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Highland Capital Management, LP v. Internal Revenue Service

United States District Court, N.D. Texas, Dallas Division

September 30, 2019

HIGHLAND CAPITAL MANAGEMENT, LP, Plaintiff,
v.
INTERNAL REVENUE SERVICE, Defendant.

          MEMORANDUM OPINION AND ORDER

          A. Joe Fish Senior United States District Judge.

         Before the court is the defendant Internal Revenue Service (“IRS”)’s motion for summary judgment (docket entry 21). For the reasons stated below, the IRS’s motion for summary judgment is granted in part and denied in part.

         I. BACKGROUND

         This case arises from a Freedom of Information Act (“FOIA”) request made by the plaintiff Highland Capital Management, LP (“Highland”) to the IRS. Highland is a Delaware limited partnership whose headquarters is in Dallas, Texas. Complaint (docket entry 2) ¶ 1. The IRS is a government agency of the United States within the meaning of FOIA, 5 U.S.C. § 552. Complaint ¶ 2; Answer (docket entry 14) ¶ 2.

         A. FOIA Request

         On October 19, 2016, Highland filed a FOIA request with the IRS seeking

[d]ocuments and emails sent to the Brattle Group by the IRS in connection with the IRS’s audit of the 2008 tax year of Highland Capital Management, LP, and documents and emails sent by the Brattle Group to the IRS, including documents relating to the IRS’s hiring of the Brattle Group, the Brattle Group’s Reports dated October 23, 2015 and February 2, 2016, and its “Phase I Report, ” in connection with the IRS’s audit of the 2008 tax year of Highland Capital Management, LP.

         Appendix to Memorandum in Support for the Internal Revenue Service’s Motion for Summary Judgment (“Appendix in Support”), Exhibit A (docket entry 23); see also Complaint ¶ 12; Answer ¶ 12. The IRS hired The Brattle Group to provide expert advice related to the examination of Highland’s tax returns for the taxable years 2008 and 2009. Appendix in Support, Exhibit 2 ¶ 6.

         B. First Search Conducted by the IRS

         To respond to Highland’s FOIA request, on November 1, 2016, the IRS assigned IRS Disclosure Office caseworker Patricia Williams (“Williams”) to begin searching for responsive documents. Appendix in Support, Exhibit 1 ¶ 8. Williams located Highland’s examination case file using the IRS’s Integrated Data Retrieval System (“IDRS”), a system consisting of computer databases and programs that support IRS employees working active tax cases. Id. ¶ 11. The IDRS manages data that has been retrieved from the Master File System, the IRS’s nation-wide information system containing most taxpayer account information. Id. Using the IDRS allows employees to take specific actions on taxpayer accounts, track status, and post transaction updates to the Master File. Id. Williams used a series of command codes to retrieve summaries of information for the years requested by Highland, as well as detailed information about Highland’s 2008 tax year, and the examination case ongoing for tax year 2008. Id. ¶ 14.

         As a result of her initial search, Williams spoke with an agent to obtain more information about Highland’s request; this agent informed Williams that Revenue Agent Marcia Vanterpool (“Vanterpool”) could provide her with additional information about the examination records. Appendix in Support, Exhibit 1 ¶ 14. Then, on November 8, 2016, Williams contacted Vanterpool, who informed Williams that she would be able to locate the documents requested by Highland in the examination case file, but that the team conducting Highland’s civil examination would require additional time to review the responsive records for confidential information. Id. ¶ 15. Accordingly, Williams mailed an extension letter to Highland on November 14, 2016, extending the response date of the FOIA request to January 13, 2017. Id. ¶ 16.

         After her conversation with Williams, Vanterpool brought the FOIA request to the attention of the examination team. Appendix in Support, Exhibit 1 ¶ 17. Chief Counsel Attorney Veronica Richards (“Richards”), who the IRS assigned to provide legal counsel to the agents conducting Highland’s examination, held a meeting with several IRS employees who were conducting Highland’s examination to discuss Highland’s FOIA request. Appendix in Support, Exhibit 2 ¶ 10. The employees at the meeting were Revenue Agents Betty Wang (“Wang”), Vanterpool, Edward “Buck” Townsend (“Townsend”), and Ronald “Mark” Degan (“Degan”). Appendix to Reply in Support of the Internal Revenue Service’s Motion for Summary Judgment (“Appendix to Reply”) (docket entry 38), Exhibit 1 ¶ 6. That same day, Townsend emailed Financial Products Senior Advisor Mark Perwien (“Perwien”) and IRS contract representative Nick Wynen (“Wynen”) to inform them that they would need to search their records for responsive documents. Id. After the meeting, Richards asked all employees who were working on Highland’s examination to provide any responsive records they possessed. Appendix in Support, Exhibit 2 ¶ 10. Richards and Wang determined that any copies of records involving The Brattle Group would be maintained by Richards, Wang, or Wynen. Id. ¶¶ 10, 11. For the search for responsive records, Wang and Wynen would serve as the two main points of contact with The Brattle Group, while Richards would serve as the examination team’s primary point of contact with the Disclosure Office. Id. ¶¶ 10, 11.

         Vanterpool, Townsend, Perwien, and Degan searched for records responsive to Highland’s FOIA request in November 2016. Appendix to Reply, Exhibit 1 ¶ 7. The records located during their searches were given to the IRS Disclosure Office and were included in the original release to Highland. Id. These four custodians, however, were not able to provide facts describing their respective searches in the November 2016 search. Id.

         At the same time, Richards, Wang, and Wynen conducted separate searches for responsive documents. As the primary point of contact with the disclosure office, Richards reviewed the examination case file provided by Vanterpool. Appendix in Support, Exhibit 1 ¶ 17. Additionally, Richards conducted a search of her emails and paper files for any communications between herself and The Brattle Group which related to Highland. Appendix in Support, Exhibit 2 ¶ 12.

         As a main point of contact with The Brattle Group, Wang searched IRS documents for records relating to The Brattle Group responsive to Highland’s request. Wang kept a log of all electronic and paper documents received from, or sent to, The Brattle Group. Id. ¶ 13. Wang used the log to determine where relevant records responsive to Highland’s request were located in the examination case file, and found the electronically stored files related to The Brattle Group. Id. In addition, Wang conducted a search of her emails, using keyword searches of Brattle Group employees who had worked with Wang. Id.

         Wynen served as the contract representative of The Brattle Group and searched his records from his work and relationship with The Brattle Group for records responsive to Highland’s request. Wynen maintained a file on his IRS computer where he stored all emails and documents related to his work as the IRS contract representative for The Brattle Group. Id. ¶ 14. To identify responsive records, Wynen conducted a manual search of his file. Id.

         All responsive records found by Wang, Vanterpool, Townsend, Degan, Perwien, and Wynen were given to Richards for review. Richards reviewed all records discovered in this search process and produced them to Williams for her own review. Id.

         This search process took several months to complete. Richards completed her initial review of the responsive records on December 13, 2016. Id. Due to technical issues in the electronic storing process of the files prepared and reviewed by Richards, Williams was unable to begin her subsequent review of the responsive records produced by Richards until March 3, 2017. Id. ¶ 18. Williams completed her subsequent review of the records on May 30, 2017 and sent the records back to Richards for additional review on June 7, 2017. Id. ¶ 19. On July 18, 2017, Williams received notification that Richards had completed her additional review. Id. During this review process, extension letters were mailed to Highland on January 12, 2017; February 8, 2017; March 29, 2017; April 26, 2017; and June 30, 2017. Id. ¶ 20.

         On July 23, 2017, the Disclosure Office shipped all the responsive records found in the search process and determined non-exempt by Richards and Williams to Highland along with the IRS’s determination letter. Appendix in Support, Exhibit 1 ¶ 20. The determination letter reported that 13, 409 pages of responsive records were located in response to Highland’s request, with 132 pages withheld in part and 1, 632 pages withheld in full. Appendix in Support, Exhibit B. Highland then submitted an administrative appeal of the IRS’s determination on October 12, 2017. Appendix in Support, Exhibit 1 ¶ 21. The IRS’s Appeals Office reviewed the July 23, 2017 response letter as well as the material and documents withheld, and on December 1, 2017 sustained the IRS’s determination, including its decision to withhold 132 pages in part and 1, 632 pages in full. Id. ¶¶ 22-23; Appendix in Support, Exhibit C.

         C. Complaint Filed and Second Search

         Shortly after unsuccessfully appealing the IRS determination, Highland filed its complaint on January 24, 2018. See Complaint. After the complaint was filed, IRS Office of Chief Counsel attorney Christopher Valvardi (“Valvardi”) was assigned to assist the Department of Justice in the litigation. Appendix in Support, Exhibit 2 ¶ 3. The IRS filed its answer on March 28, 2018. See Answer. Williams left the IRS in January of 2018, leaving Valvardi unable to procure detailed explanations of the bases for withholding the records that were not produced with the non-exempt responsive records released to Highland on July 23, 2017. Appendix in Support, Exhibit 2 ¶ 19. Accordingly, Valvardi conducted his own independent review of all responsive records. Id.

         First, Valvardi processed the documents provided to Highland by the Disclosure Office to apply and index the redaction markings for the exempt portions of the records. Appendix in Support, Exhibit 2 ¶ 20. During his review, Valvardi compared the processed copies of the documents with the records originally sent to the Disclosure Office by the examination team and observed that some pages originally provided by the examination team were missing from the copies provided to Highland. Id. Ultimately, the reason for the missing pages is unclear, but appears to have been a result of difficulties encountered by the IRS’s computer systems in processing the documents for production to Highland. Id. In August of 2018, the IRS included the previously missing pages in the released records, increasing the total number of pages determined to be responsive from 13, 409 to 15, 349. Id.; Highland Capital Management, L.P.’s Response to Internal Revenue Service’s Motion for Summary Judgment (“Response”) (docket entry 26) at 3. From this amount, Valvardi reviewed and determined that 14, 937 pages could be released in full, 52 pages should be withheld in part, and 360 pages should be withheld in full. Appendix in Support, Exhibit 2 ¶ 21.

         D. Motion for Summary Judgment Filed and Third Search

         On August 10, 2018, the IRS filed the instant motion for summary judgment, as well as an accompanying memorandum in support. See Motion for Summary Judgment; Memorandum in Support of the Internal Revenue Service’s Motion for Summary Judgment (“Memorandum in Support”) (docket entry 22). In its memorandum in support, the IRS argues that the evidence establishes that the IRS conducted a reasonable search for records responsive to Highland’s FOIA request and that the IRS is properly withholding information from Highland because it is exempt from disclosure. See id. at 18-35. On October 1, 2018, Highland filed its response. See Response. In its response, Highland argues that there exists a genuine dispute of fact as to whether the IRS conducted an adequate search as required by FOIA. Id. at 5-7. Highland also argues that portions of both Thompkins’s and Valvardi’s affidavits should be stricken on grounds of inadmissible hearsay. Id. at 14-15.

         In December 2018, Valvardi and the IRS undertook a new search and review of records to supplement the Disclosure Office’s July 2017 production to Highland. Appendix to Reply, Exhibit 1 at 2-7. The new search included the potentially responsive records held by Vanterpool, Townsend, Perwien, and Degan, none of whom kept contemporaneous accounts of the steps they took while assisting in the original November 2016 search. Id. at 2-6. In November 2018, Valvardi provided Degan with detailed instructions to conduct a new search, including a list of search terms. Appendix to Reply, Exhibit A. Degan used the provided search terms to search for responsive documents in his email and on the hard drive of his IRS computer. Appendix to Reply, Exhibit 1 ¶ 11-12. The search yielded one email, which The Brattle Group did not send or receive, so the email itself is not responsive to the FOIA request. Id. ¶ 13. The email did, however, include an attachment of 5 pages of potentially responsive material, with one page having already been produced to Highland in the original July 2017 production. Id. ¶ 14. Valvardi and the IRS withheld the remaining four pages as exempt. Id.

         Valvardi was unable to follow the same procedure for Vanterpool and Townsend, as they had both separated from the IRS by the time of the December 2018 search. Appendix to Reply, Exhibit 1 at 4-6. Additionally, neither Vanterpool, Townsend, nor Perwien created contemporaneous accounts of the steps they took while assisting with the original 2016 search. Id. Thus, to conduct a more thorough search of Vanterpool’s, Townsend’s, and Perwien’s records, the IRS’s Information Technology (“IT”) personnel collected all the electronic records maintained by Vanterpool and Townsend and provided the records to Valvardi. Id. ¶¶ 22-23. The IRS IT personnel also provided Valvardi with all the electronic records maintained by Perwien which had been collected for other cases. Id. Valvardi subsequently used the keywords he provided to Degan to search Vanterpool’s, Townsend’s, and Perwien’s records. Id. ¶ 25. The search returned 467 email files, containing 2118 total pages, and 124 non-email files, containing approximately 7120 total pages. Id. ¶ 26. Upon manual review of the electronic files found through the search, Valvardi determined that only 45 of the email records were communications with The Brattle Group that were not duplicates of records already produced from other sources, and that all the non-email files were duplicates of records already produced from other sources. Id. ¶ 27. In total, Valvardi’s search of Vanterpool, Townsend, and Perwien’s electronic files produced 105 pages of responsive records, labeled with Bates page numbers 15350 through 15455. Id. ¶ 28.

         Additionally, during the new December 2018 search, Valvardi discovered that some documents that Wang and Richards had provided to the Disclosure Office during the original FOIA search in 2016 contained embedded electronic attachments that were not visible when Valvardi first reviewed the original batch of documents. Id. ¶ 29. Valvardi reviewed the records from the original July 2017 production to find all hidden attachments and discovered that many were duplicate copies of records already reviewed and either produced to Highland or withheld as exempt. Id. ¶ 31. An additional 403 pages of attachments, however, were not previously produced to Highland, and were accordingly produced to Highland under Bates page numbers 15456 through 15858. Id. ¶ 32. In total, as the result of the new December 2018 search, on February 8, 2019, the IRS produced to Highland 508 additional documents (403 pages of attachments and 105 pages of electronic files) numbered 15350 through 15858. Id. ¶ 33.

         On March 4, 2019, the IRS filed its reply in support of its motion for summary judgment. See Internal Revenue Service’s Reply in Support of its Motion for Summary Judgment (“Reply”) (docket entry 37). In its reply, IRS first details the new December 2018 search and then argues that both the original 2016 search and its subsequent reviews and searches led by Valvardi were adequate and reasonable under FOIA. Id. at 1-6. Moreover, the IRS contends that it exceeded requirements to demonstrate proper withholding of information under FOIA by providing both Vaughn declarations as exhibits to the original motion and the reply, and by providing a Vaughn index as an exhibit to its reply. Id. at 6-9; see Appendix to Reply, Exhibit B; see generally Appendix in Support; Appendix to Reply.

         Highland filed its surreply on March 18, 2019. See Highland Capital Management, L.P.’s Surreply to Internal Revenue Service’s Reply in Support of Motion for Summary Judgment and Request for Hearing (“Surreply”) (docket entry 39). In its surreply, Highland argues that the exemptions claimed by the IRS are a pretext to prevent Highland from obtaining the “Phase I Report” created by The Brattle Group regarding the IRS’s ongoing examination into Highland’s tax year 2008. Id. at 2-5. Highland additionally requests a hearing with the court in order to present its evidence and prove to the court that the IRS is wrongfully withholding from Highland information that is properly disclosable. Id. The IRS’s motion for summary judgment is now ripe for decision.

         II. ANALYSIS

         A. Legal Standard

         In general, summary judgment is proper only if “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), (c)(1). “In the FOIA context, however, the traditional [summary judgment] standard is modified because ‘the threshold question in any FOIA suit is whether the requester can even see the documents the character of which determines whether they can be released.’” Batton v. Evers, 598 F.3d 169, 175 (5th Cir. 2010) (quoting Cooper Cameron Corp. v. U.S. Department of Labor, Occupational Safety and Health Administration, 280 F.3d 539, 543 (5th Cir. 2002)) (emphasis in original). “The FOIA expressly places the burden on the defending agency to sustain its action and show that it acted in accordance with the statute.” Driggers v. United States, No. 3:11-CV-0229-N, 2011 WL 5525337, at *3 (N.D. Tex. Oct. 26, 2011) (Ramirez, M.J.) (citing Batton, 598 F.3d at 175; Cooper Cameron, 280 F.3d at 543); see also 5 U.S.C. § 552(a)(4)(B) (“. . . and the burden is on the agency to sustain its action.”). To meet its summary judgment burden, the agency must establish that: (1) its search for the requested material is adequate; and (2) that each responsive document is either produced, unidentifiable, or exempt from production. Driggers, 2011 WL 5525337, at *3; Cooper Cameron, 280 F.3d at 543.

         In applying this standard, the court is mindful of FOIA’s purpose. The FOIA “embodies a philosophy of full disclosure by government agencies and requires them to make their records available to the public.” Driggers, 2011 WL 5525337, at *2 (citing 5 U.S.C. § 552). Moreover, “[t]he FOIA was enacted to ‘pierce the veil of administrative secrecy and to open agency action to the light of public scrutiny.’” Batton, 598 F.3d at 175 (quoting Department of the Air Force v. Rose, 425 U.S. 352, 361 (1976)). Accordingly, the exemptions to disclosure an agency may claim “are explicitly limited by statute and should be construed narrowly.” Id. Furthermore, in a FOIA case a court should grant an agency’s motion for summary judgment only if the agency identifies the documents at issue and explains why they fall under the claimed exemptions. Id.; Cooper Cameron, 280 F.3d at 543. If there is contradictory evidence or evidence of ...


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