No. 96-8035 IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1996 THOMAS FAUST, PETITIONER v. UNITED STATES OF AMERICA ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT BRIEF FOR THE UNITED STATES IN OPPOSITION WALTER DELLINGER Acting Solicitor General LORETTA C. ARGRETT Assistant Attorney General BRUCE R. ELLISEN JOHN A. NOLET Attorneys Department of Justice Washington, D.C. 20530 (202) 514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether petitioner's claim is barred by res judicata. (I) ------------------------------------------- Page Break ---------------------------------------- IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1996 No. 96-8035 THOMAS FAUST, PETITIONER v. UNITED STATES OF AMERICA ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT BRIEF FOR THE UNITED STATES IN OPPOSITION OPINIONS BELOW The opinion of the court of appeals (Pet. App. A1-A9) is reported at 101 F.3d 675. The opinion of the Court of Federal Claims (Pet. App. B1-B7) is reported at 33 Fed. Cl. 807. JURISDICTION The judgment of the court of appeals was entered on November 26, 1996 (Pet. App. A1). A timely petition for rehearing was denied on January 21, 1997 (Pet. App. C1-C2). The petition for a writ of certiorari was filed on February 26, 1997. The jurisdiction of this Court is invoked under 28 U.S.C. 1254 (1). STATEMENT 1. a. On August 20, 1992, a district court judgment was entered against petitioner on a federal tax claim (Pet. App. A2). Petitioner filed a notice of appeal from that judgment on October ---------------------------------------- Page Break ---------------------------------------- 3 16, 1992 (Pet. App. B2). While that appeal was pending, petitioner made a proposal to the Internal Revenue Service to settle his outstanding tax obligations. The employees of the Service to whom this proposal was communicated were not aware (i) that petitioner's tax liability had been referred to the Department of Justice for litigation or (ii) that a district court judgment had been entered against petitioner. On behalf of the Service, they purported to accept petitioner's settlement proposal on March 15, 1993 (Pet. App. A2, B2). When these employees of the Service thereafter learned that petitioner's tax liability had been referred to the Department of Justice, petitioner was notified that the purported settlement agreement was invalid because it was made in violation of Section 7122 (a) of the Internal Revenue Code (Pet. App. A3). That Section provides (26 U.S.C. 7122 (a)): The Secretary [of the Treasury] may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense. b. After the purported settlement agreement was signed, petitioner voluntarily dismissed his appeal from the judgment that had been entered in the government's favor (Pet. App. A2). When petitioner was thereafter advised that the settlement agreement was invalid, he moved to reinstate his appeal. His motion was granted (Pet. App. A3). ---------------------------------------- Page Break ---------------------------------------- 4 c. Petitioner argued on appeal that the United States was bound by the settlement agreement signed by the employees of the Internal Revenue Service. The court of appeals concluded that it had to address that contention because, if the settlement agreement were valid, the appeal from the judgment in the government's favor would be moot. Faust v. United States, No. 92-16833 (9th Cir. July 7, 1994). The court held, however, that "[t]he purported settlement was not valid" under Section 7122 (a) because petitioner "did not reach a settlement with the appropriate government authority" (App., infra, 3a). Because the settlement agreement was not valid, the appeal was "not moot" (ibid.). Addressing the merits, the court of appeals affirmed (id. at 4a-8a). 2. Petitioner thereafter brought this suit in the Court of Federal Claims, seeking a declaratory judgment that the settlement agreement signed by the employees of the Internal Revenue Service is valid and enforceable (Pet. App. B3). The United States moved for summary judgment, arguing that petitioner's claim is barred by res judicata from the prior action. Petitioner asserted that res judicata principles were inapplicable to this case because, under this Court's decision in Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375 (1994), the court of appeals lacked jurisdiction in the prior litigation to review the validity of the purported settlement agreement. The Court of Federal Claims granted summary judgment to the United States. The court explained that petitioner had "misread" Kokkonen (Pet. App. B4, B5): ---------------------------------------- Page Break ---------------------------------------- 5 Unlike the agreement in Kokkonen, a determination of the validity of the settlement agreement was essential to the Ninth Circuit's opinion [on the prior appeal in this case.] Indeed, before the Ninth Circuit could resolve the remainder of plaintiff's appeal, the Court had to address whether a settlement agreement existed. If an accord and satisfaction had occurred, the appeal would proceed no further. Thus, contrary to the claim in Kokkonen, the settlement issue before the Ninth Circuit was not independent and distinct, but "factually interdependent." [Kokkonen v. Guardian Life Ins. Co., 511 U.S. at 379-380.] 3. The court of appeals affirmed (Pet. App. A1-A9). The court noted that, unlike Kokkonen -- in which the district court lost jurisdiction to enforce a settlement agreement upon dismissal of the underlying suit -- the Ninth Circuit on the first appeal in this case was "empowered to decide the question of the validity of the settlement agreement in order to determine the merits of the appeal" (Pet. App. A6). Because the invalidity of the settlement agreement had actually and necessarily been addressed and determined in the first case, the court held that petitioner's claim based upon that agreement was barred by res judicata (Pet. App. A7-A8). ARGUMENT The decision of the court of appeals is correct and does not conflict with any decision of this Court or any other court of appeals. Further review is therefore not warranted. 1. a. Petitioner sought to litigate in this case the same issue that had been decided against him by the court of appeals in the first appeal. In the first appeal, the court determined that the settlement agreement on which petitioner relies is invalid because it was made in violation of 26 U.S.C. 7122 (a). It was ---------------------------------------- Page Break ---------------------------------------- 6 necessary for the court to address that issue in that case because, as the court noted, if the settlement agreement had been valid, then that appeal would have been moot (App., infra, 3a). The court of appeals in the prior case thus actually and necessarily adjudicated the claim that petitioner now seeks to relitigate in this case. The courts below were therefore correct in concluding that principles of res judicata bar and estop petitioner from pursuing his claim again in this case. See Nevada v. United States, 463 U.S. 110, 128-130 (1982); Montana v. United States, 440 U.S. 147 (1979); Commissioner v. Sunnen, 333 U.S. 591, 597 (1948). b. Petitioner argues (Pet. 9-17) that the decision of the court of appeals in the first case has no binding effect because that court had no jurisdiction to review the validity of the purported settlement agreement. He characterizes that court's decision on the issue as mere "dicta" (Pet. 7) to be disregarded under the reasoning of this Court's decision in Kokkonen v. Guardian Life Ins. Co., supra. The court of appeals correctly rejected petitioner's "misplaced" reliance on Kokkonen (Pet. App. A6). In Kokkonen, this Court held that a federal court does not retain jurisdiction to enforce a settlement of pending litigation when the suit had been dismissed without a stipulation that retained jurisdiction for the court to enforce the terms of the settlement. 511 U.S. at 381-382. In this case, by contrast, the suit had not been dismissed and the Ninth Circuit plainly retained jurisdiction over petitioner's appeal of the adverse district court decision on the merits. In ---------------------------------------- Page Break ---------------------------------------- 7 the exercise of that jurisdiction, the court actually and necessarily determined that the putative settlement agreement was invalid (App., infra, 3a). The validity of that putative agreement was a threshhold issue on the merits of that appeal, for the appeal would have been moot if the case had validly been settled (Pet. App. A6). See U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 115 S. Ct. 386, 390-393 (1994). In Kokkonen, this Court acknowledged the continued existence of a federal court's power (i) to review "factually interdependent" ancillary issues before it and (ii) to review other ancillary issues necessary "to enable the court to function successfully, that is, to manage its proceedings, vindicate its authority, and effectuate its decrees." 511 U.S. at 379-380. As the court of appeals observed in this case, "far from assisting [petitioner], the Supreme Court's Kokkonen decision supports the Ninth Circuit's assertion of jurisdiction" (Pet. App. A7). 1 2. Moreover, petitioner's claim on the merits is frivolous. Section 7122 (a) of the Internal Revenue Code clearly sets forth who has authority to compromise tax cases on behalf of the United States. Under that provision, the Internal Revenue Service lacks authority to settle any civil or criminal tax case after it has ___________________(footnotes) 1 The appellate decisions on which petitioner relies (Pet. 10-13) are similarly inapposite. Like Kokkonen, those cases involve the question whether a court has jurisdiction to enforce a settlement agreement after the case in which the agreement was entered had been dismissed. William Keeton Enter. v. All American Strip-O-Rama, 74 F.3d 178 (9th Cir. 1996); O'Connor v. Colvin, 70 F.3d 530 (9th Cir. 1995); Hagestad v. Tragesser, 49 F.3d 1430 (9th Cir. 1995); Lucille v. City of Chicago, 31 F.3d 546 (7th Cir. 1994). ---------------------------------------- Page Break ---------------------------------------- 8 been referred to the Department of Justice "for prosecution or defense" (26 U.S.C. 7122 (a)). As the court of appeals correctly observed in disposing of petitioner's claim on his first appeal, "the director of the IRS's Sacramento collection division plainly lacked authority to compromise the case. * * * Neither the Attorney General nor her delegates in charge of this case, who were the only people authorized to settle this case on behalf of the United States, ever agreed to the purported settlement" (App., infra, 3a- 4a). CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. WALTER DELLINGER Acting Solicitor General LORETTA C. ARGRETT Assistant Attorney General BRUCE R. ELLISEN JOHN A. NOLET Attorneys MARCH 1997 ------------------------------------------ Page Break ---------------------------------------- NOT FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT THOMAS J. FAUST, No. 92-16833 Plaintiff-Appellant, D.C. No. CV-88-893-MHP v. MEMORANDUM* UNITED STATES OF AMERICA, Defendant-Appellee. Appeal from the United States District Court for the Northern District of California Marilyn H. Patel, District Judge, Presiding Argued and Submitted June 14, 1994 San Francisco, California Before: HUG, SCHROEDER, and FERNANDEZ, Circuit Judges Thomas Faust appeals pro se the district court's judgment in favor of the United States after a bench trial in his action challenging the IRS's assessment of penalties and interest for unpaid payroll withholding and FICA taxes of Valley Shipbuilding, Inc. See 26 U.S.C. 6672 (a). We affirm. I. Jurisdiction The government argues that there is no appellate jurisdiction. We disagree. The district court entered judgment on August 20, 1992. Faust filed a timely notice on October 16, ___________________(footnotes) * This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir. R. 36-3. A1 ------------------------------------------- Page Break ---------------------------------------- 1992. See Fed. R. App. P. 4 (a) (appeal from judgment in civil case in which United States is a party must be filed within 60 days of entry of judgment in district court). On April 19, 1993, in the belief that he had settled his tax liability with the IRS, Faust filed a motion for voluntary dismissal of his appeal, which this court granted on April 23. On September 27, 1993, after learning that the Justice Department had rejected the settlement, Faust moved the court to reinstate his appeal. The motion was granted by a judge of this court on October 8 and the government's timely motion for reconsideration of the reinstatement order was denied by a motions panel on February 9, 1994. This court has the authority to recall its mandate once issued "to prevent injustice and to protect the integrity of [its] processes." Watson v. Estelle, 886 F.2d 1093, 1093 (9th Cir. 1989). When appropriate, we may also reinstate an appeal that has been voluntarily dismissed. See Williams v. Boeing Co., 681 F.2d 615, 616 (9th Cir. 1982) (per curiam). We have exercised our authority to recall our mandate and reinstate the voluntarily dismissed appeal in this case; and, upon reconsideration, we decided that we had exercised that authority providently. Therefore, since the appeal was taken from a final district court order and was timely filed in the first instance, we have jurisdiction to resolve it on the merits. 28 U.S.C. 1291. We will not revisit the issue. See United States v. Soderling, 970 F.2d 529, 532 n.5 (9th Cir. 1992) (per curiam) (Ninth Circuit panel need not address an issue in a case that has already been decided by another panel. The decision is binding upon the second panel.), cert. denied, U.S. 113 S. Ct. A2 [-2-] --------------------------------------------- Page Break ---------------------------------------- 2446, 124 L. Ed. 2d 663(1993). II. The Purported Settlement Agreement Was Not an Accord and Satisfaction of Faust's Tax Liability A valid settlement of the district court's judgment, once paid, would have completely and irrevocably eradicated the effects of Faust's alleged violations of the Internal Revenue Code and rendered his appeal moot. EEOC v. Goodyear Aerospace Corp., 813 F.2d 1539, 1542 (9th Cir. 1987) ("An action is moot if the issues are no longer live or the parties lack a legally cognizable interest in the outcome."); see also County of Los Angeles v. Davis, 440 U.S. 625, 631, 99 S. Ct. 1379, 1383, 59 L. Ed. 2d 642 (1979) (an appeal becomes moot when there is no expectation that the alleged violation will recur and interim events have eradicated the effects of the alleged violation). Unfortunately for Faust, he did not reach a settlement with the appropriate government authority. The purported settlement was not valid and this appeal is not moot. This case had been referred to the Department of Justice for defense shortly after Faust brought his civil action in the district court in March of 1988. At that moment, the IRS was divested of its authority to compromise the case. 26 U.S.C. 7122 (a). More than five years later, the director of the IRS's Sacramento collection division plainly lacked authority to compromise the case. Faust's failure to discern that does not change his legal position. Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 384, 68 S. Ct. 1, 3, 92 L. Ed. 10 (1947) ("anyone entering into an arrangement with the Government takes the risk of A3 [-3-] ---------------------------------------- Page Break ---------------------------------------- having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority"). One party (Faust) may have agreed to settle this case, but the other (the United States) did not. Neither the Attorney General nor her delegates in charge of this case, who were the only people authorized to settle this case on behalf of the United States, ever agreed to the purported settlement. The settlement was not effective and there was no accord and satisfaction of the district court's judgment. See Milgard Tempering, Inc. v. Selas Corp., 902 F.2d 703, 712 (9th Cir. 1990). 1 III. Faust Is Personally Liable for Valley's Unpaid Payroll Withholding and FICA Taxes Under 26 U.S.C. 6672 (a) In order to find liability under section 6672 (a), the court had to find that Faust: (1) was a "responsible person" within the meaning of the statute; and (2) acted willfully in failing to collect, truthfully account for, or pay over the withheld taxes. Davis v. United States, 961 F.2d 867, 869-70 (9th Cir. 1992), cert. denied, U.S., 113 S. Ct. 969, 122 L. Ed. 2d 124 (1993); Maggy v. United States, 560 F.2d 1372, 1374 (9th Cir. 1977), cert. denied, 439 U.S. 821, 99 S. Ct. 86, 58 L. Ed. 2d 112 (1978). ___________________(footnotes) 1 Faust's brief misapprehension that his tax liability had been settled is not the sort of "serious injustice" that merits imposition of the normally unavailable defense of equitable estoppel against the government acting in its sovereign capacity. See Johnson v. Williford, 682 F.2d 868, 871-73 (9th Cir. 1982) (government estoppel from reincarcerating erroneously paroled prisoner who demonstrated successful reintegration into the community during the first fifteen months after his release). A4 [-4-] ------------------------------------------ Page Break ---------------------------------------- The record supports the district court's determination that both elements were satisfied. Faust's significant stake in and significant control over Valley's business operations were sufficient to support the determination that he was a responsible person. See id. at 1374-75 (defining "responsible person"); United States v. Graham, 309 F.2d 210, 212 (9th Cir. 1962) (same); Wilson v. United States, 250 F.2d 312, 316 (9th Cir. 1957) (same); see also Dudley v. United States, 428 F.2d 1196, 1201 (9th Cir. 1970) (responsible person need have only significant rather than exclusive control); Pacific Nat'l Ins. Co. v. United States, 422 F.2d 26, 30-31 (9th Cir.) (underlying purpose of section 6672 is to cut through the shield of organizational form and impose liability upon those actually responsible for an employer's failure to withhold and pay over the tax), cert. denied, 398 U.S. 937, 90 S. Ct. 1838, 26 L. Ed. 2d 269 (1970). The record also supports the determination that his actions and inactions were willful. He knew of the failure to pay over the back taxes and knew of the propensity of the people on the scene at Valley to defer the payment of those taxes. Despite his ability to control the flow of money to Valley he did not make sure that the withholding taxes were paid over before other creditor's bills were discharged. The government did not have to show that his motives were bad or that he intended to defraud it. See Davis, 961 F.2d at 871. Nor does it matter that he was initially unaware of the fact that the taxes were not being paid. Once he discovered that they had not been, it was his duty to use after acquired funds to pay them before he paid other creditors. A5 [-5-] -------------------------------------------Page Break ---------------------------------------- Id. at 875-76. When he failed to perform that duty, he became liable for the penalty. Id. at 876; see Slodov v. United States, 436 U.S. 238, 245-46, 98 S. Ct. 1778, 1784, 56 L. Ed. 2d 251 (1978). IV. Other Issues A. Denial of Leave to File an Amended Complaint Leave to amend a complaint should be freely granted by a district court when justice so demands. Fed. R. Civ. P. 15 (a); DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). Nonetheless, a district court may deny a motion for leave to amend a complaint when it finds that the amendment constitutes an exercise in futility. Id. To the extent that Faust was motivated by a desire to cite additional legal authority in support of his defenses against liability to the government, he was free to cite whatever legal authority he wanted to cite without amending his complaint. To the extent that he sought to plead a claim against MarAd, he had no right to do so. Faust sought to assert two types of claims against MarAd: contract claims and tax claims. The contract claims essentially allege that MarAd is liable to Faust in the amount of the unpaid taxes because it breached its loan agreement with Faustug. The district court could not have asserted jurisdiction over those claims because they are contract claims against the United States that exceed 10,000. 28 U.S.C. 1346 (a) (2); see 46 U.S.C. 1601-1610 (MarAd is a United States agency); DSI Corp. v. Secretary of Hous. & Urban Dev., 594 F.2d 177, 180 (9th Cir. 1979). A6 [-6-] ---------------------------------------- Page Break ---------------------------------------- The court also could not have asserted jurisdiction over Faust's tax claim against MarAd. Before it can be sued, the United States must waive its sovereign immunity. E.J. Friedman Co., Inc. v. United States, 6 F.3d 1355, 1357 (9th Cir. 1993). Under 26 U.S.C. 3505, the government may collect an employer's unpaid withholding taxes from the employer's lenders under certain circumstances. See Jersey Shore State Bank v. United States, 479 U.S. 442, 448-49, 107 S. Ct. 782, 786, 93 L. Ed. 2d 800 (1987). The statute does not, however, provide for a waiver of sovereign immunity in the event that the lender is a United States agency. Without a waiver, the district court had no subject matter jurisdiction over Faust's tax claims. E.J. Friedman, 6 F.3d at 1357. Because the district court could not have asserted jurisdiction over any of Faust's proposed new claims, adding them to his complaint would have been an exercise in futility. The district court did not abuse its discretion. B. Jury Trial Faust argues that he was unjustly denied his right to a jury trial under the statute. This issue was not raised before the district court and, therefore will not be considered by this court. See United States v. Reyes, 8 F.3d 1379, 1390 (9th Cir. 1993). At any rate, he expressly waived his right to a jury trial. C. Consideration of Hamilton's Deposition The district court relied extensively on Leroy Hamilton's deposition transcript to establish many facts that were essential to its findings that Faust was a responsible person who willfully failed to pay Valley's unpaid FICA and withholding taxes. On A7 [-7-] ---------------------------------------- Page Break ---------------------------------------- January 31, 1991, Faust's counsel and the AUSA handling the case stipulated that Hamilton's entire deposition transcript would be admitted into evidence. The stipulation did not limit the purposes for which the court could consider the transcript. The court did not err. AFFIRMED A8 [-8-]