Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_18-cv-05931/USCOURTS-cand-3_18-cv-05931-1/pdf.json

Parties Involved:
Timberly Hughes
Defendant
United States of America
Plaintiff

Document Text:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA,

Plaintiff,

v.

TIMBERLY E. HUGHES,

Defendant.

Case No. 18-cv-05931-JCS 

ORDER GRANTING DEFENDANT'S 

MOTION TO SET ASIDE DEFAULT;

DENYING PLAINTIFF’S MOTION 

FOR DEFAULT JUDGMENT;

DENYING DEFENDANT'S MOTION 

TO STRIKE

Re: Dkt. Nos. 25, 34, 42

On December 6, 2019, Plaintiff the United States of America (“Plaintiff” or “United 

States”) filed a motion for default judgment. Dkt. No. 25. On February 7, 2020, the Court held a 

hearing on the United States’ motion for default judgment. Dkt. No. 33. Subsequently, Defendant 

Timberly E. Hughes (“Defendant”) filed a request for leave to answer out of time, which the Court 

construed as a motion to set aside entry of default. Dkt. Nos. 34, 35. In addition, Defendant filed 

a motion to strike a portion of the United States’ opposition. Dkt. No. 42. The Court has 

determined that the motion to set aside entry of default and the motion to strike are appropriate for 

a decision without a hearing. The hearing scheduled for Friday, April 3, 2020 is vacated. For the 

reasons set forth below, the Court GRANTS Defendant’s motion for to set aside entry of default, 

DENIES Plaintiff’s motion for default judgment, and DENIES Defendant’s motion to strike. 

I. FACTUAL BACKGROUND

The United States brought this action to collect from Defendant outstanding civil penalty 

assessments (31 U.S.C. § 5321(a)(5)), commonly known as FBAR penalties, which were assessed 

against Defendant, for her alleged failure to timely report her financial interest in, and/or her 

signatory authority over, foreign bank accounts for the 2010, 2011, 2012, and 2013 calendar years, 

as required by 31 U.S.C. § 5314 and its implementing regulations, as well as all associated 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 1 of 16
2

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

penalties and interest. The total balance allegedly due to the United States is $721,344.14 as of 

August 22, 2017. Compl. ¶ 1. Defendant Timberly E. Hughes is a resident of San Francisco, 

California, and resided in San Francisco at the time of the events that gave rise to the civil 

penalties at issue in this action. Id. ¶ 3. Defendant is a U.S. citizen. Id. 

The United States alleges Defendant has a business degree with a focus in accounting. Id.

¶ 11. Defendant worked as an accounts manager until approximately 1990, when she started her 

own bookkeeping business. Id. Since at least 2010, the United States alleges Defendant has 

performed bookkeeping services for a family trust that administers approximately $1 billion in 

assets. Id. ¶ 12. The United States alleges Defendant has also provided bookkeeping services for 

other clients which has included basis tracking, and tax return preparation services. Id. ¶ 13. For 

the calendar years 2010, 2011, 2012 and 2013, Defendant prepared approximately ten federal 

income tax returns (Forms 1040) for her clients each year and received compensation for her tax 

return preparation. Id.

The United States alleges Defendant is the sole owner of two businesses, Takamatua 

Valley Vineyards Limited (“TVV”), a vineyard, and Cuba Uncorked Limited (“CU”), a wine bar, 

which are both located in New Zealand. Id. ¶ 8. The United States alleges that Defendant had 

signatory authority and a financial interest over the following TVV and CU financial accounts 

held at ANZ Bank of New Zealand:

Year Account Name Account Numbers

2010 Takamatua Valley Vineyards (TVV) -1000, -1004, -0600, -0625

2011 Takamatua Valley Vineyards (TVV) -1005, -1000, -1004, -1006, -0600, -0625

2012 Takamatua Valley Vineyards (TVV) -1005, -1000, -1004, -1006, -0600, -0625

2013 Takamatua Valley Vineyards (TVV) -1005, -1000, -1004, -1006, -0600, -0625

Cuba Uncorked (CU) -4400

Id. ¶¶ 9, 25. The United States alleges that these accounts were bank accounts in a foreign county. 

Id. ¶ 26. The United States alleges that during the 2010, 2011, 2012, and 2013 calendar years, the 

aggregate value of the financial accounts identified above exceeded $10,000 in U.S. currency and 

Defendant was required to timely file Form TD F 90-22.1, “Report of Foreign Bank and Financial 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 2 of 16
3

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

Accounts,” commonly known as an “FBAR.” Id. ¶ 10. 

The United States alleges that Defendant’s accounts for TVV and CU at ANZ Bank earned 

interest income in the total amounts of $3,822.88, $5,090.61, $1,418.55, and $6,826.62 in taxable 

years 2010, 2011, 2012, and 2013, respectively. Id. ¶ 14. However, Defendant failed to report 

any of the interest income for taxable years 2010 and 2011. Id. ¶ 15. 

For the taxable year 2012, the United States alleges Defendant reported the interest income 

from her ANZ Bank accounts on Schedule B and answered “Yes” to the first question on line 7a 

of Part III, Foreign Accounts and Trusts (“At any time during 2012, did you have a financial 

interest in or signature authority over a financial account (such as a bank account, securities 

account, or brokerage account) located in a foreign country? See instructions.”), indicating that she 

had a foreign account. Id. ¶ 16-17. The United States alleges Defendant also answered “Yes” to 

the second question on line 7a (“If “Yes,” are you required to file Form TD F 90-22.1 to report 

that financial interest or signature authority? See Form TD F 90-22.1 and its instructions for filing 

requirements and exceptions to those requirements”), indicating that she was required to file an 

FBAR for the 2012 reporting period but Defendant did not timely file an FBAR for the 2012 

calendar year. Id. ¶ 18-19. 

For the taxable year 2013, the United States alleges Defendant reported the interest income 

for her ANZ Bank accounts for taxable year 2013 on Schedule C as part of TVV’s gross receipts. 

Id. ¶ 16. The United States alleges that on Defendant’s 2013 Schedule B, Defendant answered 

“Yes” to the first question on line 7a indicating that she had a foreign account, but answered “No” 

to the second question on line 7a indicating that she was not required to file an FBAR for the 2013 

reporting period, even though she allegedly had a reportable interest in foreign bank accounts, and 

the aggregate balance in her foreign bank accounts exceeded $10,000. Id. ¶ 20. The United States 

alleges Defendant did not timely file an FBAR for the 2013 calendar year.

The United States alleges that Defendant did not file an FBAR prior to the IRS issuing an 

information document request on August 21, 2014 for Defendant’s delinquent FBARs for the 

2011, 2012, and 2013 calendar years. Id. ¶ 21. Defendant filed delinquent FBARs for 2011, 

2012, and 2013 on September 11, 2014. Id. On January 1, 2015, the IRS issued an information 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 3 of 16
4

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

document request requesting a FBAR for the 2010 calendar year and Defendant filed her 

delinquent FBAR for the 2010 reporting period on February 1, 2015. Id. Defendant did not 

participate in any voluntary disclosure initiative. Id. ¶ 22. The United States alleges that 

Defendant’s failure to timely file FBARs with regards to the 2010, 2011, 2012, and 2013 calendar 

years was willful. Id. ¶ 29.

On September 30, 2016, pursuant to 31 U.S.C. § 5321(a)(5), an authorized delegate of the 

Secretary of the Treasury of the United States of America assessed Defendant with $ 678,899 31 

in FBAR civil penalties. Id. ¶ 30. In addition, pursuant to 31 U.S.C. § 3717(a)(1), Defendant 

alleges it is entitled to recover prejudgment interest accrued on Defendant’s unpaid penalties and 

late-payment penalties pursuant to 31 U.S.C. § 3717(e)(2). Id. ¶ 33-36. Defendant has not paid 

the FBAR penalties. Id. ¶ 38. As of November 19, 2019, the United States claims that the balance 

due from Defendant for the 2010, 2011, 2012, and 2013 FBAR penalties, including late-payment 

penalties and interest, is $827,977.79. Beasley Declaration in Support of Motion for Default 

Judgment (“Beasley Decl.”), Dkt. No. 25-1, ¶ 6.

II. PROCEDURAL HISOTRY

On September 27, 2018, the United States filed the complaint in this action against 

Defendant. Dkt. No. 1. On October 11, 2018, the United States sent Defendant a request to waive 

service of the summons in this action. On October 29, 2018, Defendant’s attorney executed the 

waiver on her behalf, and on November 20, 2018, the waiver was filed with the Clerk of Court. 

Dkt. No. 6. The parties then executed a series of stipulations to extend time for Defendant to 

answer or otherwise appear in this action in furtherance of settlement discussions in this matter. 

However, settlement discusses were unsuccessful and the United States claims that part of the 

breakdown in settlement discussions related to the dissipation of assets by Defendant, including 

her sale of real property. See Exh. 2 to Pl.’s Opp., Dkt. No. 41-1 at 41-21. 

Defendant failed to answer or otherwise respond to the complaint by the September 30, 

2019 deadline contained in the final stipulation. See Dkt. No. 11. The United States made clear it 

would seek entry of default and ultimately a default judgment. See Exh. 1, Dkt. No. 41-1 at 1-2. 

Defendant acknowledged that a judgment would be obtained by the United States and intended to 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 4 of 16
5

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

work with the United States to resolve any judgment based on her financial condition. Id.

The United States subsequently moved the Clerk of Court for entry of default against 

Defendant on November 13, 2019 and the Clerk entered default that same day. See Dkt. Nos. 16, 

19. On November 15, 2019, Defendant signed a Joint Case Management Statement (JCMS) 

representing to the Court she was aware that the Clerk had entered default against her, “The 

parties note that the Clerk of Court has entered default against defendant Timberly Hughes on 

November 13, 2019,” and specifically represented “Defendant has not yet filed an answer, and 

does not intend to answer in this action.” Dkt. No. 20 at 1-2. The JCMS also stated, “[t]he parties 

were unable to agree to a settlement, and Ms. Hughes does not wish to contest this action.” Id. at 

3. 

On December 6, 2019, the United States filed a motion for default judgment. Dkt. No. 25.1 

Defendant never filed an opposition to the motion for default judgment. On February 7, 2020, the 

Court held a hearing on the United States’ motion for default judgment. Dkt. No. 33. Defendant 

appeared at the hearing by telephone and requested that the Court delay entry of judgment in this 

case for two weeks. Id. Defendant informed the court, for the first time, that she “was told by the 

‘Offer in Compromise’ (OIC) officer for the IRS that the judgment could affect [her] OIC offer.” 

Dkt. No. 40 at 2. Defendant wanted to make sure that she could work with the IRS. Id. The 

Court granted Defendant’s request that the Court delay entry of judgment by two weeks. Dkt. No. 

33. Defendant stated that she did not contest the motion for default judgment. Id. 

On February 10, 2020, Defendant filed a “request for leave to answer out of time,” which 

the Court construed as a motion to set aside entry of default. Dkt Nos. 34, 35. Her moving papers 

contend she believes she received bad legal advice from her attorney with regard to defaulting, as 

her attorney apparently informed her that the government would win this case. See Dkt. No. 34 at 

1. In Defendant’s proposed answer, she includes an argument and narrative styled “Affirmative 

Defenses” that acknowledges or admits some of the United States’ factual allegations to which she 

1

In her moving papers, Defendant states that “[a]s of February 10, 2019, the Plaintiff has failed to 

file its application for default judgment.” Dkt. No. 34 at 2. The United States has, in fact, filed its 

motion for default judgment and Defendant has participated in the hearing for the motion. Dkt. 

No. 25, 33. 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 5 of 16
6

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

earlier denied. Id. at 3-6. Defendant further attached an affidavit and numerous exhibits related to 

her defense. The United States filed its opposition on March 6, 2020 and the Defendant filed her 

reply on March 12, 2020.2 

Defendant attached an affidavit to her reply which states that she did not understand at the 

time that she was agreeing to a “willful penalty.” Dkt. No. 42 at 5. She claims that her attorney 

emailed her admitting that “he was not competent to represent” her and advised her to “default on 

all allegations, including the false allegations of willfulness.” Id. Further, Defendant alleges that 

her attorney sent her a letter stating that “he could no longer consider working with [her] because 

[her] efforts to defense [herself] ‘created a conflict of interest.’” Id. at 5-6. Defendant claims that 

her attorney was “working with the plaintiff in the practice of attornment, to take [her] property 

and property rights, create criminal liabilities for [her] and deliver [her] property and property 

rights to the United States.” Id. at 6. Defendant further claimed that the United States overstated 

the value of the property the United States claims Defendant dissipated. Id. In the Defendant’s 

reply, she also moved to strike portions of the United States’ opposition. 

III. DISCUSSION

A. Motion to Set Aside Default

1. Legal Standard

Federal Rule of Civil Procedure 55(c) authorizes a court to set aside entry of default for 

good cause. “The court’s discretion is especially broad where, as here, it is entry of default that is 

being set aside, rather than a default judgment.” O'Connor v. State of Nev., 27 F.3d 357, 364 (9th 

Cir. 1994). Rule 60(b) lists the grounds on which a default judgment may be vacated and includes 

“mistake, inadvertence, surprise or excusable neglect.” The Ninth Circuit has held that the test 

that governs lifting entry of default for good cause under Rule 55(c) also governs the vacating of a 

default judgment under Rule 60(b)(1) for excusable neglect or mistake. TCI Group Life Ins. Plan 

v. Knoebber, 244 F.3d 691, 696–97 (9th Cir.2001), overruled on other grounds by Egelhoff v. 

2

In her reply, Defendant states that the United States “never objected or responded to the 

defendant’s request for leave to answer out of time.” Dkt. No. 42 at 2. The United States did in 

fact file its opposition. Dkt. No. 41. 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 6 of 16
7

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

Egelhoff ex rel. Breiner, 532 U.S. 141(2001) (“TCI Group”). 

A court determines the existence of good cause for removing a default by considering the 

following factors: (1) whether the party seeking to set aside the entry of default engaged in 

culpable conduct that led to the default; (2) whether there is any meritorious defense to plaintiff’s 

claims; or (3) whether setting aside the entry of default will prejudice the plaintiff. United States. 

v. Signed Personal Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010)

(“Mesle”); see also Franchise Holding LLC v. Huntington Rests. Group, Inc., 375 F.3d 922, 925-

26 (9th Cir. 2004). These factors are disjunctive: “a finding that any one of these factors is true is 

sufficient reason for the district court to refuse to set aside the entry of default.” Mesle, 615 F.3d 

at 1091. “Crucially, however, ‘judgment by default is a drastic step appropriate only in extreme 

circumstances; a case should, whenever possible, be decided on the merits.’” Id. (quoting Falk v. 

Allen, 739 F.2d 461, 463 (9th Cir. 1984)). 

2. Culpability 

“[A] defendant's conduct is culpable if he has received actual or constructive notice of the 

filing of the action and intentionally failed to answer.” TCI Group, 244 F.3d at 697 (emphasis in 

original).

3

 “‘[I]ntentionally’ means that a movant cannot be treated as culpable simply for having 

made a conscious choice not to answer; rather, to treat a failure to answer as culpable, the movant 

must have acted with bad faith, such as an ‘intention to take advantage of the opposing party, 

interfere with judicial decisionmaking, or otherwise manipulate the legal process.’” Mesle, 615 

F.3d at 1092 (quoting TCI Group, 244 F.3d at 697). Defendant’s conduct is culpable where there 

is no explanation of the default inconsistent with a devious, deliberate, willful, or bad faith failure 

to respond. Mesle, 615 F.3d at 1092. “[S]imple carelessness is not sufficient to treat a negligent 

3 The United States has argued that the Court should apply the stricter standard articulated in 

Franchise Holding II, L.L.C. v. Huntington Rests. Grp., Inc., 375 F.3d 922, 925–26 (9th Cir. 

2004), in which a defendant's conduct may be considered culpable “[i]f [the] defendant has 

received actual or constructive notice of the filing of the action and failed to answer,” with no 

mention of that failure being intentional. However, this standard is not generally applied unless

the moving party is a legally sophisticated entity or individual. Mesle, 615 F.3d at 1093. While 

Defendant may have had legal counsel at the time she failed to answer or otherwise respond to the 

complaint, it appears Defendant was likely unrepresented at the time default was entered against 

her. Thus, the proper standard to apply is that of TCI Group. See Mesle, 615 F.3d at 1093.

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 7 of 16
8

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

failure to reply as inexcusable, at least without a demonstration that other equitable factors, such 

as prejudice, weigh heavily in favor of denial of the motion to set aside a default.” Id. at 1092-93.

Here, Defendant claims that she was advised by her attorney at the time to default on the 

complaint because “the government always wins.” Def.’s Mot., Dkt. No. 34 at 1. Defendant 

states that “[o]n bad advice of her attorney, the defendant did not file a written response” by the 

September 30, 2019 deadline for Defendant to answer or otherwise respond to the complaint. Id. 

The Defendant further claims “since that time the defendant has acted diligently to prepare a 

response without any legal training whatsoever because she could no longer afford to pay her 

attorney.” Id. Defendant also states that her attorney admitted that “he was incompetent to defend 

her and . . . that her efforts to defend herself afterwards created a conflict of interest for her 

attorney.” Def.’s Reply, Dkt. No. 42 at 2. 

However, since her failure to answer by the September 30, 2019 deadline, Defendant has 

made repeated representations to the Court and the United States that she does not oppose default 

judgment. On November 15, 2019, when discussing the joint case management conference 

statement for the upcoming case management conference, the United States informed Defendant 

that if she intended to contest the underlying merits, she must move to set aside the default, and 

directed her to the Court’s resources for pro se litigants. See Exh. 5 to Pl.’s Opp., Dkt. No. 41-1 at 

28. Although Defendant initially sent out an email stating that she was “completely confused” and 

that she would like to request a continuance of the upcoming CMC for her to be able to review the 

joint statement, Defendant later told the United States to “[p]lease proceed and file the case 

management . . . I am fine with what is in the agreement I signed.” Exhs. 6,7 to Pl.’s Opp., Dkt. 

No. 41-1 at 31-42. In the case management statement, Defendant affirmed that she “does not 

intend to answer in this action” and “does not wish to contest this action.” Dkt. No. 20 at 2-3. 

The United States filed a motion for default judgment on December 6, 2019. Dkt. No. 25. 

However, Defendant did not file a response to the United States’ motion for default judgment. 

On February 7, 2020, this Court held a hearing on the United States’ Motion for Default Judgment 

and Defendant represented to the Court that she did not contest default judgment, but asked the 

Court to delay its decision regarding the motion for default judgment for two weeks so that she 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 8 of 16
9

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

could pursue a global settlement with the IRS that included the FBAR claims in this case. Dkt. 

No. 33. However, the next business day, Defendant filed her request for leave to answer out of 

time. Dkt. No. 34. The United States claims that Defendant has opted to misrepresent her 

intentions, dissipate assets, and otherwise do what she can to bring these proceedings to a halt and 

hamper the United States’ collection efforts. 

While Defendant contends that she was erroneously counseled to default, after the default 

was entered, Defendant claims to have acted diligently to prepare a response. However, 

Defendant never communicated to the Court or the United States’ counsel that she intended to 

contest the default. Instead, Defendant affirmatively stated on numerous occasions that she did 

not wish contest the action and failed to oppose the United States’ motion for default judgment. 

Defendant now claims that she did not understand that she was agreeing to a “willful” penalty. A 

review of the email correspondence shows that on November 15, 2019, Defendant asked the 

United States’ counsel why willful FBAR penalties were assessed. See Exh. 4 to Pl.’s Opp., Dkt. 

No. 41-1 at 24-16. The United States’ counsel then confirmed on that same day that a willful 

FBAR penalty was proposed by the Revenue Agent. See Exh. 5 to Pl.’s Opp, Dkt. No. 41-1 at 27-

30. While the Court has received no explanation regarding why Defendant failed to oppose the 

United States’ motion for default judgment after learning of the willful FBAR penalties, the Court 

still finds that Defendant’s conduct was likely not culpable. Defendant is proceeding pro se and 

may have been unable to understand correctly her legal obligations after she was no longer 

represented. Mesle, 615 F.3d at 1093-94. 

3. Meritorious Defense

a. Legal Standard

“A defendant seeking to vacate a default judgment must present specific facts that would 

constitute a defense. But the burden on a party seeking to vacate a default judgment is not 

extraordinarily heavy.” See TCI Group, 244 F.3d at 700 (citations omitted). “All that is necessary 

to satisfy the ‘meritorious defense’ requirement is to allege sufficient facts that, if true, would 

constitute a defense: ‘the question whether the factual allegation [i]s true’ is not to be determined 

by the court when it decides the motion to set aside the default. Id. Rather, that question ‘would 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 9 of 16
10

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

be the subject of the later litigation.’” Mesle, 615 F.3d at 1094 (quoting TCI Group, 244 F.3d at 

700). “If . . . the defendant presents no meritorious defense, then nothing but pointless delay can 

result from reopening the judgment.” TCI Group, 244 F.3d at 697; see also Haw. Carpenters' Tr. 

Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986) (“To permit reopening of the case in the 

absence of some showing of a meritorious defense would cause needless delay and expense to the 

parties and court system.”). 

b. Applicable Law in FBAR cases

The Bank Secrecy Act (BSA), 31 U.S.C. § 5311-25, requires U.S. citizens to report to the 

Secretary of the Treasury any relationships they have with foreign financial accounts with 

balances in excess of $10,000. 31 U.S.C. § 5314; 31 C.F.R. §§ 1010.306 and 1010.350. Covered 

relationships include “having a financial interest in[] or signature authority over” a foreign bank 

account. 31 C.F.R. § 1010.350. For the years relevant to this action, the relationships must be 

disclosed on an FBAR that must be filed no later than June 30 of the year following the calendar 

year during which the account was held. 31 C.F.R. § 1010.306(d); United States v. Williams, 489 

Fed. Appx. 655 (4th Cir. 2012). Each failure to report each bank account for each year an FBAR 

is required is a separate violation of 31 U.S.C. § 5321. See United States v. Boyd, No. CV 18-

803-MWF (JEMX), 2019 WL 1976472, at *5 (C.D. Cal. Apr. 23, 2019) appeal docketed, No. 19-

55585 (9th Cir.); United States v. Shinday, No. 2:18-CV-06891-CAS-EX, 2018 WL 6330424, at 

*4 (C.D. Cal. Dec. 3, 2018).

The IRS is authorized to assess FBAR penalty against individuals who violate the FBAR 

reporting requirements. See 31 U.S.C. §§ 5314 and 5321. A penalty for a non-willful FBAR 

violation cannot exceed $10,000 per violation but a penalty for a willful FBAR violation can be 

the greater of $100,000 or 50% of the balance in the account at the time of the violation for each 

violation. 31 U.S.C. §§ 5321(a)(5)(B)-(D). A person is subject to the willful failure to file an 

FBAR penalty under § 5321(a)(5) if the following four elements are met: 1) The person is a 

United States person; 2) The person had an interest in or authority over a foreign financial 

account; 3) The financial account had a balance that exceeded $10,000 at some point during the 

reporting period; and 4) The person willfully failed to disclose the account and file an FBAR form 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 10 of 16
11

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

for the account. See United States v. Pomerantz, No. C16-689, 2017 WL 4418572, at *2-3 (W.D. 

Wash. Oct. 5, 2017); United States v. Toth, 2017 WL 1703936, at *4 (D. Mass. May 2, 2017); 

United States v. McBride, 908 F. Supp. 2d 1186, 1201 (D. Utah 2012); Bedrosian v. United States, 

No. CV 15-5853, 2017 WL 1361535, at *3 (E.D. Pa. Apr. 13, 2017).

Although the term “willful” is not defined in the code section, in civil cases, willfulness 

includes both knowing and reckless violations of a standard. See 31 U.S.C. § 5321; Safeco Ins. 

Co. of America v. Burr, 551 U.S. 47, 57 (2007). Reckless disregard of a statutory duty satisfies 

the willfulness standard. McBride, 908 F.Supp.2d at 1204; Bedrosian v. United States Dep't of 

Treasury, Internal Revenue Serv., No. CV 15-5853, 2017 WL 4946433, at *4 (E.D. Pa. Sept. 20, 

2017). Recklessness is evaluated using an objective standard that evaluates whether an action 

entails “an unjustifiably high risk of harm that is either known or so obvious that it should be 

known.” Bedrosian, 2017 WL 4946433, at *4 (quoting Safeco Ins. Co., 551 U.S. at 68). The 

relevant inquiry is whether the failure to disclose the information was purposeful instead of 

inadvertent, not whether the taxpayer subjectively believed he was not required to file an FBAR. 

See Lefcourt v. United States, 125 F.3d 79, 83 (2d Cir. 1997); McBride, 908 F.Supp.2d at 1210. 

Acting with “‘willful blindness’ to the obvious or known consequences of one’s actions” also 

satisfies the willfulness standard. Bedrosian, 2017 WL 4946433, at *4 (quoting McBride, 908 

F.Supp.2d at 1205). Evidence of conduct intended to “conceal or mislead sources of income or 

other financial information” is evidence of willful blindness and recklessness. United States v. 

Williams, 489 Fed.Appx. 655, 659-60 (4th Cir. 2012). However, “an improper motive or bad 

purpose is not necessary to establish willfulness in the civil context.” McBride, 908 F.Supp.2d at 

1204 (internal citations omitted). Willfulness can be shown through circumstantial evidence and 

reasonable inferences drawn from the facts before the court. Id.

Courts have reviewed de novo whether the account holder was willful. See United States v. 

Williams, 2010 WL 3473311, at *1 (E.D. Va. 2010), rev’d on other grounds, 489 Fed. Appx 655 

(4th Cir. 2012); McBride, 908 F. Supp. 2d at 1201; Bedrosian, 2017 WL 4946433, at *2. 

However, when reviewing the penalty amount, courts have reviewed whether the penalty’s size is 

“arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C.§ 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 11 of 16
12

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

706(2)(A); see also United States v. Williams (Williams III), No. 1:09-cv 437, 2014 WL 3746497, 

at *1 (E.D. Va. June 26, 2014), Moore v. United States, No. C13- 2063RAJ, 2015 WL 1510007, at 

*7 (W.D. Wash. Apr. 1, 2015).

c. The sufficiency of United States’ claim under Fed. R. Civ. P. 

12(b)(6)

The United States’ complaint alleges that during the relevant years, Defendant was a U.S. 

citizen; Defendant was the sole owner of the business whose bank accounts are at issue; Defendant 

had signatory authority and a financial interest in the bank accounts located in a foreign county as 

described above; the accounts had an aggregated balance that exceeded $10,000 in U.S. currency; 

and Defendant failed to file an FBAR by the applicable deadline. See Compl. ¶¶ 8, 23-28. The 

complaint further alleges that Defendant’s failure to timely file FBARs was willful. See id. ¶ 29.

Defendant claims that “the complaint fails to state a cause of action or claim upon which 

relief can be granted for the reason that the complaint includes false and erroneous statements and 

is made in bad faith.” Def.’s Proposed Answer, Dkt. No. 34 at 5. Defendant states that she did 

disclose the facts of her relationship to the foreign interests but “it’s more a question of which 

form she used.” Id. In addition, Defendant states that “it is quite obvious that the government was 

not prejudiced in any way regarding disclosures or no disclosures, judging by what appears to be 

an unlimited access to all the facts in the matter and very clearly set forth in the pleadings.” Id.

Even assuming these facts to be true, Defendant’s moving papers fail to explain why the United 

States failed to state a claim in its compliant. Thus, as to liability, Defendant has not alleged 

sufficient facts that, if true, would constitute a defense that the United States failed to state a claim. 

d. Willfulness Related Arguments

Defendant argues that she had reasonable cause, the criminal standard of willfulness 

should apply, and that an IRS auditor had told Defendant that willful penalties would not be 

asserted in this case. The United States argues that such arguments are not well-taken because a 

reasonable cause defense only apples where the penalty assessed is for a non-willful violation of 

the statute. See 31 U.S.C. § 5321(a)(5)(C)(ii). Furthermore, the United States argues that the 

criminal standard of willfulness does not apply because the applicable law clearly articulates that 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 12 of 16
13

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

reckless disregard of a statutory duty satisfies the willfulness standard in FBAR cases. See United 

States v. Ott, No. 18-CV-12174, 2020 WL 913814, at *4 (E.D. Mich. Feb. 26, 2020); McBride, 

908 F. Supp. 2d at 1204. Finally, the United States argues that allegations of an IRS employee’s 

subjective views regarding the defendant’s conduct are irrelevant to the willfulness of Defendant’s 

conduct because courts review an individual’s liability for the FBAR penalty de novo. Bedrosian 

v. U.S., Dep’t of Treasury, IRS, 912 F.3d 144, 152-53 (3d Cir. 2018) (citations omitted). 

Although Defendant may not have clearly articulated the legal standard for willfulness, in 

her proposed answer Defendant alleges that she did not act willfully in this case. Defendant states 

that she “did not voluntarily, intentionally violate a known legal duty.” Def.’s Proposed Answer, 

Dkt. No. 34 at 6. Defendant further alleges that “she was unaware of the FBAR filing requirement 

and was not advised of the requirement by any of the professional advisors she consulted with 

regarding her US tax filings.” Id. Defendant also states that she was not hiding her accounts 

because she attempted to report the interest from the accounts on at least her 2012 and 2013 tax 

returns. Id. Defendant states that her failure to file the FBAR was due to confusion and mistake, 

rather than willfulness. Id. Defendant alleges that she is a bookkeeper, not a professional return 

preparer, and she was not familiar with FBAR and other international filing rules and forms. Id. 

In Defendant’s affidavit, Defendant further states that she was confused and thought that 

she “only had to declare if there were amounts over $10,000 at the end of the year.” Def.’s Aff., 

Dkt. No. 34 at 13.4 Defendant further explains that every 18 months, the TVV checking account 

“has the mortgage loan debt rolled over to fund the loan and then pay a new mortgage loan, it 

happens the same day, as the New Zealand Bank treats the account as an escrow account.” Id. 

Defendant alleges that she “did not declare the loan funds as the high balance as it was not [hers] 

and went in and out the same day. [She] had no access to these funds.” Id. Finally, in her 

affidavit, Defendant states that she is not an accountant and, while she has helped family and 

friends with simple tax returns, she has always hired an independent accountant to review the 

4 Defendant’s affidavit and the subsequent attachments also discuss arguments related to civil 

penalties associated with a failure to file forms 926 and 5471. Dkt. No. 34 at 9-13, 15-30. These 

arguments do not appear to relate to the FBAR penalties at issue in this case. 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 13 of 16
14

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

returns that she prepares. Id. at 14.

Here, the Court finds Defendant has met the minimal nature of the burden she was 

supposed to carry and has alleged specific facts that would constitute a defense to the complaint. 

See Mesle, 615 F.3d at 1094; see also TCI Group, 244 F.3d at 700. 

e. Penalty Amounts

In an attachment to Defendant’s affidavit, Defendant’s prior counsel argued that if the 

willful penalty is to be limited to 50% of the highest aggregate balance of all unreported foreign 

financial accounts during the years under examination, the auditor’s computation is incorrect. 

Exh. B to Def.’s Aff., Dkt. No. 34 at 35. This is because the penalty is based, in part, on the high 

balance in the account ending in 0600 in March 2013. Id. Defendant’s prior counsel represented

that this balance is incorrect because it includes a deposit error (“loan payment reversal”) and that 

“the remaining balance included almost entirely the proceeds of a loan which was only in 

[Defendant’s] account for one day.” Id. Defendant’s prior counsel argued that this was also true 

of other accounts. Id.

The United States argues that the amount of the FBAR penalty asserted by the IRS is 

discretionary, and a court must hold unlawful and set aside agency actions, findings, and 

conclusions found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in 

accordance with law.” 5 U.S.C. § 706(2)(A). The United States further argues that “the Court 

must not substitute its judgment for the agency’s, and must only review the record to ensure that 

the agency engaged in reasoned decision-making and that there was a ‘rational connection 

between the facts found and the choice made.’” Williams, 2014 WL 3746497, at *1 (E.D. Va. 

June 26, 2014). The statute imposing civil penalties at 31 U.S.C. § 5321(a)(5)(B) provides a 

penalty of a maximum of $100,000 per violation or 50% of the account balance at the time of the 

violation (i.e. dual maximum).

The United States argues that the IRS used 50% of the maximum aggregate account 

balance amongst the four years at issue to determine the total penalty amount, and then allocated a 

proportional amount to each of the years at issue. See Declaration of Jonathan Lauren, Dkt No. 25-

2, ¶¶ 7, 8, 9, 10. However, given the 23 separate violations to report foreign bank accounts, the 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 14 of 16
15

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

statute provides for the imposition of up to $2.3 million in civil penalties for the alleged willful 

violations committed by Defendant. The United States argues that the IRS exercised its discretion 

in asserting a total of $678,899 of FBAR penalties for the four years at issue and no penalty 

exceeded the limit imposed by 31 U.S.C. § 5321(a)(5)(B).

Because the Court has determined that Defendant has alleged specific facts that would 

constitute a defense related to the United States’ allegations of willfulness, the Court need not 

determine whether Defendant has raised a defense related to the willfulness penalty amount at this 

time. 

f. Delay Associated with Setting Aside Default 

The United States argues that setting aside the default would be a pointless delay in part 

because “it is clear that the material facts are undisputed to establish that Ms. Hughes willfully 

failed to file FBARs for the 2010, 2011, 2012, and 2013 calendar years, that the IRS appropriately 

assessed civil penalties, the penalties remain unpaid, and the United States is entitled to a money 

judgment in this action.” Pl.’s Opp., Dkt. No. 41, at 22. As discussed above, the Court has 

determined that Defendant has alleged specific facts that would constitute a defense in her 

argument regarding willfulness. “[A] case should, whenever possible, be decided on the merits.” 

Mesle, 615 F.3d at 1091 (internal quotations and citations omitted).

4. Prejudice 

“To be prejudicial, the setting aside of a judgment must result in greater harm than simply 

delaying resolution of the case.” TCI Group, 244 F.3d at 701. The United States argues that 

Defendant’s deliberate conduct in choosing to default, and her bad faith conduct in further 

delaying this litigation has prejudiced the United States. The United States claims that Defendant 

dissipated her assets during settlement negotiations for less than the value of the assets. See Pl. 

Opp., Dkt. No. 41, at 7; Exh. 2 to Pl.’s Opp., Dkt. No. 41-1 at 41-21. However, Defendant states 

in her affidavit that the United States had overstated the value of the property she sold. Def. Aff., 

Dkt. No. 42 at 6. 

The United States claims to have also suffered prejudice because it has spent a significant 

amount of time preparing the motion for default judgment, and incurred costs in attending the 

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 15 of 16
16

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

hearing on its motion for default judgment. The United States requests that the Court order 

Defendant to pay the United States’ attorney fees and other costs associated with entering the 

default or obtaining the default judgment. See Nilsson, Robbins, Dalgarn, Berliner, Carson & 

Wurst v. La. Hydrolec, 854 F.2d 1538, 1546-47 (9th Cir. 1988). However, the United States has 

not stated how much it has incurred in attorney fees and other costs as a result of its efforts to

obtain the entry of default or default judgment. While it is likely that the United States has 

suffered some prejudice, the Court finds that that this case should be decided on the merits. 

Further, because Defendant is proceeding pro se the Court declines to sanction her at this time. 

B. Motion for Default Judgment 

On December 6, 2019, the United States filed a motion for default judgment. Dkt. No. 25. 

On February 7, 2020, the Court held a hearing on the United States’ motion. Dkt. No. 33. The 

Court finds good cause to vacate the default and, thus, denies the United States’ motion for default 

judgment. 

C. Motion to Strike

In Defendant’s reply in support of her motion to set aside entry of default, Defendant also 

moved to strike portions of the United States’ opposition. The Court finds that Defendant’s 

motion to strike is moot because her motion to set aside has been granted. 

IV. CONCLUSION

For the reasons set forth above, the Court GRANTS Defendant’s motion for to set aside 

entry of default, DENIES Plaintiff’s motion for default judgment, and DENIES Defendant’s 

motion to strike. The Court ORDERS Defendant to respond to the United States’ complaint by 

filing a formal answer under Rule 8 or a motion under Rule 12 of the Federal Rules of Civil 

Procedure no later than Friday, May 1, 2020.

IT IS SO ORDERED.

Dated: March 31, 2020

JOSEPH C. SPERO

United States Magistrate Judge

Case 3:18-cv-05931-JCS Document 48 Filed 03/31/20 Page 16 of 16