Court: District Court, M.D. Florida; September 25, 2018; Federal District Court
MARCIA MORALES HOWARD, United States District Judge, is reviewing Defendants' Second Motion to Dismiss Amended Complaint or for Summary Judgment, filed on October 24, 2017. The Plaintiff, the United States (referred to as the "Government"), submitted a Response in Opposition on December 11, 2017, making the matter ready for consideration.
The case pertains to the Government's attempt to collect a penalty against Steven Schoenfeld related to his failure to file a Foreign Bank Account Report (FBAR) under 31 U.S.C. § 321 and § 5321. The FBAR requirement was established by the Bank Secrecy Act (BSA) in 1970, aimed at combating money laundering by mandating that US persons report foreign financial accounts exceeding $10,000 annually by June 30.
The Secretary of the Treasury is authorized to assess penalties for non-compliance, with the Internal Revenue Service (IRS) responsible for enforcing civil penalties. Civil penalties can stem from negligence, non-willful, or willful violations, with willful violations carrying the possibility of up to $100,000 or 50% of the unreported account balance in penalties. The IRS has a six-year window to assess these penalties and must initiate civil action to collect them within two years of the penalty assessment or any related criminal judgment becoming final.
In 1993, Steven Schoenfeld opened a foreign account with UBS AG in Switzerland using proceeds from a New York apartment sale. The account earned interest, dividends, and Passive Foreign Investment Company Gains, but Schoenfeld did not report this income on his federal tax returns while reporting domestic income. In 2009, UBS AG warned account holders that it might disclose their information to the IRS; Schoenfeld refused to authorize this release. UBS closed his account on July 14, 2010, transferring its funds to a U.S. brokerage account at Raymond James Financial Services, where his son, Robert Schoenfeld, was named the sole beneficiary and trading agent.
On September 30, 2014, the IRS imposed a civil penalty of $614,300 against Steven Schoenfeld for failing to file an FBAR for 2008, as his account balance exceeded $10,000 during a specified period. Despite receiving notice, he did not pay the penalty, which grew to $690,188.69 by August 16, 2016, due to interest and late payment penalties. Steven Schoenfeld died on August 21, 2015, having appointed Robert Schoenfeld as the personal representative of his estate, though Robert did not probate the will. On September 29, 2016, the Government filed an action against Steven to reduce the penalty to judgment, sending the complaint to his address where Robert resided. An attorney for the family informed the Government of Steven's death on October 27, 2016, leading to the filing of an Amended Complaint on December 14, 2016.
The Government's Amended Complaint names the Estate of Steven Schoenfeld and Robert Schoenfeld as defendants under 28 U.S.C. § 2404. A process server confirmed that both defendants were served personally on December 15, 2016. On January 5, 2017, the defendants filed a motion to dismiss or for summary judgment, which was scheduled for a hearing on September 22, 2017. The court denied this initial motion without prejudice, allowing the defendants until November 9, 2017, to submit a renewed motion. Defendants filed this subsequent motion on October 24, 2017, arguing that the original Complaint was void due to Steven Schoenfeld's death, claiming the Estate cannot be sued under Rule 17, and asserting that the Government could not rely on Section 2404. The Government contended that its Amended Complaint was valid, related back to the original Complaint, and did not rely on Section 2404 for its claim against Robert Schoenfeld. The court will evaluate whether the original Complaint was legally defective and if it could be amended, whether Section 2404 applies, and whether the claim abated upon Schoenfeld's death. Under Florida law, a decedent cannot be sued, thus the original Complaint was essentially void. The Government sought to rectify this by filing the Amended Complaint against the Estate and Robert Schoenfeld after the statute of limitations had expired. Defendants cited precedents that supported their view that the original Complaint was a legal nullity.
In Engle I, the district court ruled that lawsuits filed in the name of deceased individuals lack jurisdiction and are considered legal nullities. The court acknowledged potential for substitution or amendment under Federal Rules 17, 25, or 15 when the plaintiff dies post-filing or lacks capacity, but these remedies were unavailable because the personal injury claims from deceased plaintiffs were deemed "not viable." The Eleventh Circuit affirmed the dismissal of the actions but did not confirm the nullity ruling, indicating that the original complaints were not necessarily legal nullities. This distinction is critical for the current case, which involves a lawsuit filed by a proper party but naming a deceased individual. Most federal courts have concluded that such actions are not legal nullities and can be amended. Cases like Loudenslager v. Teeple and Estate of A.A. v. United States illustrate that amendments to name the estate representative are permissible under Rule 15, despite the death of a defendant before the complaint was filed.
In *Darmanchev v. Roytshteyn*, the court determined that a complaint filed against a deceased defendant could be amended despite Pennsylvania law considering such a filing a legal nullity. The court applied Rule 15 of the Federal Rules of Civil Procedure to support its conclusion that amendment is permissible under certain circumstances. The defendants did not provide adequate legal authority to establish that the original complaint was irreparably null.
The court found prior cases, like *Guettler v. City of Montgomery*, unpersuasive, noting that in *Guettler*, the plaintiff did not attempt to amend after learning of the defendant's death, leading to dismissal based on procedural failures rather than a substantive analysis of amendment rights. Additionally, *Engle I* was distinguished as the plaintiffs in that case lacked the capacity to sue from the outset, as their claims were invalid at the time of filing. In contrast, the government here filed a valid claim, which did not abate upon the death of the defendant, Steven Schoenfeld.
The court emphasized that since the government had the right to amend its complaint as a matter of course, Rule 15(a) limits the court's discretion to reject the amendment based on claims of futility. Thus, the government's filing of the Amended Complaint was deemed proper.
Defendants' reliance on Mizukami v. Buras is deemed unconvincing as it pertains to a motion to substitute deceased heirs under Rule 25, which does not apply here since the Government amended its pleading under Rule 15 instead. Rule 25 requires substitution for parties who were involved in the action before their death, whereas Rule 15 allows for amendments without such constraints. The Court supports the notion that a complaint filed against a deceased individual can be amended to address the defendant's lack of capacity and will not declare the original Complaint void ab initio. However, due to the expiration of the statute of limitations before the filing of the Amended Complaint, the action may be dismissed unless the Amended Complaint relates back to the original Complaint under Rule 15(c).
Rule 15(c)(1) specifies conditions for relation back, including that the applicable statute of limitations permits it, the amendment arises from the same conduct as the original pleading, and that any changes to parties meet the notice and knowledge criteria. The parties agree that federal law dictates the statute of limitations, thus federal relation-back rules apply. Disputes exist regarding whether the Government made a mistake about the proper party's identity and whether Defendants knew or should have known they would be sued but for that mistake. If the mistake requirement of Rule 15(c) is not met, relation back cannot occur, regardless of other conditions like notice. To assess the mistake requirement, the Court will conduct a two-part inquiry: first, determining if the plaintiff was mistaken about the proper party's identity, and second, whether the proper party was aware or should have been aware of the impending lawsuit.
The Court determined that the Government erred in identifying the correct defendant, defining a "mistake" as an erroneous belief. Under Rule 15(c), which allows for liberal interpretation of "mistake," the Court noted that a deliberate choice not to sue a known party does not constitute a mistake. However, if a plaintiff misunderstands a defendant's status, it may qualify as a mistake under the rule. In this case, the Government believed Steven Schoenfeld was alive when it filed the original Complaint, despite knowing Robert Schoenfeld existed. This misunderstanding regarding Steven's status met the criteria for a mistake under Rule 15(c). The Government argued it was unaware of Steven's death, countering the Defendants’ claim that they had made a deliberate choice to sue him. The Court compared this situation to previous cases where similar misunderstandings were found to satisfy Rule 15(c) requirements. The Defendants also asserted that the Government's failure to determine Steven's death constituted a breach of its duty for reasonable inquiry under Rule 11.
A mistaken belief in a pleading does not affect whether that belief qualifies as a "mistake" under Rule 15(c) for relation-back analysis. According to the Supreme Court in Krupski, the focus is on what the prospective defendant knew or should have known, rather than the plaintiff's knowledge at the time of the original complaint. The Government's erroneous belief regarding Steven Schoenfeld’s legal status is sufficient for Rule 15(c) purposes, regardless of whether it could have discovered his death through due diligence. The Court must evaluate what the prospective defendant knew or should have known during the Rule 4(m) service period. Defendants acknowledged their awareness that they would have been named as defendants but for the Government’s belief in Schoenfeld's status. The complaint indicated the Government's belief that Schoenfeld was alive, and his liability to the United States was evident. Moreover, the Defendants did not provide a reasonable strategy for suing someone who could not provide relief, and their actions to hire legal representation demonstrate awareness of potential liability. Defendants received the Government's waiver of service and the original complaint by October 27, 2016, within the service period under Rule 4(m), negating any claims of prejudice in defending the case. The Court finds that the original complaint was not a legal nullity and could be amended. The Amended Complaint relates back to the original filing date, as the claims are connected, the Defendants received notice during the Rule 4(m) period, the Government's mistake about legal statuses is clear, and the Defendants were aware they should have been named. Consequently, the Amended Complaint is not barred by the statute of limitations.
Regarding Section 2404, the Government asserts that its claim against Robert Schoenfeld is based on his status as a distributee of the Estate, independent of Section 2404. The Government also counters the Defendants' argument about not being able to proceed against the Estate under Section 2404, stating that equitable principles allow for proceeding against the Estate even if Section 2404 is deemed inapplicable.
The Court determines that the Amended Complaint against the Estate must be dismissed as it lacks the capacity to be sued under Rule 17, which is based on state law. In Florida, an estate is not a legal entity that can be sued; rather, the proper party is the personal representative acting in that capacity. The Government argues that Section 2404 allows it to sue the Estate, which states that a civil action for damages shall survive the death of a defendant. However, the interpretation of "estate" in this federal statute is a matter of federal law. Previous cases indicate that "estate" refers to the total property of the deceased at the time of death, not a legal entity created by state probate courts. Despite these interpretations, the Court concludes that Section 2404 does not permit the Government to pursue its claim against the Estate, as it applies only when an action is already pending against a deceased defendant at the time of death. The Court emphasizes that it cannot alter the clear statutory language for broader purposes, adhering instead to the plain meaning of the law.
The Court rejects the Government's argument based on Section 2404's legislative history. Originally, the statute indicated that civil actions involving the United States would not abate due to a defendant's death and could be enforced against the deceased's estate. Despite changes in wording, the statute's intent remains the same: it does not permit filing a claim against an estate after a defendant's death but rather addresses actions that survive the death of a party after they have commenced. Consequently, the Government cannot pursue its claim against the Estate, which lacks legal capacity as a party in this suit. While the Court acknowledges the importance of preventing wrongdoers from benefiting from their actions, it emphasizes that Section 2404 does not support the Government's claim against the Estate, leading to a granted motion for dismissal.
However, the Government's claim against Robert Schoenfeld is permissible. The Amended Complaint identifies him as a distributee of the estate and the named personal representative in Steven Schoenfeld's will, making him a proper party to the lawsuit. The issue of whether a distributee is a proper party often arises under Rule 25, which allows substitution of parties in the event of a death if the claim persists. Although the Government did not formally substitute Schoenfeld under Rule 25, relevant case law indicates that a distributee can be sued under Rule 17. The Court highlights that the Federal Rules should be consistently interpreted, referencing Supreme Court guidance on the matter. It notes that substitution can occur by an executor, administrator, or distributee of the deceased’s estate, aligning with established legal precedents.
Courts across various jurisdictions have consistently affirmed that a distributee of an estate can be sued under Rule 17. In this case, Robert Schoenfeld is identified as the sole distributee of his father’s estate, having received 100% of the assets, thus allowing the Government to pursue its claim against him. The Court must also evaluate whether the Government's claim abated upon the death of Steven Schoenfeld. An action against a deceased party cannot continue unless the cause of action survives by law, which in federal cases depends on federal common law in the absence of congressional intent. It is established that remedial actions survive death, while penal actions do not. The determination of whether the FBAR penalty is civil or penal follows the Hudson v. United States framework, which involves assessing legislative intent and applying the Kennedy factors to evaluate the nature of the penalty. These factors consider aspects such as whether the sanction imposes restraint, its historical context as punishment, the requirement of scienter, and its alignment with traditional punitive aims. The outcome is not strictly dictated by any single factor, as they may yield differing implications.
To establish the nature of the penalty, only clear proof suffices, as demonstrated in United States v. Ward. An analysis under the Hudson framework indicates that the FBAR penalty is remedial, surviving the death of Steven Schoenfeld. Congress explicitly labeled Section 5321 as imposing "Civil Penalties," suggesting an intention for it to be civil rather than criminal. This intent is supported by Congress delegating enforcement authority to the Secretary of the Treasury, indicating a civil sanction rather than a criminal one. The Court further analyzes the Kennedy factors and finds insufficient evidence to classify the FBAR penalty as punitive.
First, monetary fines, including tax assessments, do not constitute an affirmative disability or restraint, which is typically associated with imprisonment. Second, historically, money penalties have not been viewed as punishment, being enforceable through civil proceedings since the revenue law of 1789. The Court emphasizes that the remedial nature of tax penalties is well established. Lastly, the BSA allows the Secretary to impose penalties on all individuals violating Section 5321, regardless of intent, thus reinforcing the civil character of the FBAR penalty.
The FBAR penalty can be assessed without regard to the taxpayer's intent, as scienter only influences the penalty's amount. The court emphasizes that the statute itself governs whether a penalty is considered punitive. While the FBAR penalty aims to deter misconduct, it serves primarily civil purposes, including regulation rather than criminal punishment. Deterrence is acknowledged as a feature of both civil and criminal penalties, but the mere presence of a deterrent intent does not classify a sanction as criminal. The court notes that willful failure to file an FBAR can lead to criminal charges, but the existence of both civil and criminal penalties for the same act does not convert the civil penalty into a criminal one. Furthermore, Congress has explicitly labeled Section 5321 as imposing civil penalties, differentiating it from criminal sanctions in Section 5322. Finally, the FBAR penalty also functions to protect government revenue and reimburse investigation costs resulting from taxpayer fraud, reinforcing its remedial nature.
Tax penalties are designed to reimburse the government for the costs associated with investigating tax fraud and addressing lost tax revenue, particularly in cases where tax shelters are difficult to detect and prosecute. The FBAR (Foreign Bank Account Report) aims to identify individuals potentially using foreign accounts to evade U.S. law and trace funds used for illicit purposes. Congress expressed concern over the use of foreign financial institutions to violate domestic tax laws when enacting the Bank Secrecy Act (BSA).
When individuals improperly report their taxable income and conceal foreign accounts, the government incurs significant investigative costs. The Supreme Court has recognized that the remedial nature of tax penalties serves to protect public revenue and compensate the government for expenses incurred in uncovering fraud. The collection of FBAR penalties, alongside the primary tax owed, is justified as it secures full compensation for the interference with governmental rights.
The FBAR penalty is deemed not excessive, aligning with past judicial findings that similar tax penalties are remedial. Courts have upheld substantial penalties, such as a 50% assessment, as reasonable measures to offset investigation costs for taxpayers concealing income. This perspective reinforces that tax penalties are aimed at reimbursing the government for losses and expenses related to fraud, rather than merely punishing the taxpayer.
A court has affirmed that a 50% willful FBAR penalty, the maximum allowed by law, can be appropriate despite its severity, as it addresses serious issues like tax evasion and organized crime. The court emphasized that such a penalty acts as more than a mere cost of doing business for offenders. The court examined Congress's intent for the FBAR penalty to be viewed as a civil sanction and found no compelling evidence that it is punitive.
Defendant's arguments referencing multiple cases, including *Kurth Ranch*, *Dye*, *Hall*, and others, were deemed unpersuasive. In *Kurth Ranch*, the penalty was considered punitive because it was tied to criminal conduct and imposed after an arrest for that conduct, distinguishing it from FBAR penalties which apply to a broader range of taxpayers, not just those who have been criminally punished. Additionally, the drug tax in *Kurth Ranch* was deemed exceptional as it was levied on goods the taxpayer did not possess at the time of tax assessment, a feature not present in Section 5321 related to FBAR penalties. As such, the court concluded that Section 5321 operates as a standard revenue measure rather than a punitive measure, thereby rejecting the applicability of the precedents cited by the Defendant.
A civil sanction that is not exclusively remedial but serves retributive or deterrent purposes is considered punishment. The Supreme Court's decisions in Halper and Hudson clarify that all civil penalties inherently possess some deterrent effect. Hudson further disavowed Halper's approach, stating that no civil penalties fall outside the Double Jeopardy Clause merely for lacking exclusivity in their remedial nature. The case of Bajakajian determined that a 100% forfeiture for unreported currency exportation constituted punishment, as it was linked to an underlying felony conviction and its severity was grossly disproportionate to the offense, with no public loss incurred. However, the FBAR penalty in the current case is distinguishable because it is not contingent on a conviction and aims to compensate the government for losses, aligning it with a remedial purpose. The court noted that the analysis in Thompson, which referenced Bajakajian, ultimately supported the view that the tax penalty in question is also remedial. Defendants' emphasis on the penalty amount is deemed misplaced, as they highlighted a hypothetical tax obligation of $1,376.95 related to the foreign bank account, which does not alter the nature of the FBAR penalty.
The penalty against Steven Schoenfeld amounts to $614,300, which is significantly disproportionate to the alleged unreported tax. The Court references Hudson, emphasizing the need to evaluate sanctions based on the statute's face rather than the specific penalties assessed. It concludes that the Government's claim persists despite Schoenfeld's death, aligning with precedents indicating that tax penalties survive the individual. The Court cites various cases affirming that executors may be liable for FBAR assessments against the deceased's estate. The ruling states the Government's need to recover losses from fraud continues beyond the defrauder's life.
The Court also clarifies that the original Complaint is valid and can be amended, with the Amended Complaint relating back to the original filing date, thus not barred by the statute of limitations. While the Government lacks a claim against the Estate under Section 2404, it can pursue a claim against Robert Schoenfeld as a distributee. The motion to dismiss is partially granted, removing the Estate as a defendant, while all other aspects are denied. The stay previously imposed is lifted, and the parties must file a joint notice by October 15, 2018, on how to proceed. The order was issued in Jacksonville, Florida, on September 25, 2018.
Facts in this case are mostly undisputed, with any disagreements noted, and are considered favorably towards the Government due to the pending Defendants' Motion. A "person" required to file an FBAR includes U.S. citizens, residents, U.S.-organized entities (corporations, partnerships, LLCs), trusts, and estates. The Government responded to the Defendants' Motion on January 18, 2017, with subsequent supplements on February 6, 2017, and August 9, 2017. The 1991 amendment to Rule 15(c) mandates that federal courts apply state law relation-back rules in diversity cases, following state statute of limitations. Although state law applies here, federal relation-back principles from Darmanchev are also relevant. The Court finds Defendants' cited cases inapplicable due to procedural differences. The Tenth Circuit's decision in Esposito supports the notion that substitution of parties is permitted despite the original party lacking capacity to sue. The Government was informed of Steven Schoenfeld's death on October 27, 2016, and filed an Amended Complaint by December 14, 2016, indicating timely action. The Court references the Eleventh Circuit's precedent on decisions from the former Fifth Circuit and does not find the Government's argument for equitable tolling compelling. The Court also finds the Government's reliance on Sullivan v. Hudson unpersuasive regarding the term "civil action."
The Equal Justice Act includes social security proceedings, but the current case is focused not on the commencement of a civil action under Section 2404, but rather on the Government's ability to initiate an action against an estate under that section. To resolve the dispute regarding Robert Schoenfeld's capacity to be sued under Rule 17, the Court will examine materials beyond the Amended Complaint, treating the Motion as one for summary judgment under Rule 56. This approach is supported by precedent, specifically Luxor Agentes Autonomos De Investimientos, which treated a motion to dismiss under Rule 17(b) similarly. The Supreme Court's Kennedy factors are referenced, and the Court declines to consider financial records from Defendants, choosing instead to resolve the survival issue based solely on the allegations in the Amended Complaint and the parties' legal arguments. In the Kahr case, the Second Circuit held that while a civil fraud addition could be assessed on the estate's taxes, it could not be imposed in that instance due to the Government's failure to prove specific intent. The cases of Garrity and Park do not address the survival issue.
