United States of America v. Chesapeake Firestop Products, Inc. et al

Filing 14

MEMORANDUM OPINION (c/m to Defendants 8/6/18 sat). Signed by Judge Deborah K. Chasanow on 8/6/2018. (sat, Chambers)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
:
UNITED STATES OF AMERICA
:
v.

:

Civil Action No. DKC 17-3256

:
CHESAPEAKE FIRESTOP PRODUCTS,
INC., et al.

:

MEMORANDUM OPINION
Presently pending and ready for resolution in this tax case
is the motion filed by Plaintiff United States of America (the
“Government”) for default judgment against Defendant Chesapeake
Firestop

Products,

injunction

against

Inc.

(“Chesapeake”)

Defendants

(collectively, “Defendants”).

and

Chesapeake

for
and

(ECF No. 11).

rules, no hearing being deemed necessary.

a

permanent

Clifford

Smith

The court now

Local Rule 105.6.

For the following reasons, the motion for default judgment will
be granted and a permanent injunction will be entered.
I.

Background
A. Factual Background
Defendant Chesapeake operates a fire retardant business in

Montgomery County, Maryland.

(ECF No. 1 ¶ 8).

Mr. Smith is

the owner of Chesapeake and is responsible for its operation,
which

includes

ensuring

that

Chesapeake

properly

federal tax returns and pays its federal taxes.

files

its

(Id. ¶¶ 2, 9).

Chesapeake

has

failed

to

pay

its

federal

employment

tax

liabilities for twenty quarters between the third quarter of
2009 and the fourth quarter of 2016 (Id. ¶¶ 11, 12); its federal
unemployment tax liabilities for tax years 2012 and 2016 (Id. ¶¶
16, 17); and its civil penalties for tax years 2009, 2010, and
2011

(Id.

¶¶

21,

22).

Chesapeake

has

also

failed

to

file

“several federal tax returns including a federal employment tax
return for the fourth quarter of 2015 and the third quarter of
2016; a federal unemployment tax return for tax year 2015; and
an income tax return for tax year 2015[,]” and “withhold and pay
[] to the IRS its current employment tax liabilities.”
27).

(Id. ¶

Defendants currently owe the United States more than $3.4

million in unpaid federal taxes.

(Id. ¶ 3).

“The IRS has

expended significant resources attempting to bring Chesapeake
into

compliance

recording

with

multiple

the

internal

notices

of

revenue

federal

laws[,]”
tax

liens

including
against

Chesapeake (Id. ¶ 28), sending demands for payment and notices
of intent to levy upon assets to Chesapeake (Id. ¶ 29), and
explaining

the

requirements

of

the

Chesapeake’s representatives (Id. ¶ 30).

withholding

laws

to

“The IRS has exhausted

its administrative abilities to compel Chesapeake to pay its tax
liabilities and comply with the internal revenue laws” to no
avail.

(Id. ¶ 34).

2 

B. Procedural Background
The Government filed the instant complaint on November 6,
2017,

alleging

employment

that

tax

obligations.
permanent

Defendants

returns
(ECF

timely

No.

injunction,

have
and

1).

The

compelling

failed
pay

to

file

their

Government
Defendants

federal

federal
also
to

tax

seeks

a

withhold,

collect, and pay the company’s accruing federal tax liabilities
timely to the Internal Revenue Service (“IRS”), and to enjoin
Defendants
future.

from
(Id.

violating
at

November 28, 2017.

1).

the

internal

Service

of

(ECF Nos. 3, 4).

revenue

process

laws

was

in

the

effected

on

When Defendants failed to

file an answer or other responsive pleading within the requisite
time period, the Government moved for entry of default.

(ECF

No. 5).

The clerk entered default on January 24, 2018.

(ECF

No. 6).

On April 16, the Government filed the pending motion

for default judgment.

(ECF No. 11).

To date, Defendants have

taken no action in this case.
II.

Motion for Default Judgment
A. Standard of Review
Pursuant

to

Fed.R.Civ.P.

55(a),

“[w]hen

a

party

against

whom a judgment for affirmative relief is sought has failed to
plead

or

otherwise

defend,

otherwise,

the

and

that

clerk

failure
enter

the

shown

by

affidavit

or

default.”

A defendant’s default does not automatically entitle
3 

must

is

party’s

the

plaintiff

to

entry

of

a

default

judgment;

rather,

decision is left to the discretion of the court.
Lynn, 236 F.3d 766, 767 (5th Cir. 2001).

that

See Lewis v.

The United States Court

of Appeals for the Fourth Circuit has a “strong policy” that
“cases be decided on their merits,” Dow v. Jones, 232 F.Supp.2d
491, 494 (D.Md. 2002) (citing United States v. Shaffer Equip.
Co., 11 F.3d 450, 453 (4th Cir. 1993)), but default judgment may
be appropriate where a party is unresponsive,

see S.E.C. v.

Lawbaugh, 359 F.Supp.2d 418, 421 (D.Md. 2005) (citing Jackson v.
Beech, 636 F.2d 831, 836 (D.D.C. 1980)).
“Upon [entry of] default, the well-pled allegations in a
complaint

as

to

liability

are

taken

allegations as to damages are not.”
422.

as

true,

although

the

Lawbaugh, 359 F.Supp.2d at

Fed.R.Civ.P. 54(c) limits the type of judgment that may be

entered based on a party’s default: “A default judgment must not
differ in kind from, or exceed in amount, what is demanded in
the pleadings.”
judgment

cannot

“[C]ourts have generally held that a default
award

additional

damages

.

.

.

because

the

defendant could not reasonably have expected that his damages
would exceed that amount.”

In re Genesys Data Techs., Inc., 204

F.3d 124, 132 (4th Cir. 2000).

While the court may hold a

hearing to consider evidence as to the relief sought, it is not
required to do so; it may rely instead on “detailed affidavits
or documentary evidence to determine the appropriate [damages].”
4 

Adkins v. Teseo, 180 F.Supp.2d 15, 17 (D.D.C. 2001) (citing
United Artists Corp. v. Freeman, 605 F.2d 854, 857 (5th Cir.
1979)).
B. Analysis
Defendant Chesapeake has defaulted in this case and the
well-pleaded allegations in the complaint are accepted as true,
although not to damages.

The Government alleges that Defendant

Chesapeake is liable to the Government for its unpaid federal
employment taxes for the taxable quarters that ended between
September

30,

2009

and

June

30,

2016;

unpaid

federal

unemployment taxes for the 2012 and 2016 taxable years; and
civil penalties imposed pursuant to 26 U.S.C. § 6721 for 2009,
2010, and 2011.
2018,

the

The Government contends that, as of April 9,

total

$3,504,479.

amount

owed

with

(ECF No. 11-1, at 1).

$2,661,837

in

interest,

plus

unpaid

federal

$14,808

in

statutory

is

The total amount includes

employment

unpaid

additions

taxes,

federal

penalties

unemployment

and

taxes,

penalties and interest, plus $827,834 in civil penalties and
interest owed as of April 9, 2018.

(ECF No. 11-2, at 2).

The

motion is supported by the declaration of IRS Revenue Officer
James Heal (ECF No. 11-3) and corresponding true and correct
copies of IRS account transcripts for the relevant periods (ECF

5 

Nos. 13-1 – 13-26).1

Thus, the Government has made a prima facie

case of tax liability and has shifted the burden to Defendant
Chesapeake

“to

position.”

produce

evidence

refuting

the

Government’s

United States v. Kitila, No. DKC-09-0455, 2010 WL

917873, at *3 (D.Md. Mar. 8, 2010) (citing United States v.
Pomponio,

635

F.2d

293,

(4th

296

Cir.

1980)).

Defendant

Chesapeake did not produce any evidence, and therefore liability
is established for unpaid taxes and related penalties.

The

motion for default judgment will be granted and the court will
enter judgment against Defendant Chesapeake in the amount of
$3,504,479.
III. Permanent Injunction
A. Legal Standard
The Government seeks a permanent injunction pursuant to 26
U.S.C. § 7402(a).
ability

to

“issue

Section 7402(a) grants district courts the
in

civil

actions,

1

writs

and

orders

of

The account transcripts were not attached to James Heal’s
declaration and were later submitted by the Government.
(See
ECF No. 13).
The declaration states that a copy of the IRS
account transcript pertaining to unemployment taxes for the year
ending December 31, 2012 is attached as Government’s Exhibit 21.
(ECF No. 11-3 ¶¶ 8,9).
It is not attached and, instead,
attached as Exhibit 21 is another copy of the transcript
pertaining to employment taxes for the period ending December
31, 2012. (See ECF Nos. 13-8; 13-21). However, the court may
rely on the declaration of James Heal to determine damages and
will do so here. United States v. R & K Tile, Inc., No. CCB-143025, 2015 WL 1736802, at *2 (D.Md. Apr. 14, 2015) (citing Int’l
Painters & Allied Trades Indus. Pension Fund v. Capital
Restoration & Painting Co., 919 F.Supp.2d 680, 684 (D.Md.
2013)).
6 

injunction . . . and to render such judgments and decrees as may
be necessary or appropriate for the enforcement of the internal
revenue laws.”

Courts are split as to the standard for granting

an injunction pursuant to § 7402(a).

United States v. R & K

Tile, Inc., No. CCB-14-3025, 2015 WL 1736802, at *2 (D.Md. Apr.
14, 2015).

“Most courts, however, appear to have concluded

that, under 26 U.S.C. § 7402(a), ‘the government need only show
that an injunction is appropriate for the enforcement of the
internal

revenue

laws,

without

reference

to

the

traditional

equitable factors.”

Id. (emphasis in original) (quoting United

States

395

v.

Thompson,

F.Supp.2d

941,

945

(E.D.Cal.

2005))

(citing United States v. ITS Fin., LLC, 592 F.App’x 387, 400 (6th
Cir. 2014)); see also United States v. Madzima, No. 3:08-CV1043-B, 2009 WL 2596599, at *2 (N.D. Tex. Aug. 21, 2009) (“[T]o
obtain an injunction under I.R.C. § 7402(a), the United States
must show that an injunction is necessary or appropriate to
enforce the internal revenue laws.”); contra United States v.
Ernst & Whinney, 735 F.2d 1296, 1301 (11th Cir. 1984) (“[T]he
decision to issue an injunction under § 7402(a) is governed by
the traditional factors shaping the district court’s use of the
equitable

remedy.”).

which standard applies.

The

Fourth

Circuit

has

not

determined

The question need not be addressed in

the present case, however, because an injunction is appropriate

7 

under

both

the

standard

described

in

the

statute

and

the

traditional equitable principles.
On

its

face,

§

7402(a)

authorizes

a

court

to

issue

an

injunction when “necessary or appropriate for the enforcement of
the internal revenue laws.”

“Such an injunction ‘is appropriate

if the defendant is reasonably likely to violate the federal tax
laws again,’ which courts assess by evaluating the totality of
the circumstances.”

R & K Tile, Inc., 2015 WL 1736802, at *2

(quoting United States v. Thompson, 395 F.Supp.2d 941, 945-46
(E.D.Cal.

Sept.

27,

2005).

The

relevant

factors

to

that

analysis include:
(1) the gravity of harm caused by the
offense; (2) the extent of the defendant’s
participation, and her degree of scienter;
(3) the isolated or recurrent nature of the
infraction and the likelihood that the
defendant’s customary business activities
might again involve her in such transaction;
(4) the defendant’s recognition of her own
culpability; and (5) the sincerity of her
assurances against future violations.
Id. at *3 (quoting Thompson, 395 F.Supp.2d at 946).
Under the traditional equitable principles, an injunction
would be appropriate if the plaintiff demonstrates:
(1) that it has suffered an irreparable
injury; (2) that remedies available at law .
. . are inadequate to compensate for that
injury; (3) that, considering the balance of
hardships
between
the
plaintiff
and
defendant, a remedy in equity is warranted;
and (4) that the public interest would not
be disserved by a permanent injunction.
8 

Legend Night Club v. Miller, 637 F.3d 291, 297 (4th Cir. 2011)
(quoting eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391
(2006)).
B. Analysis
Here, Defendants have failed to file tax returns and pay
over $3.4 million in taxes since 2009 in violation of multiple
sections of the Internal Revenue Code.

(See ECF No. 11-1, at 5

(citing 26 U.S.C. §§ 3102, 3111, 3301, 3402, 6011)).

Defendants

continue to skirt their federal tax obligations despite proper
notice and demand for payment, recordation of multiple notices
of

federal

tax

liens,

and

the

Government

has

exhausted

its

administrative abilities to compel Defendants to comply with the
internal revenue laws.

Defendants have admitted culpability by

failing to respond in this case and do not appear to intend to
become

compliant

Accordingly,

with

issuance

their
of

tax

an

obligations

injunction

is

in

the

future.

“necessary

and

appropriate” to enforce the internal revenue laws.
Under the traditional equitable principles, and injunction
remains

appropriate.

The

Government

has

suffered,

and

will

continue to suffer, irreparable harm as a result of Defendants’
conduct.

Chesapeake owes the Government $3,504,479 in unpaid

taxes, penalties, and interest.
government,

and

their

“[T]axes are the lifeblood of

prompt

and

9 

certain

availability

an

imperious
(1935).

need.”

Bull

v.

United

States,

295

U.S.

247,

259

The Government is also harmed because it has expended

significant

resources

attempting

to

get

Defendants

to

comply

with the tax laws and attempting to collect the federal taxes
that should have been deposited by Defendants.

Legal remedies

are inadequate to compensate for the injury, which is evidenced
by

Defendants

employment
demand

continued

and

and

failure

unemployment

the

to

taxes,

Government’s

withhold
despite

continued

and

proper

attempts

pay

federal

notice
to

and

collect

payment.
When

balancing

the

hardships

between

the

Defendants, a remedy in equity is warranted.

Government

and

If an injunction

is not issued against Defendants, the Government will continue
to suffer irreparable harm in the form of permanent loss of its
tax revenue.

On the other hand, if an injunction is issued

against Defendants, they will not be harmed because they will
simply be required to obey the same tax laws as other employers.
Lastly, granting an injunction against Defendants would not
be contrary to the public interest.

“The tax system relies on

employers to collect employment and unemployment taxes and to
pay those over to the United States.”

United States v. J.A.

Subway, Inc., No. 16-GLR-0810, 2016 WL 6988800, at *4 (D.Md.
Sept. 23, 2016).

Defendants’ continued failure to withhold and

pay its federal employment and unemployment taxes is undermining
10 

the government tax system.

Issuing an injunction will lead to

“fair administration of the internal revenue laws” and “fair
competition

by

halting

these

wrongful

practices.”

Id.

Accordingly, all equitable factors support entry of a permanent
injunction against Defendants.2
IV.

Conclusion
For the foregoing reasons, the motion for default judgment

filed

by

the

Government

injunction will be entered.

will

be

granted

and

a

permanent

A separate order will follow.

/s/
DEBORAH K. CHASANOW
United States District Judge

2

The Government’s motion for default judgment and proposed
order request injunctive relief that differs in kind from the
relief requested in the complaint.
The court’s Order modifies
the Government’s proposed order so not to include any relief
that differs in kind or exceeds the relief requested in the
Government’s complaint.
11