Schaeffler v. United States of America

Filing 81

OPINION AND ORDER. For the foregoing reasons, the respondent's motion to dismiss (Docket #73) is granted and the petitioners' motion for entry of a judgment (Docket #76) is denied. The Clerk is requested to enter judgment dismissing this pe tition for lack of subject matter jurisdiction and to close this case. re: 76 MOTION for Judgment Granting Amended Petition to Quash Summons filed by Schaeffler Holding GmbH & Co. KG, INA-Holding Schaeffler GmbH & Co. KG, Schaeffler Holding, LP, Georg F.W. Schaeffler, 73 MOTION to Dismiss the Amended Petition filed by United States of America. (Signed by Magistrate Judge Gabriel W. Gorenstein on 7/16/2016) (rjm)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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GEORG F. W. SCHAEFFLER et al.,
:
Petitioners,

:

OPINION AND ORDER

-v.-

:

13 Civ. 4864 (GWG)

UNITED STATES OF AMERICA,

:

Respondent.
:
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GABRIEL W. GORENSTEIN, UNITED STATES MAGISTRATE JUDGE
This case is a petition by Georg F.W. Schaeffler and certain entities (collectively,
“Schaeffler”) to quash a summons issued by the Internal Revenue Service (“IRS”). This Court
denied the petition. On appeal, the United States Court of Appeals for the Second Circuit
vacated this Court’s judgment and remanded the case for “further proceedings.” The IRS
recently withdrew the summons and now moves to dismiss the petition for lack for subject
matter jurisdiction on the ground that it is moot. Schaeffler has cross-moved for entry of a
judgment quashing the summons.1 For the reasons that follow, the IRS’s motion is granted and
the petitioners’ motion is denied.

1

See Notice of Motion, filed Mar. 4, 2016 (Docket # 73); Memorandum of Law in
Support of Respondent’s Motion to Dismiss for Lack of Subject Matter Jurisdiction Under Rule
12(b)(1), filed Mar. 4, 2016 (Docket # 74); Declaration of Hugo Ramirez, filed Mar. 4, 2016
(Docket # 75) (“Ramirez Decl.”); Petitioners’ Notice of Motion for Entry of Judgment Granting
Amended Petition to Quash Summons, filed Mar. 7, 2016 (Docket # 76); Memorandum in
Support of Petitioners’ Motion for Entry of Judgment Granting Amended Petition to Quash
Summons, filed Mar. 7, 2016 (Docket # 77) (“Quash Mem.”); Memorandum of Law in
Opposition to Petitioners’ Motion for Entry of Judgment Granting Amended Petition to Quash
Summons, filed Mar. 23, 2016 (Docket # 78); Petitioners’ Notice of Response to Respondent’s
Motion to Dismiss for Lack of Subject Matter Jurisdiction Under Rule 12(b)(1), filed Mar. 23,
2016 (Docket # 79); Memorandum in Support of Petitioners’ Response to Respondent’s Motion
to Dismiss for Lack of Subject Matter Jurisdiction Under Rule 12(b)(1), filed Mar. 23, 2016
(Docket # 80) (“MTD Opp.”).

I. BACKGROUND
The IRS is investigating the tax liabilities of Georg F.W. Schaeffler. See Ramirez Decl.
¶ 2. On June 25, 2013, the IRS issued a summons to Ernst & Young seeking testimony and
documentary evidence relating to Schaeffler. Id. ¶ 4. Schaeffler filed the instant petition to
quash the summons on July 12, 2013. See Petition to Quash Internal Revenue Summons, filed
July 12, 2013 (Docket # 1). Schaeffler argued, inter alia, that the documents sought by the
summons were protected by attorney-client privilege and by the work-product doctrine. See
generally Amended Petition to Quash Internal Revenue Service Summons, filed Nov. 8, 2014
(Docket # 14). Eventually, Schaeffler produced a ten-volume privilege log. See Notice of Filing
of Amended Volumes 1-10 of the Privilege Log, filed Jan. 17, 2014 (Docket # 32). On May 28,
2014, this Court denied the petition, Schaeffler v. United States, 22 F. Supp. 3d 319 (S.D.N.Y.
2014), finding that Schaeffler waived any privilege by sharing the documents with a group of
banks and that the documents and testimony were not protected by the work product doctrine.
Id. at 333, 340-41.
Schaeffler appealed the Court’s decision to the Second Circuit. See Notice of Appeal,
filed June 6, 2014 (Docket # 55). The Circuit vacated this Court’s judgment and “remand[ed]
for such further proceedings as may be necessary to determine, in a manner consistent with this
opinion, whether any remaining documents are protected by the attorney-client privilege or
work-product doctrine.” Schaeffler v. United States, 806 F.3d 34, 45 (2d Cir. 2015). The
Second Circuit’s mandate issued on January 28, 2016. Mandate, filed Jan. 28, 2016 (Docket #
64).
This Court then ordered “[t]he parties . . . to consult to determine whether there should be
any further proceedings in this matter.” Order, filed Jan. 29, 2016 (Docket # 65). On February
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5, 2016, the parties submitted a joint letter “agree[ing] that there is no need for further
proceedings . . . .” Letter from Todd Welty and Rebecca S. Tinio, filed Feb. 5, 2016 (Docket
# 66). The parties represented that they were “working to draft stipulated dismissal documents.”
Id.
One week later, however, on February 12, 2016, the IRS withdrew the summons that was
the subject of the petition to quash. Ramirez Decl. ¶ 5. In a letter, the IRS informed Ernst &
Young that “[n]o further attempt will be made by the Internal Revenue Service to seek
production of records from Ernst & Young under this summons.” Letter from Hugo Ramirez to
Melissa Galetto, dated Feb. 12, 2016, appended as Exhibit 1 to Ramirez Decl. The instant
motions to dismiss and for entry of judgment followed.
II. DISCUSSION
“A case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1)
when the district court lacks the statutory or constitutional power to adjudicate it.” Makarova v.
United States, 201 F.3d 110, 113 (2d Cir. 2000) (citing Fed. R. Civ. P. 12(b)(1)). Under Article
III of the Constitution, federal courts have jurisdiction only over “Cases” and “Controversies.”
U.S. Const. art. III, § 2, cl. 1. “The Constitution limits the jurisdiction of Article III courts to
matters that present actual cases or controversies.” Altman v. Bedford Cent. Sch. Dist., 245 F.3d
49, 69 (2d Cir. 2001) (citing U.S. Const. art. III, § 2, cl. 1), cert. denied, 534 U.S. 827.
“When a case becomes moot, the federal courts ‘lack[] subject matter jurisdiction over
the action.”’ Fox v. Bd. of Trustees of the State Univ. of N.Y., 42 F.3d 135, 140 (2d Cir. 1994)
(quoting New York City Employees’ Retirement Sys. v. Dole Food Co., 969 F.2d 1430, 1433
(2d Cir. 1992)), cert. denied, 515 U.S. 1169 (1995). “[A] case is moot when the issues presented
are no longer live or the parties lack a legally cognizable interest in the outcome.” Powell v.
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McCormack, 395 U.S. 486, 496 (1969) (citation and internal quotations omitted). As the Second
Circuit has observed, “it is not enough that a dispute was very much alive when suit was
filed . . . [t]he parties must continue to have a personal stake in the outcome of the lawsuit.”
Knaust v. City of Kingston, 157 F.3d 86, 88 (2d Cir. 1998) (quoting Lewis v. Cont’l Bank Corp.,
494 U.S. 472, 477-78 (1990)) (internal citation and quotations omitted), cert. denied, 526 U.S.
1131 (1999). “As with other defects in subject matter jurisdiction, mootness may be raised at
any stage of the litigation.” In re Kurtzman, 194 F.3d 54, 58 (2d Cir. 1999) (citing Fox, 42 F.3d
at 140).
Case law has routinely recognized that the withdrawal of an IRS summons moots a
petition to quash that summons. See, e.g., Pac. Fisheries Inc. v. United States, 484 F.3d 1103,
1111 (9th Cir. 2007) (“petitions [to quash] were moot after the summonses were withdrawn”);
Gillings v. United States Internal Revenue Serv., 122 Fed. App’x 360, 361 (9th Cir. 2005)
(summary order); Malone v. Internal Revenue Serv. of the U.S. Treas. Dep’t, 237 F.2d 54, 54
(6th Cir. 1956) (per curiam); MaxCrest Ltd. v. United States, 2016 WL 3211228, at *1 (N.D.
Cal. Mar. 25, 2016); Brinkman v. U.S., Inc. ex rel. Internal Revenue Serv., 2015 WL 9920980, at
*2 (D. Minn. Dec. 16, 2015); Dew v. United States, 2010 WL 889987, at *2 (collecting
cases); Fisher v. United States, 676 F. Supp. 2d 1165, 1170 (W.D. Wa. 2009); Hardee v. United
States, 2007 WL 3037308, at *1 (W.D.N.C. Oct. 16, 2007); Thompson v. United States, 2007
WL 2778663, at *2 (S.D. Ohio Sept. 21, 2007); Thompson v. United States, 2007 WL 1891167,
at *2 (D.D.C. June 29, 2007); Dame v. United States, 643 F. Supp. 533, 534 (S.D.N.Y. 1986).
Schaeffler distinguishes such cases by noting that they “generally involve dismissals that
occurred before any meaningful litigation had begun.” MTD Opp. at 2-3 (emphasis in original).
Schaeffler gives no explanation, however, as to why this distinction affected the reasoning of
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these cases. Nor do we discern why this distinction should matter. None of the cases rely on the
timing of the withdrawal but rather on the fact that a controversy between the parties no longer
existed. And, as we have already noted, “mootness may be raised at any stage of the litigation.”
Kurtzman, 194 F.3d at 58 (citing Fox, 42 F.3d at 140).
There are some limited exceptions to the mootness doctrine. Schaeffler argues that two
of these exceptions apply here: the “voluntary cessation of illegal activity” exception and the
“evading review” exception. See Quash Mem. at 7.
“[A]s a general rule, ‘voluntary cessation of allegedly illegal conduct does not deprive
the tribunal of power to hear and determine the case, i.e., does not make the case moot,” though
such a case may become moot if “it can be said with assurance that there is no reasonable
expectation that the alleged violation will recur” and “interim relief or events have completely
and irrevocably eradicated the effects of the alleged violation.” Los Angeles Cty. v. Davis, 440
U.S. 625, 631 (1979) (quoting United States v. W.T. Grant Co., 345 U.S. 629, 632 (1953))
(citations, quotations, and punctuation omitted). This exception does not apply here, however,
because there was nothing “illegal” about the IRS’s conduct. Cf. United States v. Const. Prods.
Research, Inc., 73 F.3d 464, 469 (2d Cir. 1996) (petition to quash an administrative subpoena
issued by the Nuclear Regulatory Commission was not moot because the respondents were
“contest[ing] the authority of the NRC to have issued the subpoena in the first place.”). Indeed,
Schaeffler makes no argument that the IRS’s conduct was “illegal.”
This case also does not fall within the “capable of repetition, yet evading review”
exception. To qualify for this exception, the dispute must meet two elements: “(1) the
challenged action in its duration [must be] too short to be fully litigated prior to its cessation or
expiration, and (2) there [must be] a reasonable expectation that the same complaining party will
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be subjected to the same action again.” Turner v. Rogers, 564 U.S. 431, 439-40 (2011) (internal
punctuation and citation omitted) (challenge to completed contempt sentence was not moot
because the sentences for contempt given to the complaining party were too short to be fully
litigated through the state courts and arrive at the Supreme Court prior to the expiration of the
sentence). Here, a challenge to the issuance of a summons is not “too short” to be fully litigated
prior to its having any effect on Schaeffler. Schaeffler does not suggest that any future summons
for his tax records will require compliance prior to the adjudication of any petition to quash.
Thus, should the IRS issue a summons for the same documents in the future, Schaeffler would be
free to file a new petition to quash and the need to comply with the summons could be postponed
until the completion of court review, no matter how long it took.
Finally, Schaeffler argues that “[e]ven if the withdrawal of the relevant Summons has
somehow rendered the case moot, the Court still retains the authority to enter the judgment
requested by Schaeffler.” Quash Mem. at 8. Schaeffler asks the Court to exercise its
“significant inherent powers to fashion appropriate remedies . . . to prevent abuse of the judicial
process.” Id. at 9 (citation omitted). But not one of the cases Schaeffler cites to support this
point, id. at 8-9, involved a case where a court had found the controversy before it to be moot,
and yet entered judgment on the merits anyway. Indeed, with one exception, none of the cases
included findings that the cases were moot at all. The lone exception is the case of U.S. Bancorp
Mortg. Co. v. Bonner Mall P’ship, 513 U.S. 18 (1994). In that case, the Supreme Court found
that a controversy had been mooted when the case settled while on appeal. Id. at 392. The
Supreme Court did not order that a judgment be issued on the merits, however. To the contrary,
far from taking further action on the case, as Schaeffler urges us to do here, U.S. Bancorp Mortg.
Co. rejected a request to provide any further relief when it declined a party’s request to vacate
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