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United States v. Chesapeake Firestop Products, Inc.

United States District Court, D. Maryland

August 6, 2018




         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, Inc. (“Chesapeake”) and for a permanent injunction against Defendants Chesapeake and Clifford Smith (collectively, “Defendants”). (ECF No. 11). The court now rules, no hearing being deemed necessary. 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 files its federal tax returns and pays its federal taxes. (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.” (Id. ¶ 27). 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 with the internal revenue laws[, ]” including recording multiple notices of federal tax liens 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 withholding laws to Chesapeake's representatives (Id. ¶ 30). “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).

         B. Procedural Background

         The Government filed the instant complaint on November 6, 2017, alleging that Defendants have failed to file federal employment tax returns timely and pay their federal tax obligations. (ECF No. 1). The Government also seeks a permanent injunction, compelling Defendants to withhold, collect, and pay the company's accruing federal tax liabilities timely to the Internal Revenue Service (“IRS”), and to enjoin Defendants from violating the internal revenue laws in the future. (Id. at 1). Service of process was effected on November 28, 2017. (ECF Nos. 3, 4). 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, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default.” A defendant's default does not automatically entitle the plaintiff to entry of a default judgment; rather, that decision is left to the discretion of the court. See Lewis v. Lynn, 236 F.3d 766, 767 (5th Cir. 2001). 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 as true, although the allegations as to damages are not.” Lawbaugh, 359 F.Supp.2d at 422. 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.” “[C]ourts have generally held that a default judgment cannot 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].” 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. The Government contends that, as of April 9, 2018, the total amount owed with statutory additions is $3, 504, 479. (ECF No. 11-1, at 1). The total amount includes $2, 661, 837 in unpaid federal employment taxes, penalties and interest, plus $14, 808 in unpaid federal unemployment 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 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 produce evidence refuting the Government's position.” 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, 296 (4th 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. ...

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