First Tuskegee Bank v. Milner et al

Filing 30

MEMORANDUM OPINION AND ORDER that FTB's Motion for Discharge in Interpleader 23 is GRANTED, that FTB is DISCHARGED from liability with regard to claims to the interpleaded funds, and that Defendants in this action are RESTRAINED from instituti ng or prosecuting any proceeding in any state or United States court with regard to the disputed interpleaded funds; that the United States's Motion for Default Judgment Against Ms. Milner 28 is DENIED without prejudice, and that the Entry of Default 27 is SET ASIDE. Signed by Honorable William Keith Watkins on 5/2/2011. (Attachments: # 1 Civil Appeals Checklist)(jg, )

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
NORTHERN DIVISION
FIRST TUSKEGEE BANK,
Plaintiff,
v.
CHIQUANTA C. MILNER, individually
and doing business as It’s Tax Time, et
al.,
Defendants.

)
)
)
)
)
)
)
)
)
)
)

CASE NO. 2:10-CV-463-WKW

MEMORANDUM OPINON AND ORDER
Before the court are Plaintiff First Tuskegee Bank’s (“FTB”) Motion for Discharge
in Interpleader (Doc. # 23) and Defendant United States of America – Internal Revenue
Service’s (“United States”) Motion for Default Judgment as to Defendant Chiquanta Milner
(Doc. # 28). For the reasons to follow, FTB’s motion is due to be granted; however, the
United States’s motion is due to be denied because Ms. Milner has not been properly served
with a copy of the crossclaim.
I. BACKGROUND
On April 27, 2010, FTB brought this interpleader action in the Circuit Court of
Montgomery County, Alabama, to resolve a potential dispute concerning funds deposited in
a bank account maintained by Defendant Chiquanta C. Milner, individually and doing
business as It’s Tax Time (“Milner Account”). As alleged in the complaint, the funds were
deposited by the United States for the “purported purpose of receiving the individual tax

refunds of the clients of It’s Tax Time.” (Compl. ¶ 5 (Ex. to Doc. # 1).) FTB subsequently
was informed by the United States that those funds “may not have been properly payable”
and that the funds “could be subject to reclamation by the Department of Treasury.” (Compl.
¶ 6.) Consequently, FTB placed an administrative hold on the Milner Account pending
further developments in the investigation. (Compl. ¶ 6.) In the Complaint, FTB makes no
claim on the funds deposited in the Milner Account, but avers that it could be subject to
double or multiple liability for disbursement. (Compl. ¶ 8.)
Subsequently, on May 25, 2010, the United States timely removed this interpleader
action pursuant to 28 U.S.C. §§ 1442(a)(1) and 1444. (Not. of Removal (Doc. # 1).) It
predicates subject matter jurisdiction on 26 U.S.C. § 7402 and 28 U.S.C. §§ 1340, 1345, and
1346(c), and invokes Rule 22 interpleader, see Fed. R. Civ. P. 22.1 Venue is proper in this
district, pursuant to 28 U.S.C. § 1397.
After removal, and upon FTB’s motion, the funds in the Milner Account, totaling
$169,653.18, were paid into the registry of this court, and an Order was entered that the funds
be placed in an interest bearing account. (Order (Doc. # 17).) Thereafter, the United States
filed a crossclaim against Ms. Milner. The crossclaim alleges that for the 2009 tax year, the
refunds claimed on 268 returns were directed to the Milner Account, with a total of $648,140
deposited into that account. (Crossclaim ¶¶ 6-7 (Doc. # 18).) This amount “exceeds the
$169,653.18 in interpleaded funds which were held in the Milner Account at the time the

1

Statutory interpleader under 28 U.S.C. § 1335 is not relied upon by the United States.

2

interpleader complaint was filed.” (Crossclaim ¶ 14.) It is further alleged that all of the
refunds paid into the Milner Account were attributable to proposed overpayments, or
refundable credits, reported on income tax returns nominally filed by taxpayers who did not
have an interest in or control over the Milner Account. (Crossclaim ¶ 8.) In Count I of its
crossclaim, the United States contends that the purported assignments of those payments are
voidable under the Anti-Assignment Act, 31 U.S.C. § 3727, and that the act of directing the
payments to the Milner Account interferes with the United States’s property interest in the
funds. (Crossclaim ¶ 11.) In Count II, the United States asserts that the interpleaded funds
are based upon false or fraudulent income tax returns and, therefore, the refunds are
recoverable pursuant to 26 U.S.C. § 7405. (Crossclaim ¶¶ 12-20.) The United States
“requests that the Court enter judgment in favor of the United States for the interpleaded
funds and grant such other and further relief as justice requires.” (Crossclaim 7.) The
Certificate of Service on the crossclaim provides that the United States served it on Ms.
Milner “by transmitting copies thereof, postage prepaid, in the United States mail: Chiquanta
C. Milner[,] It’s Tax Time[,] 775 Forestdale Dr.[,] Montgomery, AL 35109.” (Crossclaim
8.)
Subsequently, on February 22, 2001, the United States filed an Application for Entry
of Clerk’s Default (“Application”) on its crossclaim against Ms. Milner, pursuant to Rule
55(a) of the Federal Rules of Civil Procedure. The Application provides that Ms. Milner
“has failed to answer or otherwise respond to [FTB’s] complaint or the United States’

3

crossclaim within the time period prescribed by the Federal Rules of Civil Procedure.” 2
(U.S.’s Application 1 (Doc. # 26).) In support of its Application, the United States submitted
the declaration of its counsel, Gregory L. Jones, who declared that “[t]he docket in this
matter reflects that [Ms.] Milner was personally served with a copy of the summons and
complaint on May 3, 2010.” (U.S.’s Application 2.) The record supports Mr. Jones’s
declaration as to service of the summons and a copy of the complaint on Ms. Milner. (See
Exs. to Doc. # 1.) Additionally, as of this date, the record reveals that Ms. Milner has not
filed an answer or other response to the complaint, or made an appearance in this action. It
is true, therefore, as set out in the United States’s Application, that Ms. Milner has not
answered the United States’s crossclaim. However, the flaw in the Application is the
absence of evidence or argument of proper service of a copy of the crossclaim on Ms. Milner.
As discussed in the next section, on this record, service of the crossclaim had to be made
upon Ms. Milner in accordance with Rule 5(a)(2) and Rule 4 of the Federal Rules of Civil
Procedure, and under these rules, service by the United States mails was not proper.
The Clerk nonetheless entered default against Ms. Milner, as the crossclaim
defendant. (Entry of Default 1 (Doc. # 27).) The Entry of Default provides that Ms. Milner
“was duly served with a copy of the crossclaim,” but “has failed to answer or otherwise

2

The time period is established in Rule 12(a)(1)(B), which requires a defendant to serve an
answer to a crossclaim “within 21 days after being served with the pleading that states the . . . crossclaim.” Fed. R. Civ. P. 12(a)(1)(B); see also Fed. R. Civ. P. 6(d).

4

defend this action as set out in the [United States’s] Application . . . .” (Entry of Default 1
(Doc. # 27).)
Subsequently, FTB filed its Motion for Discharge in Interpleader. (FTB Mot. (Doc.
# 23).) Invoking 28 U.S.C. § 2361, FTB requests an order discharging it as the interpleader
Plaintiff and permanently enjoining the claimants from instituting or prosecuting any further
action against FTB with regard to the disputed interpleader funds in any state or federal
court. (FTB Mot. 3.)
II. DISCUSSION
A.

FTB’s Motion for Discharge in Interpleader
FTB files its Motion for Discharge in Interpleader, pursuant to 28 U.S.C. § 2361,

asserting that it is a disinterested stakeholder. Section 2361 provides that, “[i]n any civil
action of interpleader,” a district court may discharge a stakeholder “from further liability.”
Id. Section 2361 also authorizes a district court to enter an order restraining all claimants
from instituting a proceeding in any state or federal court affecting the interpleaded res. Id.
No reason has been offered, and none can be envisioned, for denying the motion. Indeed,
the United States does not oppose FTB’s “motion to be discharged from liability for any
distribution of the interpleader funds in this action.” (U.S.’s Resp. to FTB Mot. 1 (Doc.
# 25).) Accordingly, FTB’s motion is due to be granted.

5

B.

The United States’s Motion for Default Judgment Against Ms. Milner
The United States moves for default judgment on Count I of its crossclaim against Ms.

Milner for a violation of the Anti-Assignment Act, § 3727, and for recovery of the
interpleaded funds.3 Because the record does not demonstrate that Ms. Milner has been
properly served with a copy of the crossclaim, the motion for default judgment is due to be
denied.
Proof that service was effected is a prerequisite to obtaining a default judgment under
Rule 55 of the Federal Rules of Civil Procedure. See Fed. R. Civ. P. 55(a) (An entry of
default is appropriate only “[w]hen a party against whom a judgment for affirmative relief
is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or
otherwise . . . .”); see also Norsyn, Inc. v. Desai, , 351 F.3d 825, 828 (8th Cir. 2003) (“If the
party against whom a default judgment is sought has incurred no obligation under the Federal
Rules of Civil Procedure to ‘plead or otherwise defend’ the action, the district court does not
abuse its discretion in refusing to grant such relief. In fact, the converse is true.”). The
threshold issue, not addressed by the United States, is whether it properly served a copy of
the crossclaim on Ms. Milner by depositing it, “postage prepaid, in the United States mail.”
(Crossclaim 8.) The answer turns on whether Rule 4 or Rule 5 of the Federal Rules of Civil
Procedure governs service of the crossclaim. In the usual case, Rule 5 of the Federal Rules

3

As to Count II of its crossclaim, the United States contends that its “claim to the interpleaded
funds does not rest on whether the refund claims are false and fraudulent, and no such finding is required
to grant the United States the relief sought.” (U.S.’s Mot. 6.)

6

of Civil Procedure governs the method of service of a “pleading filed after the original
complaint,” Fed. R. Civ. P. 5(a)(1)(B), and permits service of a crossclaim on an
unrepresented party “by mailing it to the person’s last known address – in which event
service is complete upon mailing,” Fed. R. Civ. P. 5(b)(2)(C). The latter presumably is the
method the United States used to serve its crossclaim on Ms. Milner. This is not the usual
case, however, because Ms. Milner has not entered an appearance in this action; therefore,
Rule 5(a)(2) governs service of the crossclaim.
Pursuant to Rule 5(a)(2), “[n]o service is required on a party who is in default for
failing to appear. But a pleading that asserts a new claim for relief against such a party must
be served on that party under Rule 4.” Fed. R. Civ. P. 5(a). “Rule 4, and Rule 5(a) as it
applies to parties in default for failure to appear, reflect a policy that a defendant should
receive notice of all claims for relief upon which a court may enter judgment against him.”
Varnes v. Local 91, Glass Bottle Blowers Ass’n of U.S. & Canada, 674 F.2d 1365, 1368
(11th Cir. 1982).
Ms. Milner is “in default for failing to appear” because she has been properly served
with the summons and a copy of FTB’s complaint, but has not appeared in this action in any
shape or form. Fed. R. Civ. P. 5(a)(2). The fact that an entry of default has not been entered
by the Clerk as to Ms. Milner’s failure to answer or otherwise respond to the original

7

complaint filed by FTB is of no material consequence.4 That is because under Rule 5(a)(2),
a party can be “in default for failing to appear,” even where the clerk has not entered that
party’s default. Fed. R. Civ. P. 5(a)(2). See Varnes, 674 F.2d 1368 n.3 (“A court need not
have adjudicated a party as being in ‘default’” for Rule 5(a)(2) to apply.); Cutting v. Town
of Allenstown, 936 F.2d 18, 21 n.1 (1st Cir. 1991) (“Where defendants . . . were served with
the summons and d[id] not appear and answer within the required period, they [were] ‘parties
in default’ for Rule 5(a) purposes,” notwithstanding that “the clerk had yet to enter a
default.” (citing Varnes, 674 F.2d at 1368 n.3)).
Even though Ms. Milner is in default and not entitled to service of any litigation
papers in this suit, Rule 5(a)(2) nonetheless requires service of any pleading asserting a new
claim for relief. See Fed. R. Civ. P. 5(a)(2); see also Charles Alan Wright & Arthur R.
Miller, 4B Federal Practice & Procedure Civ. § 1144 (3d ed. 2008) (“[A]lthough a party in
default for failure to appear is not entitled to receive a copy of any paper in the action, he is
entitled to receive a pleading asserting a new or additional claim for relief against him, but
it must be served upon him pursuant to Rule 4 as if it were original process.”). The United
States’s crossclaim seeks recovery of erroneous refunds of federal taxes deposited in the
Milner Account, pursuant to 31 U.S.C. § 3727 and 26 U.S.C. § 7405(b). The crossclaim
undisputedly asserts claims for relief not present in the original complaint, which simply

4

The only entry of default entered by the Clerk was for Ms. Milner’s failure to answer or
respond to the crossclaim, but that entry of default must be set aside for the same reason that the motion
for default judgment must be denied.

8

seeks to require “Defendants . . . to resolve the claims to the interpleaded funds amongst
themselves through this proceeding and determine the rightful owner of the funds.” (Compl.
¶ 3.) Because the United States’s crossclaim is “a pleading that asserts a new claim for
relief,” Rule 5(a)(2) required the United States to serve the crossclaim pursuant to Rule
4(e)(2). Service by the United States mail is not contemplated by Rule 4(e)(2), and while in
this case, Rule 4(e)(1) permits service of the crossclaim by any means permitted under
Alabama law, service by mail under Alabama’s rules must be by certified mail in the manner
prescribed. See Ala. R. Civ. P. 4(i)(2).
Because the record does not reveal proper service of the crossclaim on Ms. Milner,
the motion for default judgment against Ms. Milner is due to be denied. The absence of
evidence of proper service also provides “good cause” for setting aside the entry of default
sua sponte. Fed. R. Civ. P. 55(c); see also Anheuser Busch, Inc. v. Philpot, 317 F.3d 1264,
1267 (11th Cir. 2003) (rejecting argument that district court erred by sua sponte invoking
Rule 55(c) to set aside a non-final default judgment).
III. ORDER
For the foregoing reasons, it is ORDERED that FTB’s Motion for Discharge in
Interpleader (Doc. # 23) is GRANTED, that FTB is DISCHARGED from liability with
regard to claims to the interpleaded funds, and that Defendants in this action are
RESTRAINED from instituting or prosecuting any proceeding in any state or United States
court with regard to the disputed interpleaded funds.

9

It is further ORDERED that the United States’s Motion for Default Judgment Against
Ms. Milner (Doc. # 28) is DENIED without prejudice, and that the Entry of Default (Doc.
# 27) is SET ASIDE.
DONE this 2nd day of May, 2011.
/s/ W. Keith Watkins
UNITED STATES DISTRICT JUDGE

10