’ in fact is not a standing issue, but simply a question of whether the particular plaintiff ‘has a cause of action under the statute.’” Id. (quoting Lexmark Int'l, Inc. v. Static Control Components, Inc., 134 S.Ct. 1377, 1387 (2014)). In order to determine whether 26 U.S.C. § 7431(a) provides Defendants with a private right of action under the circumstances of this case, the court must examine the statute and “apply traditional principles of statutory interpretation.” Lexmark Int'l, Inc., 134 S.Ct. at 1388.

Section 7431(a) provides:
If any officer or employee of the United States knowingly, or by reason of negligence, inspects or discloses any return or return information with respect to a taxpayer in violation of any provision of section 6103, such taxpayer may bring a civil action for damages against the United States in a district court of the United States.

26 U.S.C. § 7431(a) (emphasis added).

         The plain language of the statute calls for reading “such taxpayer” to refer to the taxpayer whose “return information” has been disclosed, not to anyone else. And if there were any doubt about the meaning of those words, the principle that waivers of sovereign immunity are narrowly construed would call for the same conclusion. “Under settled principles of sovereign immunity, the United States, as sovereign, is immune from suit, save as it consents to be sued. . . .” United States v. Dalm, 494 U.S. 596, 608 (1990) (citations and internal quotation marks omitted). “A waiver of the Federal Government’s sovereign immunity must be unequivocally expressed in statutory text, and will not be implied. Moreover, a waiver of the Government’s sovereign immunity will be strictly construed, in terms of its scope, in favor of the sovereign.” Lane v. Pena, 518 U.S. 187, 192 (1996) (internal quotation marks and citations omitted). Other courts have likewise interpreted the phrase “such taxpayer” in Section 7431 as “the taxpayer whose ‘return’ or ‘return information’ has been allegedly disclosed.” Ruiz Rivera ...


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