Road & Highway Builders, LLC v. United States , 702 F.3d 1365 ( 2012 )

United States Court of Appeals
for the Federal Circuit
__________________________
ROAD AND HIGHWAY BUILDERS, LLC,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee,
__________________________
2012-5063
__________________________
Appeal from the United States Court of Federal
Claims in Case No. 09-CV-401, Senior Judge Lawrence S.
Margolis.
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Decided: December 20, 2012
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CARL M. HEBERT, Carl M. Hebert, LTD, of Reno, Ne-
vada, argued for plaintiff-appellant.
MARTIN F. HOCKEY, JR., Senior Trial Attorney, Com-
mercial Litigation Branch, Civil Division, United States
Department of Justice, of Washington, DC, argued for
defendant-appellee. On the brief were STUART F. DELERY,
Acting Assistant Attorney General, JEANNE E. DAVIDSON,
Director, HAROLD D. LESTER, JR., Assistant Director, and
GREGG PARIS YATES, Trial Attorney.
ROAD AND HIGHWAY BUILDERS v. US 2
__________________________
Before RADER, Chief Judge, LOURIE, Circuit Judge, and
DANIEL, Chief District Judge.*
LOURIE, Circuit Judge.
Plaintiff-Appellant Road and Highway Builders, LLC
(“RHB”) appeals from a judgment of the United States
Court of Federal Claims holding that RHB failed to meet
its burden of proof that the United States Internal Reve-
nue Service (“IRS”) acted in bad faith when it entered into
a release to redeem certain real property. See Rd. &
Highway Builders, LLC v. United States, 102 Fed. Cl. 88(2011). Because RHB failed to rebut the presumption
that the IRS agents discharged their duties in good faith
by clear and convincing evidence, we affirm the entry of
judgment against RHB.
BACKGROUND
This appeal involves an agreement by the IRS to re-
lease its right to redeem certain real property at 2640 N.
Las Vegas Boulevard, Las Vegas, Nevada (“the property”)
pursuant to I.R.C. § 7425(d) in return for RHB’s payment
of $100,000 (“the release”).
In 2000, the IRS assigned a taxpayer identification
number to then newly-incorporated Crystal Cascades,
LLC. In May 2001, Crystal Cascades, LLC changed its
name to Crystal Cascades Civil, LLC, but did not notify
the IRS of the name change and continued using the
originally-issued taxpayer identification number in its tax
* The Honorable Wiley Y. Daniel, Chief District
Judge, United States District Court for the District of
Colorado, sitting by designation.
3 ROAD AND HIGHWAY BUILDERS v. US
filings. In July 2004, deeds of trust were recorded in
Clark County, Nevada against the property to secure
certain loans made to Crystal Cascades Civil by a Nevada
bank. Following failure by Crystal Cascades Civil to fully
pay its employment taxes in 2003 and 2004, the IRS
caused notices of federal tax liens to be filed in August
2004 and January 2005. However, the lien notices were
filed under the taxpayer identification number as known
to the IRS and thus directed to “Crystal Cascades, LLC”
rather than “Crystal Cascades Civil, LLC.” In February
2005, additional deeds of trust were recorded against the
property as security for loans made to Crystal Cascades
Civil by RHB. In June 2005, the trustee for the Nevada
bank, acting as the senior secured creditor, initiated
foreclosure proceedings because Crystal Cascades Civil
had defaulted on its loan obligations. Crystal Cascades
Civil then filed for Chapter 11 protection in the United
States Bankruptcy Court for the District of Nevada
(“bankruptcy court”), and RHB subsequently filed an
adversary proceeding against the IRS in February 2006
arguing seniority over the tax liens. During the contem-
poraneous foreclosure sale, RHB purchased the property
for $1.43 million.
Pursuant to § 7452(d), the IRS has the right to re-
deem properties against which it has a valid tax lien.
Following the February 2006 foreclosure sale, the IRS
communicated to RHB that it was willing to release its
right of redemption in exchange for suitable considera-
tion. In June 2006, the parties negotiated a settlement
agreement whereby RHB paid the IRS $100,000 and the
IRS executed a “release of right of redemption” in favor of
RHB.
In November 2007, the bankruptcy court held a two-
day trial in the adversary proceeding between RHB and
ROAD AND HIGHWAY BUILDERS v. US 4
the IRS and concluded that the IRS’s notices of federal
tax liens did not impart constructive notice to third par-
ties because they were improperly recorded in the name of
“Crystal Cascades, LLC” and not “Crystal Cascades Civil,
LLC.” In re Crystal Cascades Civil, LLC, 398 B.R. 23(Bnkr. D. Nev. 2008). The bankruptcy court also awarded
surplus proceeds from the foreclosure sale to RHB, but
“express[ed] no opinion on the initial or continuing valid-
ity of the transaction by which the IRS received
$100,000.” Id. at 37 n. 17. The IRS appealed the bank-
ruptcy court’s ruling, which was affirmed by the Bank-
ruptcy Appellate Panel of the United States Court of
Appeals for the Ninth Circuit. In re Crystal Cascades
Civil, LLC, 415 B.R. 403 (B.A.P. 9th Cir. 2009).
In 2009, RHB sued the United States in the United
States Court of Federal Claims seeking return of the
$100,000 release payment, asserting that the June 2006
settlement agreement was void for lack of consideration.
It argued that the IRS’s right of redemption was illusory
because the tax liens were later held invalid by the bank-
ruptcy court. After a one-day trial, the Court of Federal
Claims held that RHB failed to prove that the IRS acted
in bad faith when it entered into the release negotiation.
Rd. & Highway Builders, 102 Fed. Cl. at 95. The court
noted that government officials are presumed to act in
good faith, and that presumption stands unless there is
clear and convincing evidence to the contrary. Id. at 92–
93. In light of the evidence, the court found that (i) the
IRS’s conduct did not give rise to an inference of bad faith
because the IRS agents had no reason or responsibility to
search for other names used by Crystal Cascades; (ii)
RHB failed to demonstrate bad faith on the part of the
IRS in negotiating the release; and (iii) RHB failed to
demonstrate that the IRS lacked a good faith belief in the
validity of its right of redemption. Id. at 93–94.
5 ROAD AND HIGHWAY BUILDERS v. US
RHB appeals from the judgment of the Court of Fed-
eral Claims. We have jurisdiction under 28 U.S.C.
§ 1295(a)(3).
DISCUSSION
We review judgments of the Court of Federal Claims
to determine if they are incorrect as a matter of law or
premised on clearly erroneous determinations of fact.
Dairyland Power Coop. v. United States, 645 F.3d 1363,
1369 (Fed. Cir. 2011).
The critical issue in this dispute is whether the IRS
official who executed the release acted in bad faith.
Forbearance of a right can represent consideration to
support an agreement, provided that the forbearing party
believes in good faith that its claim or defense may be
fairly determined to be valid. Restatement (Second) of
Contracts § 74(1); see Aviation Contractor Emps., Inc. v.
United States, 945 F.2d 1568, 1574 (Fed. Cir. 1991) (for-
bearance of a “right in honest dispute” can represent
consideration to support a contract). RHB contends that
the IRS did not and could not have had a good faith belief
that it had a right to redeem its tax liens against the
property pursuant to § 7425(d) when the agency entered
into the release agreement. RHB seeks to void the con-
tract on the ground that there was a failure of considera-
tion by the IRS because the agency’s purported right to
redeem the lien interest was later found invalid in bank-
ruptcy proceedings.
I. Presumption of Good Faith
We and our predecessor court, the Court of Claims,
have long upheld the principle that government officials
are presumed to discharge their duties in good faith. See
ROAD AND HIGHWAY BUILDERS v. US 6
e.g., Am-Pro Protective Agency v. United States, 281 F.3d
1234, 1239 (Fed. Cir. 2002); T & M Distribs., Inc. v.
United States, 185 F.3d 1279, 1285 (Fed. Cir. 1999);
Torncello v. United States, 681 F.2d 756, 770–71 (Ct. Cl.
1982); Schaefer v. United States, 633 F.2d 945, 948–49
(Ct. Cl. 1980); Kalvar Corp. v. United States, 543 F.2d
1298 (Ct. Cl. 1976); Librach v. United States, 147 Ct. Cl.
605, 614 (1959); Knotts v. United States, 128 Ct. Cl. 489,
492, 121 F. Supp. 630, 631 (1954). As we clarified in Am-
Pro, it is “well-established . . . that a high burden must be
carried to overcome this presumption,” amounting to clear
and convincing evidence to the contrary. 281 F.3d at1239–40. Specifically, we described the clear and convinc-
ing standard of proof as “impos[ing] a heavier burden
upon a litigant than that imposed by requiring proof by
preponderant evidence but a somewhat lighter burden
than that imposed by requiring proof beyond a reasonable
doubt.” Id. at 1240. We further noted that clear and
convincing evidence has been expressed as that “which
produces in the mind of the trier of fact an abiding convic-
tion that the truth of a factual contention is ‘highly prob-
able.’” Id. Moreover, a challenger seeking to prove that a
government official acted in bad faith in the discharge of
his or her duties must show a “specific intent to injure the
plaintiff” by clear and convincing evidence. Id.RHB argues that the trial court should not have ap-
plied the presumption of good faith to the IRS officials
here because RHB did not allege that they engaged in
fraudulent or quasi-criminal wrongdoing, but merely that
the agency’s negligence resulted in a breach of contract.
In support of that argument, RHB cites dictum from our
opinion in Am-Pro and analysis from a decision by the
Court of Federal Claims in Tecom, Inc. v. United States,
66 Fed. Cl. 736 (2005), in an attempt to limit the good
faith presumption to situations in which a government
7 ROAD AND HIGHWAY BUILDERS v. US
official allegedly engaged in fraud or in some other quasi-
criminal wrongdoing. That is not our law. The plaintiff
in Am-Pro claimed “duress” when a contracting officer
threatened to cancel the plaintiff’s contract if it did not
agree to certain contractual modifications, and we deter-
mined that the presumption of good faith applied not-
withstanding that the alleged duress was not fraudulent
and did not violate any criminal statute. Am-Pro, 281
F.3d at 1241. Indeed, as the trial court correctly noted in
this case, we have continued to apply the presumption of
good faith and the clear and convincing evidentiary stan-
dard to cases not involving allegations of fraud or quasi-
criminal wrongdoing since our decision in Am-Pro. See
e.g., Savantage Fin. Servs., Inc. v. United States, 595 F.3d
1282, 1288 (Fed. Cir. 2010) (holding plaintiff failed to
rebut presumption of good faith when government was
accused of using contract requirements as pretext to
circumvent injunction); Nova Express v. Potter, 277 F.
App’x 990, 993 (Fed. Cir. 2008) (holding plaintiff failed to
rebut presumption of good faith where government was
accused of terminating contract based on plaintiff’s failure
to meet contract requirements); Galen Med. Assocs., Inc.
v. United States, 369 F.3d 1324, 1335–37 (Fed. Cir. 2004)
(holding plaintiff failed to rebut presumption of good faith
where government was accused of bias in awarding
contracts). Like the contracting officer in Am-Pro, the
IRS officials here are accused of “sharp practices” at
worst. We decline to adopt RHB’s narrow characteriza-
tion of Am-Pro and agree with the trial court that the IRS
officials here are presumed to have discharged their
duties in good faith—a presumption that can be overcome
only by clear and convincing evidence to the contrary.
II. Evidence of Bad Faith
ROAD AND HIGHWAY BUILDERS v. US 8
RHB contends that it met a lesser burden of prepon-
derance of the evidence that the IRS could not reasonably
have had a good faith belief in the validity of its right of
redemption by showing the following: (i) agency officials
did not investigate whether Crystal Cascades, LLC was
conducting business under other names; (ii) the IRS had
already decided that it would not exercise its purported
right to redeem before entering negotiations with RHB for
a waiver of that right; (iii) the IRS later lost at trial and
on appeal in bankruptcy adversary proceedings; and (iv)
the IRS’s expert witness at the bankruptcy trial testified
that an ordinary person searching for liens on the prop-
erty would not have found the notices of federal tax liens.
See Rd. & Highway Builders, 102 Fed. Cl. at 93. We
agree with the trial court that those facts do not give rise
to an inference of bad faith on the part of the IRS, and
therefore that RHB failed to demonstrate by clear and
convincing evidence that the IRS lacked a good faith belief
in the validity of its right to redemption.
First, evidence that the IRS officials failed to verify
that the original landowner of the property, Crystal
Cascades, LLC, was doing business under any other name
before either filing a notice of federal tax lien or negotiat-
ing the release does not support a finding of a specific
intent to injure RHB. As the trial court noted, the IRS
“had no reason or responsibility to search for other names
used by Crystal Cascades, LLC.” Id. Testimony by IRS
officials regarding agency practice demonstrated that it
was neither expected nor required that Revenue Officers
would verify the names of delinquent taxpayers, such as
Crystal Cascades, LLC, beyond making sure that the
name on the liens matched the name in the agency’s
collections system. RHB did not dispute this finding, nor
identify any other evidence to support a conclusion that
the trial court’s determination was clearly erroneous.
9 ROAD AND HIGHWAY BUILDERS v. US
RHB merely recites the same evidence to argue that the
trial court erred in its ruling. Appellant Br. 13–14. That
is insufficient to support a ruling that the trial court’s
findings of fact were clearly erroneous. Landmark Land
Co., Inc. v. FDIC, 256 F.3d 1365, 1373 (Fed. Cir. 2001).
Second, evidence that the IRS negotiated the release
of its right of redemption after having already decided not
to exercise that right also does not support a finding of
bad faith on its part or clear and convincing proof of a
specific intent to injure RHB. The court noted that RHB
“failed to cite any evidence or case law to suggest that the
IRS is required to release its right to redemption once it
decides not to redeem” and that it is standard practice for
the agency to “realize value” from the release of a right of
redemption in cases where actual redemption may not be
feasible. Id. at 94. We agree that that does not constitute
an improper motive on the part of the Revenue Officer.
RHB again does not point to any other evidence to sup-
port a determination that the trial court’s decision was
clearly erroneous.
Third, the fact that a bankruptcy court later held that
the IRS’s notices of federal tax liens were not properly
recorded because they were entered under the name
“Crystal Cascades, LLC,” instead of “Crystal Cascades
Civil, LLC,” does not support a finding of specific intent to
injure RHB. As the court correctly noted, “[e]ven though
the invalidity [of a party’s claim] later becomes clear, the
bargain is to be judged as it appeared to the parties at the
time.” Id. at 95 (quoting Restatement (Second) of Con-
tracts § 74 cmt. b). At the time of the release agreement,
there was a legal question in the Ninth Circuit as to what
constituted a reasonable inspection of public records. See
Crystal Cascades Civil, 415 B.R. at 409. But the IRS’s
position with respect to the validity of the notices of
ROAD AND HIGHWAY BUILDERS v. US 10
federal tax liens that gave rise to the right of redemption
at issue was supported by case law from other jurisdic-
tions that enforced federal tax liens even after finding an
error in the taxpayer’s name at the time of the release
agreement. See Crystal Cascades Civil, 398 B.R. at 29–
30.
Finally, RHB emphasizes that the IRS’s expert wit-
ness in bankruptcy court testified that the average rea-
sonably diligent user looking for liens on property owned
by Crystal Cascades Civil would not have found the
notices of federal tax liens. While that testimony could
indicate that the IRS acted unreasonably, it does not
suggest that the IRS acted in bad faith. The court care-
fully reviewed the record, considered the testimony, and
evaluated the credibility of witnesses at trial to support
its conclusion that RHB did not show by clear and con-
vincing evidence that the IRS acted in bad faith.
CONCLUSION
For the reasons stated above, we conclude that the
Court of Federal Claims did not err in holding that RHB
failed to rebut the presumption by clear and convincing
evidence that the IRS agents discharged their duties in
good faith. The judgment of the Court of Federal Claims
in favor of Defendant-Appellee is
AFFIRMED