United States v. Hughes

Background

The United States sued Timberly E. Hughes to collect civil penalties assessed under the Bank Secrecy Act for allegedly failing to timely report foreign financial accounts for calendar years 2010 through 2013. The United States alleged that Hughes was a U.S. citizen, owned two New Zealand businesses, had a financial interest in or signatory authority over accounts at ANZ Bank of New Zealand, and had account balances exceeding $10,000. It alleged that her failures to file the required foreign-bank-account reports were willful. The United States sought penalties, interest, and late-payment penalties.

The United States filed the complaint on September 27, 2018. After the parties extended Hughes’s deadline to respond during settlement discussions, Hughes did not answer by the final September 30, 2019 deadline. The Clerk entered default on November 13, 2019. Hughes later represented in a joint case-management statement that she did not intend to answer and did not wish to contest the action. The United States then moved for default judgment.

Motion to Set Aside Default

Federal Rule of Civil Procedure 55(c) allows a court to set aside an entry of default for “good cause.” The court considered whether Hughes had engaged in culpable conduct, whether she had a potentially meritorious defense, and whether setting aside default would prejudice the United States. The court emphasized that default judgment is a severe remedy and that cases should generally be decided on their merits when possible.

The United States argued that Hughes knowingly chose not to respond and that her conduct delayed the case and harmed its collection efforts. Hughes said her attorney advised her to default because the government would win, and she later could not afford to continue with that attorney. Although the court noted that Hughes repeatedly said she did not oppose default judgment, it found that her conduct was likely not culpable because she was representing herself and may not have understood her legal obligations after losing representation.

For the potential-defense requirement, Hughes alleged that she did not willfully violate a known reporting duty, was unaware of the reporting requirement, believed her account activity had been properly disclosed on tax forms, and failed to report the accounts because of confusion and mistake. She also challenged the account balances used to calculate the penalties, including balances that she said reflected temporary loan proceeds.

The court held that Hughes had alleged specific facts that, if true, could constitute a defense to the United States’ allegations of willfulness. The court did not decide whether those allegations were true or resolve Hughes’s liability. It also did not decide whether she had a defense concerning the amount of the penalties because the alleged defense concerning willfulness was sufficient to reopen the case.

The United States claimed prejudice from asset sales and from the time and expense of seeking default and default judgment. The court found that the United States likely had suffered some prejudice but concluded that the case should be decided on its merits. Because Hughes was representing herself, the court declined to impose sanctions at that time.

Rulings

The court found good cause to set aside the entry of default and therefore denied the United States’ motion for default judgment. Hughes’s motion to strike portions of the United States’ opposition was described as moot because the motion to set aside default had been granted, but the order’s conclusion states that the court denied the motion to strike.

The court ordered Hughes to respond to the complaint by filing a formal answer under Rule 8 or a motion under Rule 12 no later than May 1, 2020. The order did not decide whether Hughes owed the alleged penalties or whether her conduct was willful.