Smith et al v. USA

Filing 16

ORDER: 13 Order is made absolute. Claims One through Five are dismissed in accordance with the Bankruptcy Court's Order of 4/3/2019. Claims Six and Seven are dismissed with prejudice. Judgment shall issue accordingly. Entered by Judge Raymond P. Moore on 4/27/2021. (Attachments: # 1 Bankruptcy Court Order) (cpear)

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UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLORADO
Bankruptcy Judge Thomas B. McNamara
In re:
Bankruptcy Case No. 17-16354 TBM
Chapter 7

DAVID LEE SMITH and
MARY JULIA HOOK,
Debtors.
DAVID LEE SMITH and
MARY JULIA HOOK,

Adv. Pro. No. 18-01248 TBM

Plaintiffs,
v.
UNITED STATES OF AMERICA,
Defendant.
_______________________________________________________________________
ORDER GRANTING UNITED STATES’ MOTION FOR PARTIAL DISMISSAL AND
ORDER TO SHOW CAUSE WHY THIS COURT OUGHT NOT DISMISS THE
REMAINING CLAIMS
_______________________________________________________________________
THIS MATTER comes before the Court on the “United States’ Motion for Partial
Dismissal” (Docket No. 11, the “Motion”) and the “Debtors’/Plaintiffs’ Response in
Opposition to United States’ Motion for Partial Dismissal” (Docket No. 13, the
“Opposition”). The United States of America (the “Defendant”) filed its Motion instead of
filing a responsive pleading to the Debtors’ “Complaint and Jury Demand” (Docket No. 1,1
the “Complaint”).
I.

Introduction and Factual Background.

The Plaintiffs in this action are David Lee Smith (“Smith”) and Mary Julia Hook
(“Hook”) (the “Debtors”). They are the debtors in a Chapter 7 case In re Smith and Hook,
Case No. 17-16354 TBM (Bankr. D. Colo.) (the “Main Case”). They are proceeding
without counsel but both are attorneys. Thus, this Court “need not afford (their) filings the
liberal construction ordinarily given to pro se pleadings.” Hook v. U.S., 624 Fed. Appx.
972, 976 (10th Cir. 2015); LNV Corp. v. Hook, 2015 WL 7962971, at *3 (D. Colo. Dec. 3,
2015).
1

Except when noted otherwise, the convention “Docket No. ____” refers to the number which
corresponds to the document in the CM/ECF docket for this Adversary Proceeding.

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The Debtors filed their Chapter 7 case on July 11, 2017. The indications are that
the Debtors filed their case to thwart the efforts of their secured lender, LNV Corporation
(“LNV”), to foreclose on the Debtors’ residence. The Debtors, LNV and the United States
have been involved in a judicial foreclosure proceeding initiated by LNV. That action is
now pending in the United States District Court for the District of Colorado (the “District
Court”) in the case of LNV Corporation v. Hook, Civ. Action No. 14-cv-00955 (D. Colo.)
(the “LNV Action” or the “LNV Court”). Particularly, the record of that case reveals that
the District Court entered an order on June 28, 2017 authorizing the judicial foreclosure of
the Debtors’ residence. (Docket No. 320 in the LNV Action.)
Prior to the LNV Action, the Debtors, as tax payers, commenced an action against
the United States seeking a refund or credit in the amount of $1 million for overpayment
of taxes for tax years 1992-1996 and 2001-2006 in the case of Smith v. United States,
Civ. Action No. 13-cv-01156 RM-KLM (D.Colo.) (the “Smith Case” or “Smith Court”). The
Debtors also sought a release of all federal tax liens against their residence which is the
subject of the LNV foreclosure.
When the Debtors filed their Chapter 7 case, they listed LNV and the United States
as creditors. The filing of their bankruptcy case stayed the LNV Action. Eventually,
however, LNV obtained an order granting it relief from stay to continue with the LNV
Action. (Docket No. 50 in the Main Case.)
Thereafter, the bankruptcy case proceeded uneventfully. Both LNV and the United
States filed proofs of claim in the bankruptcy case. Later, on November 8, 2017, the
Debtors received a discharge (Docket No. 54 in the Main Case, the “Discharge Order”).
Litigation ensued in this Court when the Chapter 7 Trustee (the “Trustee”) filed his Final
Report.
On June 29, 2018, the Trustee filed a Final Report (Docket No. 61 in the Main
Case, the “Initial Final Report”). The Debtors objected to that Initial Final Report (Docket
No. 66 in the Main Case, the “Objection”) and, on August 2, 2018, the Court overruled the
Debtors’ Objection. On September 4, 2018, the Trustee filed his “Final Account and
Distribution Report Certification that the Estate Has Been Fully Administered and
Application to be Discharged” (Docket No. 75 in the Main Case, the “Final Report”). The
Debtors did not file a further objection and the Court closed the Debtors’ Main Case on
October 5, 2018. (Docket No. 80 in the Main Case.)
The record, including the Final Report, reveals that the Trustee collected total
gross receipts of $1,053.99 for the bankruptcy estate, of which $485.89 was paid for
Administrative Expenses of the Trustee and the remaining $568.10 was paid as a partial
distribution on the $520,668.76 Priority Unsecured Claims of the IRS. That left nothing to
pay the approximately $839,000.00 of General Unsecured Claims filed in this case.
Furthermore, it is evident from the Final Report that the Debtors scheduled claims against
the IRS for tax refunds in excess of $1,000,000 and damages of over $5,000,000, but the
Trustee elected not to pursue them. Upon closing of the case, such claims were
abandoned to the Debtors by operation of 11 U.S.C. § 554(c).

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II.

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The Debtors’ Complaint.

On August 3, 2018, the day after this Court rejected the Debtors’ challenge to the
Trustee’s Initial Final Report, the Debtors filed their Complaint against the Defendant.
The Debtors’ Complaint is a jumble of vague assertions. To complicate matters, the
Debtors incorporated into the Complaint by reference the “Verified Answer of Defendant
M. Julia Hook to the Amended Cross Claim of the United States of America; Affirmative
Defenses and Compulsory Counterclaims; and Jury Demand” (Docket Nos. 1 and 3).
The LNV Action is pending before the United States District Court for the District of
Colorado (the “District Court”) and the Debtors have appealed to the United States Court
of Appeals for the Tenth Circuit (the “Tenth Circuit”) several of the District Court’s orders.
The Defendant complains, rightfully, that the Debtors “generally disregard Rule
10’s requirements that factual allegations be made in numbered paragraphs and that
claims based on separate sets of circumstances be asserted as separate counts.” Motion
at 2. Nevertheless, the Defendant discerned seven “requests for relief” and assigned
numbers to them as follows:
1.
2.
3.
4.

A request for refund of federal taxes in excess of $1 million;
Disallowance of the IRS’s proof of claim;
Quiet title to the Debtors’ real and personal property;
An award of damages based on alleged misconduct by the Defendant,
including fraud in the LNV Action;
5. An award of damages based on alleged violations of the discharge injunction
by the Defendant;
6. An award of damages based on alleged violation of the automatic stay by the
Defendant; and
7. Request for determination of dischargeability of federal taxes.

Id.
III.

The Defendant’s Motion for Partial Dismissal.

Based upon its categorization of the relief the Debtors seek, the Defendant moves
to dismiss Claims 1 - 4 arguing they are barred on jurisdictional and res judicata grounds;
and to dismiss Claim 5 because it fails to state a claim upon which relief may be granted
under Fed. R. Civ. P. 12(b)(6) (made applicable to adversary proceedings by Fed. R.
Bankr. P. 7012(b)) (“Rule 12(b)(6)”). More specifically, the Defendant asserts that the
Debtors’ “conclusory allegations are devoid of any supporting factual averments.” Id. at
11. “With respect to Claim (5), Smith and Hook fail to allege that the United States took
any act against them personally after the discharge was awarded.” Id. at 3. For reasons
known only to the Defendant, the Defendant does not move to dismiss what it has
identified as Debtors’ Claim 6 (requesting an award of damages for the Defendant’s willful
violation of the automatic stay of Section 362 of the Code) and Claim 7 (for declaratory
relief that the “taxes and penalties owed to governmental units” are discharged and have
been discharged (Complaint at 5) in the Debtors’ Main Case).

3

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Thereafter, the Defendant’s Motion reads like a math word problem. The
Defendant contends the Court should dismiss Claims 1 through 4 under Rule 12(b)(6)
“because these claims are the same claims that were raised and rejected for lack of
jurisdiction and failure to state a claim by the court in the LNV Action.” Id. at 3-4.2
The Defendant contends that Claims 1, 2 and 3 should be dismissed under Fed. R.
Civ. P. 12(b)(1) (made applicable to adversary proceedings by Fed. R. Bankr. P. 7012(b))
(“Rule 12(b)(1)”) because this Court lacks subject matter jurisdiction over them. It states
“the LNV Court (and other courts)” have rejected those claims. Id. at 5. The LNV Court’s
determination that it lacked subject matter jurisdiction “has a preclusive effect on those
claims here.” Id.3
In what appears to be an alternative argument, the Defendant urges the Court to
dismiss Claims 1 and 4 pursuant to Rule 12(b)(6). It complains that the Debtors are
merely “rehash(ing) previously rejected allegations” Id. at 8; and “to the extent that the

2

The Defendant cites six (6) cases in which a federal court has adjudicated “Smith’s and Hook’s
claims challenging their tax liabilities for tax years 1992-1996, 2001-2006, requesting a refund, seeking
quiet title and damages.” Motion at 4 n.2. The Defendant cites the following: Smith v. Comm’r of Internal
Revenue, T.C. Memo. 2003-266, 2003 WL 22100685, aff’d, sub nom. Hook v. Comm’r of Internal Revenue,
103 Fed. Appx. 661 (10th Cir. 2004) (affirming Tax Court determination of Smith and Hook’s tax
deficiencies for the 1992-1996 tax years); Smith v. Comm’r, T.C. Memo. 2010-240, *3 aff’d, 458 Fed. Appx.
714 (10th Cir. 2012) (affirming Tax Court determination of Smith and Hook’s tax deficiencies for the 20012005 tax years); Smith v. Comm’r, Docket No. 27995-09L, slip op. (Tax Court, Jan. 7, 2011); Smith v.
United States, 101 Fed. Cl. 474, aff’d, 495 Fed. Appx. 44 (Fed. Cir. 2012) (affirming the Court of Federal
Claims’ rejection of Smith’s claims relating to the “tax enforcement and collection actions taken against him
and his wife” and challenges to tax deficiencies assessed against him for tax years 1992-1996 and 20012006, on jurisdictional grounds, and finding no federal district court would have subject-matter jurisdiction
over Smith’s claims because they had not paid the assessed taxes in full, a prerequisite to a tax refund
suit); Smith v. United States, 2014 WL 6527980, aff’d, sub nom. Hook v. United States, 624 Fed. Appx. 972
(10th Cir. 2015); LNV v. Hook, 2015 WL 7962971(D. Colo. Dec. 3, 2015) (the District Court dismissed
Hook’s Compulsory Counterclaims [the same Compulsory Counterclaims which the Debtors have
incorporated into their Complaint in this case] for the same reasons the District Court dismissed them in
Smith v. U.S., 2014 WL 6527980 (D. Colo. Nov. 20, 2014) ( the “Smith Action”) which reasoning was
affirmed by Hook v. U.S., 624 Fed. Appx. 972 (10th Cir. 2015)).
3
The Defendant qualifies this broad assertion with respect to Claim 2 (for disallowance of the Proof
of Claim filed by the Internal Revenue Service (the “IRS”)). The Defendant appears to limit the scope of its
Motion to dismiss Claim 2 for lack of subject matter jurisdiction under Rule 12(b)(1) as to its tax claim for tax
years 2007 and 2009-2013. The Defendant explains in a footnote:
The IRS’s claim for tax years 2009-2013 relate only the Hook’s tax liability.
The United States acknowledges that no court has determined Hook’s tax
liability for 2009-2013, nor has a court determined Smith and Hook’s tax
liability for tax year 2007. Thus, the United States is not seeking dismissal
of the claim objection for those taxes on res judicata grounds. However,
the United States maintains that there may be grounds for this Court to
abstain from adjudicating claims relating to those liabilities.
Motion at 8 n.4. The Defendant never explains its position that “there may be grounds for this Court to
abstain from adjudicating claims relating to those liabilities.” Despite the ambiguity of the Defendant’s
footnote, the Court construes the Defendant’s explanation and acknowledgment to mean it seeks dismissal
of Claim 2 for tax years 1992-1996, 2001-2006 and 2008 under Rule 12(b)(1) but for tax years 2007 and
2009-2013 only under Rule 12(b)(6).

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LNV Counterclaim incorporated by reference in this action is the basis for Claims (1) and
(4), these claims are barred by res judicata.” Id.
The Defendant suggests that the Debtors’ wholesale incorporation of their
Compulsory Counterclaims in their Complaint is fatal to its viability, at least with respect to
Claims 1, portions of 2, 3 and 4. The Defendant acknowledges that Fed. R. Civ. P. 10(c)
(made applicable to adversary proceedings by Fed. R. Bankr. P. 7010) (“Rule 10”),
permits a party to incorporate by reference a statement in a pleading “elsewhere in the
same pleading or in any other pleading or motion.” However, because the LNV Court
considered and rejected the incorporated Compulsory Counterclaims, LNV v. Hook, 2015
WL 7962971 (D. Colo. Dec. 3, 2015), the Defendant maintains that this Court must reject
them too. Id. at 9.
Finally, the Defendant contests the Debtors’ Claim 5 for alleged violations of the
discharge injunction asserting it should be dismissed under Rule 12(b)(6) for failure to
state a claim upon which relief can be granted. Particularly, the Defendant notes:
the only factual assertion made by Smith and Hook with
regard to post-discharge actions taken by the United States is
that “the United States and its counsel have. . . continued to
pursue false and fraudulent claims for relief against Hook and
Smith in the [LNV Action]. Compl. at p. 4. But this assertion
does not allege a violation of the discharge injunction. The
[LNV Action] is an in rem (foreclosure) action in which the
United States in merely a defendant. It is not an in personam
action. This difference is significant because in rem actions,
which include actions to enforce a lien against encumbered
property, are not prohibited by the discharge injunction.
Id. at 10-11 (citing Johnson v. Home States Bank, 501 U.S. 78 (1991); Jester v. Wells
Fargo Bank, N.A. (In re Jester), 2015 WL 6389290, at *5 (10th Cir. B.A.P. Oct. 22, 2015)
aff’d, 656 Fed. Appx. 425 (10th Cir. 2016)).
IV.

The Debtors’ Opposition.

The Debtors’ Opposition repeats verbatim the “allegations” of their Complaint.
Opposition at 3-5. They rely on the Cover Sheet (Docket No. 1 at 8-9) which they filed
with their Complaint as “proof” that the Complaint states a claim for relief. The Cover
Sheet is an official form and it states: “the clerk of court needs the information to process
the adversary proceeding and prepare required statistical reports on court activity.” It is
not a part of the Complaint. In the remainder of their Opposition, they reargue their
“claims for relief” stated in their Complaint. Lastly, the Debtors challenge the sufficiency
of what they refer to as the Defendant’s “affirmative defense of res judicata.” Id. at 8.
The Debtors argue:
[T]he United States has failed to make even a prima facie
showing of the validity of its affirmative defense of res
judicata. . . with respect to the claims for relief alleged by
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Hook and Smith in their Complaint and Jury Demand, much
less proof of this affirmative defense by a preponderance of
the evidence, as will be required at the Seventh Amendment
jury trial. . . .
Id.
V.

Issues Presented.

The Defendant’s Motion requires the Court to decide if the Debtors’ Complaint is
sufficient with respect to Claims 1, 2, 3, 4 and 5. Particularly, does the LNV Court’s
dismissal of the Debtors’ Compulsory Counterclaims bind the Debtors and the Defendant
and prevent the Court from adjudicating those claims on res judicata grounds? Is this
Court without jurisdiction over the Debtors’ Refund Claim based upon the determination
by higher courts of the United States that federal courts lacked subject matter jurisdiction
over the Debtors’ Refund Claim? May this Court take judicial notice of the records of the
District Court and Tenth Circuit in ruling on the Defendant’s Motion? Have the Debtors
stated a claim for relief that they are entitled to damages for the Defendant’s alleged
conduct taken in the LNV Action which Debtors assert violated the discharge injunction?
Have the Debtors presented the Court with a live “case or controversy” that the Defendant
has taken any action or intends to take any action against them personally in violation of
the discharge injunction? Do the Debtors have standing to object to the IRS Proof of
Claim? Is any bankruptcy purpose served by disallowance of the IRS Proof of Claim?
The Court determines for the reasons set forth below that: (1) the Debtors are
barred from relitigating the Debtors’ Compulsory Counterclaims, which they incorporated
into their Complaint, and which were dismissed for various reasons by both the LNV
Court and the Smith Court; (2) to the extent a federal court higher than this Court has
determined that federal courts do not have jurisdiction to hear the Debtors’ Refund Claim
(Claim 1) or to determine the Debtors’ tax liability for certain tax years included within the
IRS Proof of Claim, this Court is so bound and without jurisdiction; (4) in a related vein,
this Court may take judicial notice of the cases cited by the Defendant and those in the
records of cases involving the Debtors in both the District Court and the Tenth Circuit; (4)
the Debtors do not allege any facts in support of their claim that the Defendant violated
the discharge injunction, they do not allege that the Defendant has or intends to proceed
against the Debtors personally, or that it has taken the position that its unsecured tax
debts are excepted from their Discharge; and (5) in light of the insolvency of the Debtors’
Main case, and because the Main Case is closed, the Debtors do not have standing to
object to the IRS Proof of Claim, and no bankruptcy purpose is served by adjudicating the
amount of any of the Debtors’ tax liability stated in the IRS Proof of Claim.
The Court recognizes the Defendant’s effort to remedy the Debtors’ failure to
comply with Rule 10 and to separate the wheat from the chaff. The Debtors’ failure to
comply makes the job of the party responding to their Complaint difficult, if not impossible.
To facilitate its ability to respond to the Complaint, the Defendant has assigned numbers
to what it interprets the Debtors to be claiming in their Complaint. But that effort has its
drawbacks. For example, the Debtors allege that “[t]he United States and its counsel
have continued to pursue their false and fraudulent claims for relief against Hook and
Smith in [the LNV Action] in willful violation of the automatic stay, the discharge order, and
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the discharge injunction” entered in the Debtors’ Main Case (Complaint at 4). The
Defendant has separated that “allegation” into two separate claims for relief, Claim 5, for
damages for a violation of the discharge injunction, and Claim 6 for damages for violation
of the automatic stay of 11 U.S.C. § 362(a). In its Motion, the Defendant seeks to dismiss
Claim 5 but not Claim 6. Arguably, however, the challenges Defendant brings to Claim 5
may apply with equal force to Claim 6. Furthermore, if the LNV Court or others have
rejected the Debtors’ assertions that the United States violated the Section 362(a) stay,
Debtors’ Claim 6 might be subject to dismissal on res judicata grounds.
Similarly, the Debtors in their Claim 7 “request declaratory judgment that the
‘Taxes or penalties owed to governmental units’ are dischargeable and have been
discharged in (their Main Case), and the IRS’s lien on ‘all of debtor(s) right, title and
interest to property,’ including ‘debtor’s principle residence’ is void.” Complaint at 5.
Claim 7 may be subject to attack because the Defendant does not assert its debt claimed
in its Proof of Claim is excepted from discharge as a personal liability of the Debtors; nor
does it indicate any intention to collect such taxes from the Debtors personally.
Moreover, to the extent the Debtors in their Compulsory Counterclaims repeat and rehash
allegations against the Defendant which higher courts have adjudicated in the LNV Action
and Smith Case, they too may be subject to res judicata or collateral estoppel.4
VI.
A.

Applicable Law.

Subject Matter Jurisdiction; Case or Controversy; Standing and Mootness.

The Defendant’s primary contention is that prior federal courts have rejected and
dismissed the Debtors’ Compulsory Counterclaims for lack of subject matter jurisdiction.
Rule 12(b)(1) permits a party to raise the defense of “lack of subject-matter jurisdiction” by
motion rather than in a responsive pleading. Fed. R. Civ. P. 12(b)(1). The rule
“empowers a court to dismiss a complaint for lack of subject matter jurisdiction. . . [I]t calls
for a determination that the court lacks authority to adjudicate the matter, attacking the
existence of jurisdiction rather than the allegations of the complaint.” Heath v. ROOT9B,
2019 WL 1045668, at *3 (D. Colo. Mar. 4, 2019). The Court may dismiss a complaint at
any stage of the proceedings, but the dismissal is without prejudice. Id.; Fed. R. Civ. P.
12(h)(3).
“Generally, Rule 12(b)(1) motions to dismiss for lack of subject matter jurisdiction
take two forms. First, a facial attack on the complaint’s allegations as to subject matter
jurisdiction questions the sufficiency of the complaint. In reviewing a facial attack on the
complaint, a district court must accept the allegations in the complaint as true.” Holt v.
U.S., 46 F.3d 1000, 1002 (10th Cir. 1995) (internal citation omitted). If, however, a party
challenges the factual basis for the court’s subject matter jurisdiction, the second form,
4

The Debtors did not comply with Rule 10 when drafting their Complaint. They incorporated their
Compulsory Counterclaims which were dismissed by the District Court and supplemented that with a jumble
of assertions. The only thread of a factual allegation in support of Claim 6 is that “the United States and its
counsel have refused to pay Hook and Smith their Social Security payments for the month of July, 2017, in
willful violation of the automatic stay.” Complaint at 4. But, they allege nothing more, and, by itself, may
not rise to the level of stating a claim for relief.

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the court “may not presume the truthfulness of the complaint’s factual allegations. A court
has wide discretion to allow affidavits, other documents, and a limited evidentiary hearing
to resolve disputed jurisdictional facts under Rule 12(b)(1).” Id. at 1003; Stuart v.
Cocorilla, LTD., 2019 WL 529517, at *2 (D. Colo. Feb. 11, 2019). For example, if federal
jurisdiction is based on diversity jurisdiction under 28 U.S.C. § 1332(a) and a party seeks
to challenge whether the plaintiff meets the amount in controversy threshold, the court
may be required to consider facts outside the complaint. Id., 2019 WL 529517, at *3-4.
The burden “of establishing subject matter jurisdiction is on the party asserting
jurisdiction.” Heath, 2019 WL 1045668, at *3 (citing Basso v. Utah Power & Light Co.,
495 F.2d 906, 909 (10th Cir. 1974)); Stuart, 2019 WL 529517, at *2. Similarly, “the party
invoking federal jurisdiction has the burden of establishing standing.” Heath, 2019 WL
1045668, at *3 (citing Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992)).
Federal jurisdiction is limited so as to achieve a balance of powers among the
three branches of government. Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1546-47 (2016);
Town of Chester, New York v. Laroe Estates, Inc., 137 S.Ct. 1645, 1650 (2017). “Article
III of the Constitution limits the exercise of the judicial power to ‘Cases’ and
‘Controversies.’” Town of Chester, 137 S.Ct. at 1650 (citing U.S. Const. art. III, § 2, cl. 1.);
Spokeo, 136 S.Ct. at 1547; Campbell-Ewald Co. v. Gomez, 136 S.Ct. 663, 669 (2016).
“No principle is more fundamental to the judiciary’s proper role in our system of
government than the constitutional limitation of federal-court jurisdiction to actual cases or
controversies.” Spokeo, 136 S.Ct. at 1547.
The highest Court of this land has interpreted the “actual cases or controversies”
requirement “to demand that ‘an actual controversy . . . be extant at all stages of review,
not merely at the time the complaint is filed.’” Campbell-Ewald, 136 S.Ct at 669 (quoting
Arizonans for Official English v. Arizona, 520 U.S. 43, 67 (1997)). Furthermore, “[i]f a
dispute is not a proper case or controversy, the courts have no business deciding it, or
expounding the law in the course of doing so.” Town of Chester, 137 S.Ct. at 1650
(quoting DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 341 (2006)).
The Spokeo Court instructs that “[s]tanding to sue is a doctrine rooted in the
traditional understanding of a case or controversy. . . The doctrine limits the category of
litigants empowered to maintain a lawsuit in federal court to seek redress for a legal
wrong.” Spokeo, 136 S.Ct. at 1547. To have “standing,” a plaintiff must “alleg[e] such a
personal stake in the outcome of the controversy as to . . . justify [the] exercise of the
court’s remedial powers on [their] behalf.” Town of Chester, 137 S.Ct. at 1650 (quoting
Simon v. Eastern Ky. Welfare Rights Organization, 426 U.S. 26, 38 (1976)); Heath, 2019
WL 1045668, at *3. That plaintiff must: (1) have suffered an injury in fact; (2) that is fairly
traceable to the challenged conduct of the defendant; and (3) that is likely to be redressed
by a favorable judicial decision.” Town of Chester, 137 S.Ct. at 1650; Spokeo, 136 S.Ct.
at 1547; Heath, 2019 WL 1045668, at *3. As Heath highlights,
[t]the law in this circuit is clear that a plaintiff lacks standing if
she “fail[s] to demonstrate the necessary causal connection
between [her] injury and (the) defendants,” including by failing
to present evidence that the defendants “have done or have
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threatened to do anything that presents a substantial likelihood
of causing [plaintiff] harm.”
Heath, 2019 WL 1045668, at *3 (quoting Nova Health Sys. v. Gandy, 416 F.3d 1149,
1156-57 (10th Cir. 2005)) (emphasis added).
If at any point during the litigation, however, “an intervening circumstance deprives
the plaintiff of a ‘personal stake in the outcome of the lawsuit,’. . .the action can no longer
proceed and must be dismissed as moot.” Campbell-Ewald, 136 S.Ct. at 669 (quoting
Genesis Healthcare Corp. v. Symczyk, 133 S.Ct. 1523, 1528 (2013)). “Federal courts are
without power to decide questions that cannot affect the rights of litigants in the case
before them.” City of Albuquerque v. U.S. Dept. of Interior, 379 F.3d 901, 918-19 (10th
Cir. 2004) (quoting North Carolina v. Rice, 404 U.S. 244, 246 (1971)). The Tenth Circuit
further explained:
[a] case is moot when the issues presented are no longer
“live” or the parties lack a legally cognizable interest in the
outcome. . . The crucial question is whether “granting a
present determination of the issues offered . . . will have some
effect in the real world.”
Id. at 919 (internal citations omitted).
B.

Legal Standard for Motions to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(6).

The Defendant urges the Court to dismiss Debtors’ Claim 5 pursuant to Rule
12(b)(6). The Defendant asserts that the Debtors have not alleged it has taken any action
in violation of the discharge injunction in their Main Case. It also seeks to dismiss Claims
1 and 4 under Rule 12(b)(6) but on different grounds, because a prior court has rejected
the claims the Debtors allege in their Compulsory Counterclaims.
When considering a motion to dismiss under Rule 12(b)(6), the Court accepts as
true all well-pleaded factual allegations in the complaint and views them in the light most
favorable to the plaintiff. Burnett v. Mortgage Electronic Registration Systems, Inc., 706
F.3d 1231, 1235 (10th Cir. 2013). A complaint will be dismissed unless it “contains
sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its
face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 570 (2007)).
A claim is considered “plausible” when the complaint contains facts which allow the
Court “to draw a reasonable inference that the defendant is liable for the misconduct
alleged.” Id. “Plausible” does not mean “probable”, although the plaintiff must show that
its entitlement to relief is more than speculative. Id.; Twombly, 550 U.S. at 555. If the
allegations in a complaint “are so general that they encompass a wide swath of conduct,
much of it innocent, then the plaintiffs have not nudged their claims across the line from
conceivable to plausible.” Kansas Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1215
(10th Cir. 2011). Put another way, “the complaint must give the Court reason to believe
that this plaintiff has a reasonable likelihood of mustering factual support for these
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claims.” Ridge at Red Hawk, LLC v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007)
(emphasis in original).
The Court is only bound to accept factual allegations as true and will not give
deference to legal conclusions. “Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 578. As a
result, courts often begin their analysis by identifying allegations that are no more than
conclusions and, therefore, not entitled to the “assumption of truth.” Id. Legal
conclusions must be supported by well-pleaded factual allegations, which can be
assumed as true and evaluated as to whether they plausibly give rise to the requested
relief. Id. This process is a context-specific task which depends on the elements of a
particular claim and requires the Court to draw upon its judicial experience and common
sense. Burnett, 706 F.3d at 1236.
C.

Res Judicata Effect of Prior Jurisdictional Determinations.

The Defendant asserts that the Debtors’ Claims 1 through 3 are barred on
jurisdictional and res judicata grounds. “The preclusive effect of a judgment is defined by
claim preclusion and issue preclusion,5 which are collectively referred to as res judicata.”
Jara v. Standard Parking, 753 Fed.Appx. 558, 559 (10th Cir. 2018) (quoting City of
Eudora v. Rural Water Dist. No. 4, 875 F.3d 1030,1034 (10th Cir. 2017)). The Supreme
Court has held that “[t]he preclusive effect given to federal court judgments is a question
of federal law.” Matosantos Commercial Corp. v. Applebee’s Int’l, Inc., 245 F.3d 1203,
1209-10 (10th Cir. 2001) (citing Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497
(2001)).
The Defendant notes the tenet that, as a general matter, a dismissal of a complaint
for lack of subject matter jurisdiction is not a decision on the merits and would not
preclude a later decision by a second court on the merits. Motion at 5. “However, when a
court dismisses a claim for lack of subject-matter jurisdiction, the court’s determination on
jurisdiction is a final judgment on the merits of the court’s jurisdiction.” Id. (citing
Matosantos, 245 F.3d at 1209-10); see also LNV Corp. v. Hook, 2015 WL 7962971, at *5
(D. Colo. Dec. 3, 2015) (citing Matosantos, the LNV Court rejected Hook’s argument that
“dismissal for lack of subject matter jurisdiction in the Smith Action, is not res judicata
and, therefore does not support a dismissal of [the Compulsory Counterclaims]” in the
LNV Case).
The Tenth Circuit has been consistent in holding: “collateral estoppel prevent(s) a
party from relitigating an issue critical to jurisdiction that had previously been decided in a
prior lawsuit dismissed for lack of jurisdiction.” Matosantos, 245 F.3d at 1210 (citing
Stewart Securities Corp. v. Guaranty Trust Co., 597 F.2d 240 (10th Cir. 1979)); see also
Davis v. California, 734 Fed. Appx. 560, 562 n.2 (10th Cir. 2018) (Although dismissal of a
5

The Tenth Circuit in Jara defined each as follows: Issue preclusion “bars a party for relitigating an
issue once it has suffered an adverse determination on the issue.” Jara, 753 Fed.Appx. at 559 (quoting
Burrell v. Armijo, 456 F.3d 1159, 1172 (10th Cir. 2006)). On the other hand, claim preclusion “prevent[s] a
party from litigating a legal claim that was or could have been the subject of a previously issued final
judgment.” Id. at 560 (quoting Lenox MacLaren Surgical Corp. v. Medtronic, Inc., 847 F.3d 1221, 1239 (10th
Cir. 2017)).

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party in a prior lawsuit for lack of subject matter jurisdiction, “which is not a judgment on
the merits, res judicata effect can still be given to such dismissal limited to the question of
jurisdiction.”).
D.

Res Judicata Effect of Dismissal for Failure to State a Claim.

The Defendant also urges the Court to dismiss Claims 1 and 4 under Rule 12(b)(6)
on the grounds of res judicata. As a general matter and as noted above, the court’s
review of a motion to dismiss under Rule 12(b)(6) is limited to the face and sufficiency of
the compliant. Id. at *2. The court, however, may consider “attached exhibits, documents
incorporated by reference, and ‘documents referred to in the complaint if the documents
are central to the plaintiff’s claim and the parties do not dispute the documents’
authenticity.’” Id. at *3 (quoting Smith v. United States, 561 F.3d 1090, 1098 (10th Cir.
2009)). Furthermore, “factual allegations that contradict . . . a properly considered
document are not well pleaded facts that the court must accept as true.” Id. (quoting GFF
Corp. v. Associated Wholesale Grocers, 130 F.3d 1381, 1385 (10th Cir. 1997)). If a
court exercises jurisdiction over a claim and later dismisses it for failure to state a claim
under Rule 12(b)(6), that dismissal is on the merits. Hagans v. Lavine, 415 U.S. 528, 542
(1974). In other words, if a court previously adjudicated, (and dismissed), the Debtors’
claims which they incorporate into their Complaint as failing to state a claim, that
determination binds a subsequent court. The LNV Court dismissed the Debtors’
Compulsory Counterclaims for failure to state a claim upon which relief can be granted.
Thus, the same claims, when incorporated in the Complaint, are rendered implausible. If
implausible, the claims may be dismissed in the current action for failure to state a claim
upon which relief may be granted.
E.

Judicial Notice of Records of Debtors’ Related Cases.

The strength of the Defendant’s Motion is the multiple decisions, published and
unpublished, rendered by the LNV Court and the Smith Court. The Defendant cites many
of them in its Motion. Motion at 4 n.2. Not to overstate the obvious, this Court is an
adjunct of the United States District Court for the District of Colorado, where litigation
between the Debtors and the Defendant and LNV is and has been pending for years. In
addition, the District of Colorado is within the geographic purview of the Tenth Circuit
Court of Appeals. This Court is subject to and bound by applicable legal precedent set by
that Court.
Federal Rule of Evidence 201 governs when and how a court may take judicial
notice of adjudicative facts. Fed. R. Evid. 201 provides in pertinent part:
The court may judicially notice a fact that is not subject to
reasonable dispute because it:
(1) is generally known within the trial court’s territorial
jurisdiction; or
(2) can be accurately and readily determined from
sources whose accuracy cannot reasonably be
questioned.
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The court:
(1) may take judicial notice on its own; or
(2) must take judicial notice if a party requests it and the
court is supplied with the necessary information.
Fed. R. Evid. 201(b) and (c).
The Tenth Circuit has held that:
a court may, sua sponte, take judicial notice of its own records
and preceding records if called to the court’s attention by the
parties. Further it has been held that federal courts, in
appropriate circumstances, may take notice of proceedings in
other courts, both within and without the federal judicial
system, if those proceedings have a direct relation to matters
at issue.
St. Louis Baptist Temple, Inc. v. Fed. Deposit Ins. Corp., 605 F.2d 1169, 1172 (10th Cir.
1979). The Tenth Circuit has recognized and endorsed the use of judicial notice of court
files in related cases in the context of both motions for summary judgment, id., and
motions to dismiss under Rule 12(b)(6). Porter v. Ford Motor Company, 917 F.3d 1246
(10th Cir. 2019) (Even when records from another action are “not included in the
complaint, they are nevertheless properly considered. A court may look to documents
subject to judicial notice in deciding a motion to dismiss.”).
VII.

Analysis.

The core of the Debtors’ Complaint in this case is their Compulsory Counterclaims
brought in the LNV Action and previously raised in the Smith Case. Both the Smith and
the LNV Courts dismissed Debtors’ claims. See Hook v. U.S., 624 Fed. Appx. 972 (10th
Cir. 2015) (The Tenth Circuit affirms the District Court’s dismissal of Debtors’ refund
claim, claim for release of levies and return of levied property and quiet title action.); and
LNV v. Hook, 2015 WL 7962971, at *5-6 (D.Colo. Dec. 3, 2015) (District Court dismisses
Debtors’ Compulsory Counterclaims for same reasons the Smith Action was dismissed.).
The Debtors attach to and incorporate in their Complaint, the Compulsory
Counterclaims brought in the LNV Action. Thus, the Court may properly consider it in
ruling on the Motion. In addition, the Defendant cites a number of cases in its Motion in
which the United States Tax Court, the Tenth Circuit and the District Court have
addressed the very claims the Debtors raise in the Complaint as Claims 1 through 5.
On the authority of Fed. R. Evid. 201 and St. Louis Baptist and Porter, this Court may
take judicial notice of those decisions and more recent decisions in the LNV Case, both
reported and unreported.
For example, the Tenth Circuit, in affirming the District Court’s dismissal of the
Debtors’ complaint in the Smith Case pursuant to Rules 12(b)(1) and (b)(6), set the
stage:
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In the instant action, plaintiffs sought a credit or refund of
nearly $1 million (plus any future increases in their tax liability
due to allegedly improper levies on Mr. Smith’s social security
benefits payments) for payment or overpayment of federal
income taxes, penalties, and interest for tax years 1992-1996
and 2001-2006. They also requested an abatement of
penalties for those tax years, actual damages; the release of
all federal tax liens; the return of all levied or seized property;
the release of continuing levies on Mr. Smith’s social security
payments; an order quieting title to all their real and personal
property; interest, costs, and all attorney’s fees; and any other
just relief. . . Plaintiffs sought a declaration that the orders,
opinions and judgments of the United States Tax Court, the
United States Bankruptcy Court for the District of Colorado,
and the United States Court of Federal Claims were null and
void ab initio because of numerous violations of Smith’s and
Hook’s constitutional and statutory rights to due process of
law.
Hook v. U.S., 624 Fed. Appx. 972, 974-975 (10th Cir. 2015). In the same opinion, the
Tenth Circuit dismissed the Debtors’ “quiet title claim” pursuant to Rule 12(b)(6) as “no
longer viable once the court had determined that dismissal of the claims on which it
depended (or from which it arose) was proper. Id. at 979. The Tenth Circuit recited the
sections or paragraphs of the Debtors’ complaint seeking to quiet title to their real and
personal property. The paragraph quoted by the Tenth Circuit is exactly the same as the
Debtors’ Paragraph K in the Compulsory Counterclaims, the exhibit to Debtors’ Complaint
in this case. Id. See Compulsory Counterclaims ¶ IV. K.
Later that same year, the LNV Court described the claims the Debtors brought in
that case:
Hook’s Compulsory Counterclaims in this action are nearly
identical to the claims dismissed in the Smith Action. First, the
claims are the same—Hook seeks to “recover[ ]. . . internalrevenue taxes erroneously or illegally assessed or collected,
and penalties collected without authority, and sums that are
excessive or were collected in a wrongful manner under
internal-revenue laws, . . . and to quiet title to real and
personal property. . . Next, Hook’s attachments to the
Compulsory Counterclaims are the same as those attached to
the claims in the Smith Action. . . Finally, the relief Hook seeks
is the same in all material respects—a refund/credit/set-off for
amounts allegedly overpaid for tax years 1992-1996 and
2001-2006; the abatement of penalties and interest for such
tax years; economic damages; the release of all federal tax
liens; the return of all levied/seized property; the release of
continuing levies on Smith’s and Hook’s social security
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payments; to quiet title to property; interest, costs, and legal
fees and expenses; and other legal and equitable relief.
LNV v. Hook, 2015 WL 7962971, at *4 (D. Colo. Dec. 3, 2015). Finding that the Debtors
had not properly postured their claim for a refund (as required by 26 U.S.C. § 7422(a)),
the LNV Court dismissed that claim for lack of subject matter jurisdiction. Id. at *5. As for
the Debtors’ claim with respect to their outstanding tax liabilities for 1996, 2001-2005,
2006 and 2008,6 the LNV Court also dismissed it for lack of subject matter jurisdiction for
the Debtors’ failure to comply with the full payment rule.7 Id. at *6.
The LNV Court also observed:
As in the Smith Action, Hook also seeks the return of
levied/seized property under 26 U.S.C. § 6343; the release of
tax liens . . .; and to quiet title to real and personal property
under 28 U.S.C. § 2410. These remaining claims are also
subject to dismissal on the same bases as stated in the Smith
Decision, e.g., the failure to show the tax liabilities for which
the levies were made have been satisfied, the failure to
exhaust administrative remedies, and the failure to establish
any improper clouds on title on which a quiet title claim may be
based.
Id. at *6 (citing Hook v. U.S., 2015 WL 4927272, at *5).
More recently, the Debtors sought to include in a Final Pretrial Order in the LNV
Action, claims against the United States (and LNV) for allegedly violating the Debtors’
Discharge entered in their Main Bankruptcy Case. LNV v. Hook, 2018 WL 2008699 (D.
Colo. Apr. 30, 2018). Just as the Debtors claim in this case, the Debtors claimed there
that by pursuing the LNV Action and the foreclosure sought therein, LNV and the
Defendant were “’continuing their action to collect, recover, and/or offset’ debts which
have been discharged.” Id. at *2. The LNV Court’s rejection of that argument is
instructive:
Even if a debtor’s personal obligations have been extinguished
by an order of discharge, the “mortgage holder still retains a
‘right to payment’ in the form of its right to the proceeds from
the sale of the debtor’s property.” This is because “a
bankruptcy discharge extinguishes only one mode of enforcing
a claim-namely, an action against the debtor in personam6

In a footnote, the LNV Court added a caveat: “[t]he Court does not read the Compulsory
Counterclaims as asserting a claim based on the 2008 tax year, but Hook did not take exception to the
United States’ argument [that the Court lacked subject matter jurisdiction]. Therefore, assuming the 2008
tax year is at issue, the analysis applies equally to the 2008 tax year.” LNV v. Hook, 2015 WL 7962971, at
*6 n.13.
7
The “full payment rule” codified in 28 U.S.C. § 1346, affords the district court original jurisdiction
over actions against the United States for the recovery of certain internal revenue taxes. But the tax payer
must pay the full amount of the tax in dispute. LNV v. Hook, 2015 WL 7962971, at *6. The failure to do so,
on the other hand, deprives the district court of subject matter jurisdiction. Id.

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while leaving intact another-namely, an action against the
debtor in rem. Accordingly, the Bankruptcy Court [this Court]
found, in granting [LNV] relief from the automatic stay, [LNV] is
allowed to proceed “in accordance with any order(s) entered in
[the LNV] case to judicially foreclose on certain real property” .
. . but not to “proceed to collect any deficiency resulting from
such foreclosure against the Debtors or their post petition
property.”
Id. (referring to and quoting this Court’s “Order Granting Motion for Relief from Automatic
Stay” (Docket No. 50 in the Main Case)). The LNV Court further noted that the United
States, as a defendant in the LNV (foreclosure) Action,
has no claims pending in this action. The United States
argues Defendants miscomprehend the effect of the Order of
Discharge. The Court agrees. As the Tenth Circuit stated to
another debtor who argued that a secured creditor violated the
automatic stay and discharge injunction with a post-discharge
foreclosure on secured property:
He [debtor] fails to appreciate the difference
between the discharge of their personal obligation
on the loan secured by the property and Wells
Fargo’s [creditor] continued interest in the
property via the security instrument. The former
was discharged, the latter was not.
Id. at *2-3 (quoting Jester v. Wells Fargo Bank, N.A. (In re Jester), 656 Fed. Appx. 425,
428 (10th Cir. 2016)). See also, LNV v. Hook, 2018 WL 1242006, at * 2 (D. Colo. Mar. 9,
2018) (“As the Court indicated in its earlier Order (ECF No. 355), Defendants’ [Debtors’]
bald assertions failed to show that proceeding with this action [the LNV Action] violates
the Order of Discharge, as they contend. Such assertions failed to sufficiently allege any
claims (or defense). The same holds true as the Defendants allegations that Defendant
United States is violating the automatic stay; any such violation claimed had not been
plausibly plead.”).
The record before the Court is comprised of the Debtors’ Complaint, their
Compulsory Counterclaims, which they incorporated into their Complaint, and the various
reported and unreported decisions of higher courts rejecting the Debtors’ claims they
seek to litigate in this case. The District Court dismissed the Debtors’ Compulsory
Counterclaims for lack of subject matter jurisdiction related to Claims 1 and 2. This Court
is bound by that determination and is therefore without subject matter jurisdiction to revisit
the Debtors’ refund claim and their objections to the IRS’s Proof of Claim for the tax years
which are the subject of both the Smith and LNV Cases.
To the extent the Debtors seek disallowance of the IRS’s Proof of Claim, the
Debtors lack standing to object. See In re Morreale, 2015 WL 3897796 (Bankr. D. Colo.
June 22, 2015) (Chapter 7 Debtor who failed to show any pecuniary interest in matters
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affecting administration of the estate has no standing to object to such matters). The
record of the Main Case demonstrates that the Debtors’ estate was grossly insolvent
leaving a pittance to pay creditors and no hope of any surplus to be returned to the
Debtors. Furthermore, the Debtors’ Main Case has been closed. Disallowance of any
filed proof of claim serves no purpose whatsoever.
As to Debtors’ Claims 3 (the quiet title claim), 4 (the damages claim for the
Defendant’s alleged misconduct in the LNV Action) and 5 (the claim for damages for the
Defendant’s alleged violations of the Discharge Order), the LNV Court’s dismissals of
each for either lack of subject matter jurisdiction or failure to state a claim bind this Court.
Finally, applying the reasoning of the LNV Court when it addressed and discounted the
Debtors’ allegations that the Defendant violated the Discharge Order, the Debtors fail to
state a claim under Rule 12(b)(6). The Defendant is also a defendant in the LNV Action.
LNV named the United States as a defendant because it holds a tax lien against the
Debtors’ real property which LNV seeks to foreclose. The Debtors fail to state any claim
that the Defendant by relying on or enforcing its lien has or will violate the Discharge
Order.
Through their Complaint, the Debtors endeavor to relitigate the same claims they
have been asserting for over a decade in the District Court, the Tax Court and in the
Tenth Circuit. Each court roundly rejected the Debtors’ Claims. Just as those higher
courts have concluded they do not have subject matter jurisdiction to litigate Debtors’
refund and tax claim disputes, this Court is bound by those jurisdictional determinations
and must conclude the same. The Debtors rely heavily, almost exclusively, on the
incorporation of their Compulsory Counterclaims into their Complaint. The Compulsory
Counterclaims were rejected by the LNV and Smith Courts. Thus, the incorporation of
those claims and the prior rulings thereon are fatal to the same claims in this case.
VIII.

Remaining Claims: Claims 6 and 7.

As noted, the Debtors did not comply with Rule 10. As a result, the Defendant
and this Court are left with the difficult task of straining to determine what are the
Debtors’ factual allegations and claims. Such failure weighs against the Debtors and the
burden which rests on them to establish this Court’s jurisdiction and to withstand a
motion to dismiss. However, here, the Defendant did not move to dismiss what it labeled
Debtors’ Claims 6 and 7. Claim 6 is the Debtors request for an award of damages based
on the United States alleged violations of the automatic stay. Claim 7 is their request for
declaratory relief determining that the taxes which are the subject of the IRS Proof of
Claim have been discharged in their Main Case. The only hint of an allegation of fact is
that the United States improperly seized the Debtors’ July 2017 social security
payments. They offer no specifics of the alleged offset and do not allege any injury.
They only allege in conclusory fashion that they are entitled to damages. The Debtors
also fail to allege in any manner that the United States views its debt claimed in the Proof
of Claim as other than discharged as a personal liability of the Debtors. Thus, it would
appear, that the viability of those claims is also in question.

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Conclusion and Orders.

The Court concludes that it lacks subject matter jurisdiction to adjudicate Debtors’
Claim 1, Claim 2, Claim 3 and Claim 4. Further, the relitigation of such claims is barred
under principles of res judicata. With respect to Claim 2, the Debtors also lack standing
to pursue such claim and no bankruptcy purpose is served by litigating a proof of claim in
a closed insolvent estate. The Debtors have failed to state a claim upon which relief may
be granted with respect to Claims 1, 2, 3, 4 and 5. As to Claims 6 and 7 which are not
the subject of the Defendant’s Motion, such claims are of dubious merit. Accordingly, the
Court:
ORDERS that the Defendant’s Motion is GRANTED and the Debtors’ Claims 1, 2,
3, 4 and 5 are dismissed; and
FURTHER ORDERS that the Debtors and the Defendant shall show cause in
writing filed within 21 days of the entry of this Order why the Debtors’ Claims 6 and 7
should not be dismissed also.
DATED this 3rd day of April, 2019.
BY THE COURT:

Thomas B. McNamara
United States Bankruptcy Judge

17