Opinion
Case No. 02-cv-72226
July 21, 2003
ORDER DENYING "RULE 13(H) CROSS-DEFENDANT KEITH A. FRY'S MOTION FOR ATTORNEY PEES, COSTS AND SANCTIONS PURSUANT TO FED. R. CIV. P. 11,"
Pending before the court is "Rule 13(h) Cross-Defendant Keith A. Fry's Motion for Attorney Fees, Costs and Sanctions Pursuant to Fed.R.Civ.P. 11," filed on July 2, 2003. A response was filed on July 15, 2003. Although the court has granted Fry's motion to dismiss, the court finds that Rule 11 sanctions are not warranted. Accordingly, the court will deny the motion,
Federal Rule of Civil Procedure 11 provides, in pertinent part:
By presenting to the court (whether by signing, filing, submitting, or later advocating) a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.
Fed.R.Civ.P. 11(b). For violations of the rule, the court may impose sanctions, but such an imposition is discretionary, bidder v. City of Springfield, 109 F.3d 288, 293-294 (6th Cir. 1997). The test for whether sanctions are appropriate is whether the conduct at issue was objectively reasonable under the circumstances. Union Planters Bank v. L J Development Co., Inc., 115 F.3d 378, 384 (6th Cir. 1997) (quoting Lemaster v. United States, 891 F.2d 115, 118 (6th Cir. 1989).
Applying this test to the instant case, the court determines sanctions to be inappropriate. This court specifically granted MacDonald leave to file his cross-complaint. (See 2/28/03 Order.) While MacDonald's cross-complaint was ultimately dismissed for lack of subject matter jurisdiction, MacDonald's assertion of supplemental jurisdiction was not wholly frivolous. Accordingly, the court cannot find that MacDonald's failure to withdraw the complaint is sanctionable.
Although the court granted MacDonald's "Motion to Add Indispensible Parties" in a short-form order, procedurally the order had the effect of allowing MacDonald to file a cross claim against Keith Fry, and to add North American Financial Group, Inc. and North American Insurance Services, Inc. as indispensable plaintiffs in the cross claim.
IT IS ORDERED that "Rule 13(h) Cross-Defendant Keith A. Fry's Motion for Attorney Fees, Costs and Sanctions Pursuant to Fed.R.Civ.P. 11" [Dkt. # 49] is DENIED.
ORDER GRANTING "RULE 13(H) CROSS-DEFENDANT KEITH A. FRY'S MOTION TO DISMISS RULE 13(H) CROSS COMPLAINT"
Pending before the court is "Rule 13(h) Cross-Defendant Keith A. Fry's Motion to Dismiss Rule 13(h) Cross Complaint," filed on May 27, 2003. The matter has been fully briefed; and the court concludes a hearing is unnecessary. See E.D. Mich. LR 7.1(e)(2). For the reasons stated below, the court will grant the motion.I. BACKGOUND
This rather complicated action centers around the tax liability of Stephen MacDonald and others for their involvement in two now-defunct corporations, North American Financial Group, Inc. ("NAFG") and North American Insurance Services, Inc. ("NAIS"), (Collectively, North American Financial Services or "NAFS")). After being assessed penalties for unpaid taxes due from NAPS, Stephen MacDonald initiated this action under 26 U.S.C. § 6672 against the United States. Specifically, he disputes the assessment, and therefore seeks a refund of amounts paid and an abatement of remaining taxes, The United States filed a counterclaim against MacDonald, seeking a judgment for the amount of the penalties and taxes, naming Daniel Whaley and Eric Smith as additional counterclaim defendants. See Fed.R.Civ.P. 13(h).
The pleadings in this case consistently refer to NAFG and NAIS as interchangeable with NAFS. This discrepancy is not material to the instant order, and does not affect the outcome of Fry's motion.
Specifically, MacDonald was assessed penalties for unpaid taxes based upon NAFS's failure to pay taxes withheld from employees' paychecks.
Whaley, Smith, and MacDonald were, at various times, all officers of NAFS.
Thereafter, on February 28, 2003, the court granted MacDonald's motion to add NAIS and NAFG as indispensible parties in a cross claim against Keith Fry. Fry was served with the cross complaint, alleging jurisdiction through 28 U.S.C, §§ 1367(a) and 1346(a)(1). The cross complaint alleges that Fry contracted with NAFG and NAIS to pay their tax liabilities, and that there would be no tax deficiency if Fry had fulfilled his contractual obligation.
Fry has filed the instant motion challenging the court's subject matter jurisdiction over the cross complaint and alternatively, seeking dismissal under Federal Rule of Civil Procedure 12(b)(6), arguing MacDonald lacks standing to assert his cross claim, and asserting that Fry was improperly joined under Federal Rule of Civil Procedure 19(a) and 26 U.S.C, § 6672. Because the court will not exercise supplemental jurisdiction over MacDonald's cross claim, it need not address the alternative arguments
II. DISCUSSION A. 28 U.S.C. § 1346(a)(1)
Fry first argues that: 28 U.S.C. § 1346 (a)(1) does not grant the court subject matter jurisdiction over the cross complaint. The court agrees. Section 1346 grants the district courts original jurisdiction over claims which are asserted against the United States. The United States is not a party to the cross complaint, and thus § 1346 is not applicable.
Indeed, MacDonald does not appear to contest this, as he did not mention § 1346 in his response brief.
B. 26 U.S.C. § 6672
Fry first asserts that the court is precluded from exercising jurisdiction over the cross claim in light of § 6672, which provides:
Right of contribution where more than 1 person liable for penalty. — If more than 1 person is liable for the penalty under subsection (a) with respect to any tax, each person who paid such penalty shall be entitled to recover from other persons who are liable for such penalty an amount equal to the excess of the amount paid by such person over such person's proportionate share of the penalty. Any claim for such a recovery may be made only in a proceeding which is separate from, and is not joined or consolidated with — (1) an action for collection of such penalty brought by the United States, or (2) a proceeding in which the United States files a counterclaim or third-party complaint for the collection of such penalty.26 U.S.C. § 6672(d). Fry asserts that MacDonald's claim for contribution is barred by the plain language of § 6672, MacDonald argues, and the court agrees, that his claim is not for contribution under § 6672, but a breach of contract claim. Claims for contribution under § 6672 center around two questions: (1) whether the defendant is a "responsible person" under 26 U.S.C. § 6672 and (2) whether he "willfully" failed to pay over to the government the amount due. See, generally, Kinne v. United States, 994 F.2d 279 (6th Cir. 1993); Gephart v. United States, 818 F.2d 469, 473 (6th Cir. 1987). In this case, however, MacDonald has explicitly stated that he, along with NAFG and NAIS, assert an action for breach of contract, not for liability under § 6672. Thus, § 6672's prohibition on contribution claims does not apply.
26 U.S.C. § 6672(a) provides:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense Co which this section is applicable.
B. 28 U.S.C. § 1367
MacDonald next asserts that the court can exercise supplemental jurisdiction over his cross complaint pursuant to 28 U.S.C. § 1367. Section 1367 provides:
Except as provided in subsections (b) and (c) or as expressly provided otherwise by Federal statute, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part: of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties.28 U.S.C. § 1367. "Supplemental jurisdiction is a doctrine of discretion, not of plaintiff's right," Habich v. City of Dearborn, 331 F.3d 524, 535 (6th Cir. 2003) (quotations omitted). MacDonald contends that his cross claim is sufficiently related to the initial action that it forms part of the same case or controversy.
MacDonald relies on Blakely v. United States, 276 F.3d 853, 861 (6th Cir. 2002), in which the Sixth Circuit explained:
"In other words, if there is some basis for original jurisdiction, the default assumption is that the court will exercise supplemental jurisdiction over all related claims." Campanella, 137 F.3d at 892. Claims form part of the same case or controversy when they "derive from a common nucleus of operative facts." Abeam v. Charter Township of Bloomfield, 100 F.3d 451, 454-55 (6th Cir. 1996); accord White v. County of Newberry, S.C., 985 F.2d 168, 172 (4th Cir. 1993) (recognizing that claims form part of same case or controversy if they "revolve around a central fact pattern").
MacDonald's theory in his cross complaint is that Fry was contractually obligated pursuant to certain assignments to pay the withholding taxes at issue in the initial complaint. Despite MacDonald's consistent attempts to cast his cross complaint as an extension of the initial § 6672 action, the court finds that the two claims are not: related. Indeed, as discussed above, MacDonald has specifically declined bringing a claim for contribution under § 6672, and has instead opted to bring a state law breach of contract action. The proofs on these two claims will revolve around an entirely different set of operative facts. The discovery, legal theories, and facts related to MacDonald's breach of contract: claim are unrelated to the discovery, legal theories, and facts related to the § 6672 action.
Even if it is ultimately determined that Fry had contracted to pay the taxes at issue in the § 6672 controversy, this finding would have no bearing on the United States attempt to collect from MacDonald. Fry's alleged contractual responsibility cannot be used to offset MacDonald's alleged statutory duty. See Kinnie v. United States, 994 F.2d 279, 284 (6th Cir. 1993) ("[O]ne who possesses significant control over the company's financial affairs may not escape liability by delegating the task of paying over the taxes to someone else.") (citing Gustin v. United States I.R.S., 876 F.2d 485, 491 (5th Cir. 1989); Thomsen v. United States, 887 F.2d 12, 17 (1st Cir. 1989)). The two cases are simply unrelated to one another. Accordingly, the court finds that it lacks subject matter jurisdiction over the cross complaint; and that the exercise of supplemental jurisdiction is improper.
The court also notes that, in the event it had determined that supplemental jurisdiction was appropriate, Fry's motion would nonetheless be granted on the alternative 12(b)(6) basis. Specifically, the court would conclude that the alleged assignment unequivocally did not apply to federal taxes.
Though decidedly liberal, 12(b)(6) standard of review does require more than the bare assertion of legal conclusions. LiIlard v. Shelby County Bd. of Educ., 76 F.3d 716, 726 (6th Cir. 1996) Indeed, "[i]n practice, `a . . . complaint must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory.'" Id. 726 (emphasis in original) (quoting Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434, 436 (6th Cir. 1988)). "In determining whether to grant a Rule 12(b)(6) motion, the court primarily considers the allegations in the complaint, although matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint, also may be taken into account." Amini v. Oberlin College, 259 F.3d 493, 502 (6tth Cir. 2001) (emphasis in original) (citing Nieman v. NLO, Inc., 108 F.3d 1546, 1554 (6th Cir. 1997)), Under chic standard, MacDonald Simply could prove no set of facts entitling him to relief.