Opinion
NO. 5:99CV00006
September 29, 2000
Julie C. Dudley, U.S. Attorney's Office, Roanoke, VA, for Plaintiff.
Angelo Frattarelli, U.S. Department Of Justice, Washington, DC, for Plaintiff.
Charles S. McCandlish, Harrison Johnston, Winchester, VA, for Defendants.
Aubrey J. Owen, Owen Truban, Winchester, VA, for Defendants.
FINAL ORDER
This action is one of three lawsuits to come before the court involving the above-named parties and revolving around Frank Armstrong, Jr.'s 1991 and 1992 redemption and gifts of National Fruit Products Co., Inc stock. Before the court are cross motions for summary judgment and the memoranda in support and opposition thereto, and a motion by the government to strike the affidavits in support of the defendants' motion for summary judgment. By order of the court pursuant to 28 U.S.C. § 636(b)(1)(B), the matter was referred to the presiding United States Magistrate Judge, B. Waugh Crigler, for a recommended disposition. On December 17, 1999, the Magistrate Judge issued a Report and Recommendation as to the dispositive motions. In the Report, the Magistrate Judge recommended that Count II be reduced to judgment in favor of the government, and Counts I and III of the government's claim be dismissed on grounds of res judicata. On December 22, 1999, the government filed objections to the Report and Recommendation. Accordingly, pursuant to 28 U.S.C. § 636 (b)(1)(C) the court has performed a de novo review of those portions of the Report and Recommendation to which objections were made. Upon careful review of the Report and Recommendation, the government's objections thereto, the entire record, and the relevant case law, and for the reasons stated in the accompanying memorandum opinion, it is accordingly this day
ADJUDGED, ORDERED AND DECREED
as follows:
(1) The Magistrate Judge's December 17, 1999 Report and Recommendation shall be, and hereby is, ADOPTED in its entirety.
The court notes a minor exception: the typographical error in the second recommendation, recommending that "Counts II and III" be dismissed. Consistent with the accompanying Report, the court is confident that the Magistrate intended to recommend dismissal of Counts I and III and adopts the Report and Recommendation with that understanding.
(2) The plaintiff's Motion for Summary Judgement shall be, and hereby is, GRANTED in part and DENIED in part. .
(3) The defendants's Motion for Summary Judgment shall be, and hereby is, GRANTED in part and DENIED in part.
(4) Judgment shall be, and hereby is, GRANTED in favor of the plaintiff and against the defendants in the stipulated amount of the fiduciary income taxes for the tax years 1993, 1994, and 1995, in the amount of $53,223.00, plus statutory penalties and interest accrued thereon.
(5) Counts I and III shall be, and hereby are, DISMISSED on grounds of res judicata.
(6) The plaintiff's Motion to Strike Affidavits shall be, and hereby is, DENIED as moot.
(7) This matter shall be stricken from the docket of the court.
The Clerk of Court hereby is directed to send a certified copy of this Order and the accompanying Memorandum Opinion to Magistrate Judge Crigler and all counsel of record.
MEMORANDUM OPINION
This action is the second of three lawsuits to be decided by the court involving the same parties embroiled in litigation resulting from Frank Armstrong Jr.'s ("Armstrong") 1991 and 1992 redemption and gifts of National Fruit Products Co., Inc. ("NFP") stock. Before the court are cross motions for summary judgment, the presiding United States Magistrate Judge's Report and Recommendation regarding the disposition of said motions, and the government's objections thereto. Pursuant to 28 U.S.C. § 636 (b)(1)(C), the court shall perform a de novo review of those portions of the Magistrate's Report and Recommendation to which objections were made. Also before the court is the motion of the government to strike the affidavits in support of the defendant's motion for summary judgment.
The complex factual underpinnings of this action are grossly familiar to the court and, to be sure, the parties. Based on the Report and Recommendation of the Magistrate Judge and his history of presiding over cases between the parties, it is clear that the Magistrate also has a considered understanding of the facts of this case. The court need not review in detail here the facts of this case, as it has done several times before, most explicitly in Armstrong v. United States, 7 F. Supp.2d 758 (W.D.Va 1998) (hereinafter " Armstrong I"). Rather, the court will rely on the statement of facts delineated in Armstrong I and address facts in further detail as necessary.
I.
In the Report and Recommendation, the Magistrate Judge recommends that the court enter an order reducing to judgment the tax liability of the Frank Armstrong Jr. Trust for the Benefit of Frank Armstrong, Jr. ("Trust") for unpaid fiduciary income taxes for the years 1993, 1994, and 1995. In the Stipulation of Facts, all parties agree that the Trustee reported fiduciary income tax liability in the amount of $3,801 for 1993, $18, 932 for 1994, and $30,490 for 1995, which amounts, plus interest and penalties accruing thereon, remain unpaid. (Stip. Of Facts at ¶ ¶ 12, 13, 18.) Count II of the government's complaint seeks to convert the tax liability incurred by the Trust between 1993 and 1995 to judgment. No party objected, and the court agrees, to the recommendation of the Magistrate Judge to reduce to judgment the liability for unpaid taxes due. Accordingly, the fiduciary income tax liabilities of the Trustee in the stipulated amounts listed herein, plus statutory penalties and interest accrued on said amounts, shall be reduced to a judgment in favor of the United States against the Trust.
For further explanation of the Trust, see Armstrong I, 7 F. Supp.2d at 760.
II.
In the Report and Recommendation, the Magistrate Judge finds that the government's claims in this case are duplicative of matters in Armstrong I and recommends dismissing Counts I and III of the government's complaint on the grounds of res judicata. The government objects to such a disposition on the grounds that the court, in its opinion in Armstrong I, preserved certain matters for further litigation. In fact, the government states in its objections to the Report and Recommendation, "The United States admits, as it must, that the elements of res judicata are present here. Nevertheless, the United states contends that Counts I and III of its complaint are not barred by the doctrine of res judicata since this Court expressly reserved the United States' right to sue the Trustee for the purpose of enforcing the terms of the Grantor Trust." (Pl. Obj. at 3.)
The doctrine of res judicata provides that:
when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are there after bound `not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.'Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 597 (1948) (quoting Cromwell v. County of Sac, 94 U.S. 351, 352 (1876)). "There are three elements necessary to trigger claim preclusion by res judicata: (1) a judgment on the merits in a prior suit resolving (2) claims by the same parties or their privies, and (3) a subsequent suit based on the same cause of action." Aliff v. Joy Mfg. Co., 914 F.2d 39, 42 (4th Cir. 1990) (citing Montana v. United States, 440 U.S. 147, 153 (1979); Harnett v. Billman, 800 F.2d 1308, 1312 (4th Cir. 1986)); cited in Coyne Delany Co. v. Selman, F.3d 1457, 1473 (4th Cir. 1996). Res judicata is also referred to as claim preclusion. See Aliff, 914 F.2d at 42. Simply put, claims between parties that have already been litigated or could have been litigated in a matter that has been adjudicated on the merits cannot be raised again in a subsequent action. See Guiness PLC v. Ward, 955 F.2d 875, 893-94 (4th Cir. 1992) (citing multiple Supreme Court and Fourth Circuit cases supporting res judicata definition).
Of the three elements of res judicata, the first two — (1) judgment on the merits in a prior suit (2) resolving claims by the same parties — are easily met in this case. As explained above, the parties in the instant lawsuit have already enjoyed a resolution of claims by the court in Armstrong I. The third element of res judicata, whether the present suit is based on the same cause of action as Armstrong I, is also satisfied. "The law. . .is well established that res judicata may apply even though the [claimant] in the first suit proceeded under a different legal theory." See Aliff, 914 F.2d at 43. In Armstrong I, the government asserted a cross-claim that its levy on the Contract between Armstrong and NFP was valid, and sought foreclosure thereon. See Armstrong I, 7 F. Supp.2d at 761. The government also asserted a cross-claim seeking, as a third party beneficiary, to enforce the Contract between Armstrong and NFP by demanding payment from NFP. See id. The claims of the United States were adjudicated on their merits when the court, after a detailed analysis of each claim, dismissed the third party claims of the government pursuant to Fed.R.Civ.P. 12(b)(6) because, as written, the complaint could "prove no set of facts that would entitle [the United States] to relief." Id. at 768 (citations omitted).
For further explanation of the Contract, also referred to as the Promissory Note, see Armstrong I, 7 F. Supp.2d at 760.
Armstrong assigned his interest in the Contract with NFP to the Trust.
In addition to Count II, see infra Part I., the government asserts two claims in the present matter. In Count I, the government seeks to demand payment on the Contract as the beneficiary of the Trust. Count III seeks to have the government's lien on the Contract deemed valid and to foreclose thereon. Counts I and III are claims that could have been litigated in Armstrong I. The primary difference between Armstrong I and the present case is that the government seeks to assert its rights under the Trust rather than under the Contract. The government had a full fair opportunity to raise these claims in the course of Armstrong I and, for reasons unknown to the court, chose not to. Accordingly, Counts I and III are barred by the doctrine of res judicata. See Brown v. Felsen, 442 U.S. 127, 131 (1979) (" Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding") (citations omitted).
The government concedes that the elements of res judicata are present here. (Pl. Obj. at 3.) However, the government argues that, notwithstanding the manifest elements of res judicata, res judicata does not preclude the instant claims because, in Armstrong I, the court specifically preserved the right of the government to bring a cause of action to enforce the Trust instrument. The sentence in Armstrong I, which the government relies on to support its argument against the operation of res judicata, could only support the government's position if the language were read in isolation from the holding of the opinion. However, it is clear to the court that the sentence in question was entirely precatory and had no bearing on the actual holding. The language at issue does not serve, nor was it ever intended to serve, as a free pass for the government to escape operation of res judicata. Accordingly, the principles of res judicata bar the government's Counts I and III.
"Because the United States is the principal beneficiary of the Trust, it could bring an action in equity against the trustee to recover funds held by the trustee for the benefit of the cestui que trust as authorized by the trust instrument." Armstrong I, 7 F. Supp.2d at 770.
The court's language, relied upon by the government, that the United States "could bring an action in equity against the trust" is better understood as could have brought. A reading of the entire paragraph, not just the sentence quoted supra at note 2, shows that the court was not offering advice to the government as to what it may do in the future, but rather, was pointing to what might have been.
There appears to be some confusion between the parties as to the distinction between res judicata and collateral estoppel. Although the court is loathe to include any superfluous information in its opinion, particularly due to the premise of this opinion, the court is compelled to address the issue of collateral estoppel, which was raised by both parties in their supplemental res judicata memoranda.
Whereas res judicata is claim preclusion, collateral estoppel may be issue preclusion. See Aliff, 914 F.2d at 43. Collateral estoppel is a subset of res judicata, operating on similar principles but on a smaller scale. When there is a different cause of action from a previous lawsuit that could not therein have been raised, thereby making res judicata inapplicable, collateral estoppel may still operate to preclude relitigation of certain issues that have already been adjudicated. Thus, if a claim is precluded by res judicata, then no further inquiry is required. However, if res judicata, or claim preclusion, does not apply, it is still possible that collateral estoppel, or issue preclusion, may apply.
Although the defendants misconstrue the government's claims as subject to collateral estoppel rather than res judicata (Def. Supp. Mem. at 4-5), the government properly concedes that the elements of res judicata are present (Pl. Resp. to Pl. Supp. Mem. at 3; Pl. Obj. at 3). However, the government then proceeded to argue the United States is not collaterally estopped from foreclosing certain liens on the Contract. First, the court points out that res judicata does apply; therefore collateral estoppel is not an issue. Second, the government argues that, if the court grants summary judgement to the United States on Count I, then Count III will not be precluded because the facts of this case would be "dramatically different from those upon which the court based [ Armstrong I,]" because the requisite condition precedent for foreclosing the liens will be met. (Pl. Obj at 4.) Without unnecessarily delving into the dizzying fact pattern of this case, the government's argument must fail because Count I is, in fact, barred by res judicata; therefore nothing has changed to make Count III anything other than it is: a claim that is barred by the doctrine of res judicata.
III.
The government's motion to strike the affidavits submitted in support of the defendants' motion for summary judgment shall be dismissed as moot. On all accounts, the affidavits addressed issues pertaining to Counts I and III. Based on the court's finding that those claims are barred by res judicata, the issue of whether the affidavits in question were properly submitted has been rendered moot.
IV.
For the foregoing reasons, the government's Motion for Summary Judgment with respect to Count II shall be granted in part, reducing to judgment the tax liability of the Trust in the stipulated amounts totaling $53,223, plus interest and applicable penalties. The defendant's Motion for Summary Judgment shall be granted in part, to the extent that Counts I and III shall be dismissed on grounds of res judicata. The parties' cross motions for Summary Judgment, as they pertain to the merits of Counts I and III, and the government's motion to strike affidavits shall be dismissed as moot. An appropriate Order shall this day enter.