Novoselsky et al v United States of America
Filing
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ORDER signed by Judge Lynn Adelman on 12/3/18. IT IS ORDERED that plaintiffs' motion to amend their complaint 20 is DENIED. IT IS FURTHER ORDERED that defendant's motion for summary judgment 12 is GRANTED and this action is DISMISSED. (cc: all counsel) (jad)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
DAVID A. NOVOSELSKY and
CHARMAIN J. NOVOSELSKY,
Plaintiffs,
v.
Case No. 18-C-836
UNITED STATED OF AMERICA,
Defendant.
DECISION AND ORDER
Plaintiff David Novoselsky is a lawyer; he is representing himself and his wife,
Charmain Novoselsky, in this action. On May 4, 2018, the Novoselskys initiated this action
in state court to test the validity of a federal tax lien on their residence and to determine
its priority relative to other liens on the same property. They amended their complaint on
May 11, 2018, and a documented titled “First Amended Action to Quiet Title” became the
operative pleading in this action. The United States subsequently removed the action to
federal court and then moved for and was granted an extension of time to file an answer
on grounds that the real property in issue was the subject of motions then pending in
bankruptcy court. The United States answered the amended complaint on July 30, 2018,
and then moved for summary judgment on August 21, 2018.
Plaintiffs subsequently moved to amend their complaint for a second time, both to
flesh out the facts and legal theories supporting their quiet title action, and to assert new
allegations based on the United States’ conduct after the original complaint was filed. I
will construe the portion of plaintiffs’ motion seeking to further develop plaintiffs quiet title
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claim as a motion to amend under Fed. R. Civ. Pro. 15(a)(2), and the portion that alleges
conduct that happened after the filing of the original complaint as a motion to supplement
the pleadings under Fed. R. Civ. Pro. 15(d). Plaintiffs’ motion to amend/supplement and
defendant’s earlier motion for summary judgment are both now pending before me.
I.
BACKGROUND
a. The Novoselskys’ Dealings with the IRS
The legal issues raised in the United States’ motion for summary judgment and its
opposition to plaintiff’s motion to amend and supplement the complaint require some
factual context. The facts outlined in this section of the Decision and Order are not
disputed and are derived from the original complaint, the United States’ answer to the
original complaint, and exhibits and statements of fact filed by both parties in connection
with the United States’ motion for summary judgment.
On various dates between April 2014 and November 2016, the IRS assessed on
David and Charmain Novoselsky income taxes for years 2010, 2014 and 2016, gave
notice of those taxes and demanded payment of the taxes. ECF No. 14-1; ECF No. 142. On January 10, 2017, the IRS entered into an Installment Agreement with David and
Charmain Novoselsky. ECF No. 15-1. Under the Installment Agreement, the Novoselskys
agreed that the amount they owed as of that date totaled $290,261.14, and that they
would make installment payments of $200 per month toward that liability, commencing in
March, 2017. Id. In exchange, the IRS agreed to refrain from levying on the Novoselskys’
property to collect those taxes if the Novoselskys stayed current on their installment
payment obligations. ECF No. 15 at ¶ 5.
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One of the terms of the Agreement was the following:
[The IRS] may file a Notice of Federal Tax Lien if one has not
been filed previously which, [sic] may negatively impact your
credit rating, but [the IRS] will not file a Notice of Federal Tax
Lien with respect to the individual shared responsibility
payment under the Affordable Care Act.
ECF No. 15-1 at 4. A Notice of Federal Tax Lien (“NFTL”) notifies other creditors that the
United States has a claim against certain property and establishes the priority of the
United States’ claim. IRS Publication 594. On March 19, 2018 the IRS filed an NFTL
against Charmain Novoselsky for the 2010, 2014, and 2015 income tax years with the
Recorder of Deeds of Kenosha County. ECF No. 8 at ¶ 2. On April 10, 2018, the IRS
filed an NFTL against David Novoselsky for the same tax years. Id.
b. The Operative Complaint and the United States’ Motion for Summary
Judgment
In their first amended complaint, currently operative in this case, plaintiffs claim
that the IRS’s lien on plaintiffs’ property is “not valid.” ECF No. 1-1 at *10, ¶11. First, they
argue that the installment agreement between the Novoselskys and the IRS barred the
IRS from “placing” the lien on the property. Id. at *10, ¶ 7. Second, they argue that the
IRS is precluded from “placing” the lien because it had previously “withdraw[n]” a lien on
the same property. Id.
Defendant construed plaintiffs’ complaint as claiming that “the IRS violated the
installment-payment agreement when it filed the [NFTLs],” and “seek[ing] declaratory
relief determining that the [NFTLs] were illegally filed.” ECF No. 16 at 4. Defendant moved
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for summary judgment arguing that plaintiffs’ claims fail as a matter of law because the
Installment Agreement expressly permits the IRS to file NFTLs. Id.
c. The Proposed Amended Complaint’s Allegations
As described above, plaintiffs have now moved to file a Second Amended
Complaint. The proposed amended complaint makes the following new allegations.
In February 2017, the IRS entered an NFTL 1 against the plaintiffs’ residence. ECF
No. 21, ¶ 24. At that time, the Novoselskys were in bankruptcy and protected by an
automatic stay. Id. In January, 2018, the IRS agreed to withdraw the NFTL on the property
in order to facilitate a settlement of the bankruptcy case. Id., ¶ 27. However, the case did
not settle. On April 10, 2018, while the automatic stay remained in effect, the IRS entered
a second NFTL against plaintiffs’ residence. Id., ¶ 25.
In May, 2018, the IRS “issued a levy seeking to seize funds” then in the control of
the Novoselskys’ bankruptcy trustee. ECF No. 21, ¶¶ 14, 34. At that time, counsel for the
IRS represented to the Bankruptcy Court that the Installment Agreement, which barred
the IRS from levying on plaintiffs’ property while it was in effect, had been terminated;
however, the IRS allegedly later disclosed that the Installment Agreement actually
remained in effect until June 1 of 2018. Id., ¶¶ 16-17. The IRS later moved the bankruptcy
court to lift the automatic stay. Id., ¶ 35. On July 14, 2018, the IRS again “issued a levy
to the attorney for the Bankruptcy Trustee holding $100,000 in funds.” Id. The IRS
ultimately seized those funds. Id., ¶¶ 14, 35, 39. Plaintiffs allege that the trustee was
1 The complaint uses the term “recorded a lien.” I will instead use the phrase “entered an NFTL” because
I wish to maintain a clear distinction between the IRS’s lien, which is a property interest that arose by
statute when the Novoselskys failed to pay the taxes, and the NFTL, which is a public filing that gives
other creditors notice of the IRS’s lien and allows the IRS to assert the lien’s priority.
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holding the funds because the bankruptcy proceedings were then close to a settlement
resolution, and that the settlement was undermined in part because the IRS seized these
funds. Id., ¶ 35,
Plaintiffs also allege that the IRS’s stated reasons for terminating the Installment
Agreement have been inconsistent: they say the IRS originally claimed that the basis for
the termination was plaintiffs’ failure to make timely payments, but later stated that the
reason was the plaintiffs’ failure to properly represent their financial circumstances. Id., ¶
18. They also allege that they have filed multiple requests for due process hearings
regarding the termination of the installment agreement using the IRS’ internal appeals
processes. Id, ¶¶ 19, 36. They allege that no hearings have been held, and that the IRS
has informed them that it cannot conduct these hearings using its own internal processes,
because plaintiffs’ accounts are now under the jurisdiction of the Department of Justice.
Id.
Plaintiffs also allege that they have used the administrative procedures provided
for by 26 U.S.C. § 7433 to seek relief from certain conduct of Curtis Weidler, the
Department of Justice attorney representing the United States in the Bankruptcy case
and the present case. Id., ¶¶ 47-48. Plaintiffs allege that they made these requests “on
various occasions prior to the issuance of the 2018 levies,” and that they received no
response from the IRS. Id. Plaintiffs allege that they also requested administrative
procedures under § 7433 “when the levy activity began in May of 2018 and just prior to
that.” Id., ¶ 48. They say that the Taxpayer Advocate Service initially responded to this
request, but soon informed them that it was the decision of the IRS that Mr. Weidler of
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the Department of Justice had “the exclusive right to address and to decide within his own
discretion any concerns or requests made by plaintiffs.” Id., ¶ 49.
The proposed amended complaint asserts three claims for relief: (1) the quiet title
action, as allowed by 28 U.S.C. § 2410; (2) a claim for injunctive relief related to the July
2018 levy on the funds held by the Novoselsky’s bankruptcy trustee; and (3), a claim for
damages under 26 U.S.C. § 7433.
II.
MOTION TO AMEND COMPLAINT
a. Legal Standard.
Under Fed. R. Civ. Pro. 15(a)(2), a party may amend its pleading with the leave of
the court, and “[t]he court should freely give leave when justice so requires.” Fed. R. Civ.
Pro. 15(a)(2). However, a court is justified in denying a motion to amend a complaint if
the proposed amendment would be futile, meaning that it would not withstand a motion
to dismiss, Glick v. Koenig, 766 F.2d 265, 268 (7th Cir. 2003), or a motion for summary
judgment, Bethany Pharmacal Co., Inc. v. QVC, Inc., 241 F.3d 854, 861 (7th Cir. 2001).
As noted above, Counts II and III of the proposed amended complaint allege
conduct that happened after the filing of the original complaint in this action. I will treat
plaintiffs motion with respect to these counts as a motion to supplement the complaint
under Rule 15(d). See Glatt v. Chicago Park Dist., 87 F.3d 190, 194 (7th Cir. 1996). The
distinction is not significant, though: the standard governing the court’s discretion is the
same with respect to motions under 15(a) and 15(d). Id.
Amendment or supplementation is futile if the amended or supplemented
complaint could not survive a motion to dismiss under Rule 12(b)(6). To survive a Rule
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12(b)(6) motion, a plaintiff must “state a claim to relief that is plausible on its face.” Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009). The complaint must, at a minimum, “give the defendant fair notice of what the
claim is and the grounds upon which it rests.” Twombly, 550 U.S. at 555. In construing
plaintiff’s complaint, I assume that all factual allegations are true but disregard statements
that are conclusory. Iqbal, 556 U.S. 678.
Amendment or supplementation is also futile if the amended or supplemented
complaint could not survive a motion for summary judgment. Summary judgment is
required where “there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Applying this standard in
the context of the Novoselskys’ motion to amend or supplement their complaint, I may
deny the motion if, viewing the evidence in the light most favorable to the Novoselskys, I
conclude that no reasonable juror could find for them. See Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248, 255 (1986).
b. Action to Quiet Title
Count I of the proposed second amended complaint is again a claim to quiet title
under 28 U.S.C. § 2410; however, the basis for this claim is different from that in the
operative complaint. Plaintiffs now assert that they are challenging neither the IRS’s right
to file NFTLs within the terms the installment agreement, nor the fact that, by statute, the
U.S. has a property interest in the Novoselskys’ residence and other property that came
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into being when the Novoselskys failed to pay a tax that they owed. Rather, plaintiffs claim
that the filing of the NFTLs (i.e., the U.S.’s assertion of its property rights) was illegal and
invalid because (1) the NFTLs were filed in violation of the automatic stay issued by the
Bankruptcy court; and (2) the U.S. had waived its right to assert the priority of its liens on
the Novoselskys’ residence by its conduct before the bankruptcy court.
The Novoselskys’ automatic stay theory is unavailing. As Fed. R. Evid. 201(c)(2)
requires me to do, I take judicial notice that the bankruptcy court entered an order lifting
the automatic stay with respect to the Novoselskys’ residence in July of 2016, well before
the 2018 filing of the NFTLs now at issue. Case No. 14-29136 (Bankr. E.D. Wis.), ECF
No. 937. Thus, if the United States were to move for summary judgment on this issue, the
Novoselskys would not be able to establish that the automatic stay barred the IRS from
filing the 2018 NFTLs.
Nor am I persuaded that the Novoselskys’ proposed amended complaint states
facts sufficient to survive a 12(b)(6) motion on the waiver theory. Plaintiffs’ specific
allegations in support of the waiver theory are contained in ¶ 27 of the proposed amended
complaint, which reads:
The present course of action is brought seeking to resolve the
propriety of the issuance of these liens after they were not only
issued in violation of the automatic stay, but also after the liens
in question as well as the intent of the Internal Revenue
Service to issue liens against the property to avoid further
disposition was specifically waived in January 2018 by the
conduct of the service in agreeing to withdraw these liens or
any other impediment on the property in order to facilitate a
settlement relating to the residence then proposed and
unopposed by the Internal Revenue Service as reached
before the Chief Judge of the Bankruptcy Court in January
through March of 2018.
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ECF No. 21, ¶ 27. These allegations are inadequate for several reasons. To begin, the
complaint’s allusion to the IRS’ “conduct . . . in agreeing to withdraw these liens or any
other impediment on the property in order to facilitate a settlement” is not enough to
provide the defendant the “fair notice of what the claim is and the grounds upon which it
rests” that is required under Twombly. 550 U.S. at 555. The complaint does not tell me
what the IRS said or did to signal its agreement not to enforce its lien on plaintiffs’
residence. In its motion to exclude, the United States suggests that ¶ 27 may be referring
to a January 4, 2018 letter from the IRS to plaintiffs, which withdrew an NFTL that had
been filed on February 2, 2016, i.e., before the bankruptcy court lifted the automatic stay. 2
As such, the letter withdrew an NFTL that was already void or voidable. See Middle
Tennessee News Co. v. Charnel of Cincinnati, 250 F.3d 1077, 1082 (7th Cir. 2001). And
the law is clear that withdrawal of an NFTL does not affect the underlying lien. 26 C.F.R.
301.6323(j)-1(a). Plaintiffs cannot reasonably present the withdrawal of the void or
voidable February, 2016 NFTL as indicative of the IRS’s intent to relinquish its right to file
other future NFTLs.
Further, the transaction described in ¶ 27 resembles a contract negotiation, if
anything, and not a waiver. Waiver is the “intentional relinquishment of a known right.”
United States v. Perry, 223 F.3d 431, 433 (7th Cir. 2000). What plaintiffs describe is not
a “relinquishment” of the U.S.’s right to enforce its lien, but rather an offer not to enforce
it—in exchange, presumably, for plaintiffs’ anticipated compliance with the terms of the
2
Because I could consider this letter if I were rendering summary judgment on the waiver claim, I may
consider it now as I determine whether amendment of the complaint would be futile.
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proposed settlement agreement. But the proposed amended complaint does not allege
facts sufficient to support an inference that any enforceable contract was created to bar
the IRS from filing NFTLs. In short, allowing the proposed amendment to Count I would
be futile because the proposed amended complaint does not state a claim that the IRS
acted illegally in filing the 2018 NFTLs, or that those NFTLs are valid.
The proposed amended complaint also requests, as alternative relief, a court
determination that the United States’ tax lien is junior to other, earlier recorded liens on
the residence, “including, but not limited to, liens filed by the County of Kenosha,
Wisconsin.” ECF No. 21, ¶ 29. Wisconsin law governs this question. See Harrell v. U.S.,
13 F.3d 232, 234 (7th Cir. 1993) (explaining that, while 28 U.S.C. § 2410 waives the
federal government’s sovereign immunity with respect to suits to determine title to real
property on which the United States has a lien, the actual cause of action must be
supplied by state law). Wis. Stat. § 841.01 permits an action for quiet title, and Wis. Stat.
§ 841.02 details the information that must be included in the complaint in order to state a
claim under § 842.01. See SJ Properties Suites v. Specialty Finance Group, LLC, 864
F.Supp.2d 776 (E.D.Wis. 2012). Specifically, the complaint must “describe . . . the interest
of each person claiming an interest known to be adverse to the plaintiff.” Wis. Stat. §
841.02. The Novoselskys’ proposed amended complaint does not meet this requirement.
I will not permit this alternative amendment to Count I.
c. Injunctive Relief
The proposed Count II is a claim for injunctive relief. The plaintiffs allege that the
IRS levied on funds that were in the control of the attorney for the bankruptcy trustee
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while their installment agreement was still in effect, thus violating 26 USC § 6331(k)(2)(D);
they further allege that the IRS did not comply with its notice obligations under 26 USC
6159(b)(5) in terminating the installment agreement, and that it has denied them the
opportunity to appeal the termination of the installment agreement using the IRS’s internal
appeals process. They ask me to remand this issue to the IRS with instructions to have
the levy and the termination of the installment agreement reviewed by an impartial IRS
employee.
The Anti-Injunction Act forbids suits to restrain the collection or assessment of
taxes, and it bars the Novoselskys from proceeding on this claim. 26 U.S.C. § 7421(a).
The purpose of this statute is to “protect the Government’s ability to collect a consistent
stream of revenue [] by barring litigation to enjoin or otherwise obstruct the collection of
taxes.” Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 US 519, 543 (2012). By operation of
the Act, a tax ordinarily must be challenged only in a suit for a refund after it is paid. Id.
Plaintiffs attempt to frame Count II as a request for due process and not for any
restraint on collection. ECF No. 27 at 10-11. However, the relief they seek—an order
directing the IRS to hold hearings on the termination of the installment agreement and the
validity of the levy—“would, if granted, effectively appeal the IRS determination [of those
issues] and restrain the collection of taxes.” See Rael v. Apodaca, 210 Fed.Appx 787,
791 (10th Cir. 2006).
I conclude that supplementation of the complaint to include Count II would be futile,
because my jurisdiction over Count II is barred by the Anti-Injunction Act. I will not permit
plaintiffs to supplement their complaint with the addition of Count II.
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d. Damages Under 26 U.S.C. § 7433
In Count III of the proposed amended complaint, plaintiffs seek damages under 26
U.S.C. § 7433, which allows a taxpayer to recover damages resulting from an IRS
employee’s intentional, reckless or negligent disregard of a provision of the tax code. That
statute and the IRS regulation that interprets it require the taxpayer to exhaust his or her
administrative remedies before filing suit. Gray v. United States, 723 F.3d 795, 802 (7th
Cir. 2013); 26 U.S.C. § 7433(d)(1); 26 C.F.R. § 301.7433-1(d). The United States argues
that amending the complaint to include Count III would be futile because the Novoselsky’s
have not alleged that they exhausted their administrative remedies in the manner required
by the regulations interpreting § 7433. Exhaustion is an affirmative defense to § 7433,
and not a pleading requirement. Gray, 723 F.3d at 799, fn.1; Kim v. U.S., 632 F.3d 713,
718-19 (D.C.Cir. 2011). Still, “a complaint may be subject to dismissal under Rule 12(b)(6)
when an affirmative defense . . . appears on its face.” Jones v. Bock, 549 U.S. 199, 215
(2007).
In their complaint, plaintiffs allege that they requested administrative relief following
the procedures required by § 7433 “on various occasions prior to the issuance of the 2018
levies” and “when the levy activity began in May of 2018 and just prior to that.” ECG No.
21, ¶¶ 47-48. But a significant portion of the conduct that plaintiffs allege as the basis for
their §7433 claim happened after May 2018: plaintiffs allege that in July 2018, the IRS
issued a second levy, instructed the bankruptcy trustee’s attorney to turn over the leviedupon funds without informing the bankruptcy court of the levy, and then seized the funds.
The Novoselskys’ failure to exhaust their administrative remedies with respect to the
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conduct that is the basis of their proposed § 7433 claim thus appears on the face of the
complaint. I conclude that supplementation of the complaint to include this claim would
be futile, and I will not permit it.
III.
SUMMARY JUDGMENT
Having determined that the Novoselskys may not amend their complaint, I now
turn to the United States’ earlier-filed motion for summary judgment on the current
operative complaint. This complaint states only a quiet-title claim, based on an allegation
that the IRS filed its April 10 NFTL “despite an agreement in writing regarding the
underlying debt for a plan of Installment Payments as permitted by the Internal Revenue
Service Code and further despite a prior withdrawal of the lien 3 memorializing the debt.”
As discussed above, the installment agreement expressly allowed the IRS to file NFTLs
while it was in effect; further, the withdrawal of the prior NFTL did nothing to disturb the
underlying lien or to bar the IRS from filing future NFTLs. The IRS is entitled to summary
judgment on the operative complaint.
IV.
CONCLUSION
For the reasons stated above, IT IS ORDERED that plaintiffs’ motion to amend
their complaint (ECF No. 20) is DENIED.
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IT IS FURTHER ORDERED that defendant’s motion for summary judgment (ECF
No. 12) is GRANTED and this action is DISMISSED. The clerk of court shall enter
judgment accordingly.
Dated at Milwaukee, Wisconsin, this 3rd day of December, 2018.
s/Lynn Adelman________
LYNN ADELMAN
District Judge
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