Horstemeyer v. Internal Revenue Service (In re Horstemeyer)

Citation: 557 B.R. 427Docket: C/A No. 14-04773-DD; Adv. Pro. No. 15-80003-DD

Court: United States Bankruptcy Court, D. South Carolina; September 2, 2016; Us Bankruptcy; United States Bankruptcy Court

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An order was issued by Chief US Bankruptcy Judge David R. Duncan granting the Internal Revenue Service (IRS) motion to quash a subpoena filed by plaintiff Derek L. Horstemeyer on August 3, 2016, which sought to depose David Lowell, a former IRS appeals officer, regarding Horstemeyer's tax debts. The IRS argued that the subpoena was inappropriate as it pertained to issues already covered in past litigation. The court acknowledged that the underlying case involves Horstemeyer's Chapter 7 bankruptcy filing on August 24, 2014, and the IRS's claims for tax debts owed by Horstemeyer’s companies, DLH and HLN, asserting that Horstemeyer is the alter ego of these entities. The parties had previously agreed that the case's resolution would focus on the alter ego theory, while Horstemeyer later attempted to argue that this issue had been settled in prior tax court proceedings. Notably, discovery deadlines had been extended multiple times, with the final deadline set for January 8, 2016; however, no initial disclosures or witness lists had been exchanged by either party. The plaintiff’s attempt to conduct the deposition of Lowell came after the discovery period had ended, prompting the IRS to file its motion on August 12, 2016. A hearing took place on August 29, 2016, after which the court took the matter under advisement before issuing the order.

Mr. Lowell is set to testify that he reviewed the tax litigation and found the corporate entities legitimate; he would have collapsed them under an alter-ego theory if he had deemed otherwise. During the hearing, the IRS noted it had issued multiple subpoenas and depositions, while the Plaintiff did not depose any witnesses and only served one set of interrogatories. The IRS identified only a few individuals with knowledge of its case, and Plaintiff failed to disclose Mr. Lowell as a potential witness. The IRS argues the subpoena for Mr. Lowell should be quashed, citing that his deposition notice was issued over six months post-discovery and that Mr. Lowell was not identified as a witness during the litigation. Under Fed. R. Civ. P. Rule 26(a), the IRS contends Plaintiff was required to disclose Mr. Lowell, and under Fed. R. Civ. P. Rule 37(c), his non-disclosure is neither justified nor harmless, causing unfair surprise and trial disruption. The IRS also claims Mr. Lowell’s testimony is irrelevant to the alter-ego issue, previously determined not to be part of the tax litigation. Conversely, Plaintiff argues there is no deadline that has passed for disclosing Mr. Lowell, referencing Fed. R. Civ. P. Rule 26(a)(3), which allows disclosure up to 30 days before trial, and claims the IRS hasn't disclosed its witnesses either. Plaintiff maintains that the purpose of de bene esse deposition is to preserve Mr. Lowell’s testimony for trial due to his unavailability, asserting that this is distinct from discovery. Plaintiff argues Mr. Lowell's testimony is pertinent to evaluating the alter-ego issue and whether there was willful tax evasion.

Federal Rule of Civil Procedure (FRCP) Rule 30, applicable through Federal Rule of Bankruptcy Procedure (FRBP) 7030, governs oral depositions, while FRCP Rule 31 (FRBP 7031) addresses depositions via written questions, and FRCP Rule 32 (FRBP 7032) pertains to the use of depositions in court. A de bene esse deposition is intended to preserve witness testimony for trial, with no specific exception outlined in the rules for such depositions. The Advisory Committee's Notes for Rule 30 clarify that no distinction is made between discovery and de bene esse depositions. The Fourth Circuit has held that depositions used at trial, regardless of their purpose, are treated the same under the Federal Rules. In relevant case law, such as Tube City IMS, LLC v. Severstal U.S. Holdings, LLC, the Fourth Circuit has not recognized a right to conduct depositions after the discovery period has ended. Some district courts within the Fourth Circuit have permitted de bene esse depositions post-discovery, but only where local rules allow it. In the present case, no local rule permits such depositions outside the discovery timeframe. Therefore, the Plaintiff has no absolute right to depose Mr. Lowell.

The court retains discretion to permit a de bene esse deposition after the close of discovery. However, applying principles of fairness, the court finds it inappropriate to allow the Plaintiff to conduct this deposition eight months post-discovery, especially given that the Plaintiff failed to take any depositions during the discovery period, despite two extensions. The Plaintiff had prior knowledge of Mr. Lowell's whereabouts and the limitations of the 100-mile subpoena power. Furthermore, the court questions the relevance of Mr. Lowell's testimony concerning alter ego theory, as his qualifications to provide a persuasive opinion on the matter appear unconvincing.

Mr. Lowell is classified as a fact witness by the Plaintiff, which prohibits him from offering opinions regarding the legal issue of alter ego status in this adversary proceeding. His insights related to the tax liabilities of the involved entities are not pertinent to the alter ego determination in the contexts of collection or dischargability. Furthermore, the tax court case where Mr. Lowell served as the IRS appeals officer has been settled regarding the parties' liabilities, while this proceeding focuses on collection rather than liability. Consequently, the Court finds Mr. Lowell's testimony insufficiently relevant to justify allowing his deposition close to the trial date, especially since the Proposed Joint Pre-Trial Order has been filed and trial exhibits submitted, which may lead to trial delays. As a result, the Plaintiff's subpoena for Mr. Lowell’s deposition is deemed improper, and the IRS’s Motion to quash it is granted. Additionally, per Federal Rule of Civil Procedure 26(a), parties are required to disclose witnesses with discoverable information without awaiting a discovery request. The Government is currently obtaining necessary administrative files from the IRS to fulfill this obligation. Under Fed. R. Civ. P. Rule 37(c), failure to disclose a witness as required may result in the inability to use that witness's testimony unless justified. Rules 30 and 31 permit depositions by oral or written questions, while Rule 32 allows for the use of depositions at hearings or trials under certain conditions, including the witness's unavailability.