                            STATE OF WEST VIRGINIA

                          SUPREME COURT OF APPEALS


Town of Cowen,
Defendant Below, Petitioner                                                       FILED
                                                                                May 20, 2016
vs) No. 15-0438 (Webster County 14-CAP-1)                                      RORY L. PERRY II, CLERK
                                                                             SUPREME COURT OF APPEALS
                                                                                 OF WEST VIRGINIA
Junior Cobb,

Plaintiff Below, Respondent



                              MEMORANDUM DECISION
       Petitioner Town of Cowen, by counsel Dan L. Hardway, appeals the “Opinion and
Order” of the Circuit Court of Webster County, entered on April 14, 2015. Respondent Junior
Cobb, by counsel Dara A. Acord and Howard J. Blyler, filed a response.

        Junior Cobb, the former mayor of Cowen, sued the Town of Cowen to recover money
that he was forced to pay to the Internal Revenue Service due to his and the Town’s failure to
pay employment taxes required by federal law. Following a bench trial, the circuit court ruled in
Mr. Cobb’s favor, finding that, although both parties had unclean hands in the failure to pay the
taxes, the Town would be unjustly enriched if the Town was not required to reimburse Mr. Cobb.
The Town now appeals.

        This Court has considered the parties’ briefs and the record on appeal. The facts and legal
arguments are adequately presented, and the decisional process would not be significantly aided
by oral argument. Upon consideration of the standard of review, the briefs, and the record
presented, the Court finds no substantial question of law and no prejudicial error. For these
reasons, a memorandum decision affirming the circuit court’s order is appropriate under Rule 21
of the Rules of Appellate Procedure.

                             Factual and Procedural Background

        This case commenced with the filing of a civil complaint by Mr. Cobb against the Town
of Cowen in the Magistrate Court of Webster County on January 2, 2014. Mr. Cobb served as
mayor of Cowen from August of 2008 until his resignation from office in July of 2011. In his
complaint, Mr. Cobb alleged that he “was required by the [Internal Revenue Service] to pay
$5,000.00 in employees [sic] taxes due to non-payment by recorder and Town Council.” As
relief, Mr. Cobb sought the “[r]eturn of $5,000.00 and court cost.” It is undisputed that,
beginning in the first quarter of 2010, neither the Town nor Mr. Cobb caused withholding or
payroll taxes to be paid to the federal government as required by federal law.




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        The magistrate court dismissed the complaint, and Mr. Cobb appealed to the Circuit
Court of Webster County.1 The matter proceeded to a bench trial on March 13, 2015, and the
circuit court entered an “Opinion and Order” on April 14, 2015. Therein, the court found that,
although the parties disputed who had the actual duty to make the tax payments (Mr. Cobb or the
Recorder), both Mr. Cobb and the Town Council knew that the taxes were not being paid to the
Internal Revenue Service (“IRS”). The IRS determined that Mr. Cobb, as mayor of the Town of
Cowen, was personally liable for the taxes and penalties pursuant to 26 U.S.C. § 6672.2 Around
April of 2013, the IRS sent Mr. Cobb notice that it intended to levy on his assets for unpaid taxes
and penalties in the sum of $4,139.52. In response, Mr. Cobb made a net payment to the IRS in
the amount of $5,028.82.3

        The circuit court found that Mr. Cobb did not exhaust his administrative remedies under
federal law to challenge the IRS’s determination. The circuit court further found that the IRS
applied only $1,070.43 of the amount paid by Mr. Cobb to the tax obligation of the Town, and
applied the remainder to the interest and penalties due as a result of the unpaid taxes. The circuit
court found that Mr. Cobb was legally obligated to pay the interest and penalties that were
incurred as a result of his failure to perform his duty to meet the Town’s tax obligation while he
was mayor, and that the interest and penalties incurred were justly his obligation.

       However, the circuit court also found that both Mr. Cobb and the Town had “unclean
hands” because they both knew that the tax obligations were not being met. The circuit court
found that the Town was unjustly enriched in the amount of $1,070.43 for the tax payment by
Mr. Cobb. As a result, the circuit court ordered that the Town pay Mr. Cobb the sum of
$1,070.43, entered judgment for Mr. Cobb in that amount, and assessed the costs to the Town.

        Prior to trial, the Town filed a motion to dismiss in which it argued that the circuit court
did not have subject matter jurisdiction because the lawsuit presented questions of federal tax
law, which are reserved for the federal district court. The Town alternatively argued that, if the
circuit court has jurisdiction, Mr. Cobb failed to state a claim upon which relief could be granted.

       1
           The basis of the magistrate court’s dismissal of the case is not apparent from the record.
       2
           26 U.S.C. § 6672(a) provides, in part, as follows:

       Any person required to collect, truthfully account for, and pay over any tax
       imposed by this title who willfully fails to collect such tax, or truthfully account
       for and pay over such tax, or willfully attempts in any manner to evade or defeat
       any such tax or the payment thereof, shall, in addition to other penalties provided
       by law, be liable to a penalty equal to the total amount of the tax evaded, or not
       collected, or not accounted for and paid over.
       3
        According to the circuit court’s findings of fact, Mr. Cobb sent the IRS a cashiers’ check
in the amount of $4,139.52. In addition, however, the IRS seized an income tax refund check in
the amount of $1,889.00 that was due Mr. Cobb’s wife, making a total payment to the IRS in the
amount of $6,028.82. As a result of the overpayment, the IRS refunded Mr. Cobb $1,000.00,
making his net payment $5,028.82.
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On this point, the Town argued that “[Mr. Cobb], in essence, seeks indemnification for his own
wrongful acts. The Internal Revenue Service, in assessing the penalty, found that [Mr. Cobb]
willfully failed in his duties to collect and remit taxes. [Mr. Cobb] paid the penalty and did not
contest the assessment.” (Emphasis in original). The Town argued that no provision of federal
law allows a person penalized under 26 U.S.C. § 6672 to seek reimbursement from another
person. The circuit court denied the Town’s motion to dismiss,4 stating as follows from the
bench:

       I’m going to deny the motion to dismiss the action. I think I do have jurisdiction.
       As I previously told the lawyers, I believe the issue in this case is unjust
       enrichment and of course there are various factors that if in fact the town, which
       was relieved of its tax obligation by virtue of the funds that were seized or paid by
       Mr. Cobb, then I can consider that on the issue of unjust enrichment.

The Town now appeals to this Court.

                                            Discussion

        On appeal, the Town raises four assignments of error, the first of which challenges the
circuit court’s ruling on its motion to dismiss for lack of jurisdiction. As the question presented
by the Town’s motion to dismiss is a question of law, we review its ruling de novo. See Syl. Pt.
4, Peters v. Rivers Edge Mining, Inc., 224 W.Va. 160, 680 S.E.2d 791 (2009) (“Where the issue
on an appeal from the circuit court is clearly a question of law or involving an interpretation of a
statute, we apply a de novo standard of review.” Syllabus point 1, Chrystal R.M. v. Charlie A.L.,
194 W.Va. 138, 459 S.E.2d 415 (1995)).

         The Town argues that the interpretation of the federal tax code is clearly a question
reserved for the federal courts. See Smith v. Industrial Title Ins. Co., 957 F.2d 90 (3d Cir. 1992).
Additionally, the Town argues that nonpayment of federal taxes, including reimbursement for
penalties assessed against an officer of an obligated employer, must be heard in federal court.
See Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308,
310 (2005) (holding that there is a “national interest in providing a federal forum for federal tax
litigation . . .). Finally, petitioner argues that the two federal statutes, 26 U.S.C. § 3403 and 26
U.S.C. § 7422, require dismissal of Mr. Cobb’s complaint. 26 U.S.C. § 3403, entitled “Liability
for tax,” states that “[t]he employer shall be liable for the payment of the tax required to be
deducted and withheld under this chapter, and shall not be liable to any person for the amount of
any such payment.” The second statute, 26 U.S.C. § 7422, entitled “Civil actions for refund,”
provides, in part, as follows:

       (a) No suit prior to filing claim for refund. -- No suit or proceeding shall be
       maintained in any court for the recovery of any internal revenue tax alleged to
       have been erroneously or illegally assessed or collected, or of any penalty claimed

       4
          It appears from the bench trial transcript that the circuit court ruled on the Town’s
motion at some point prior to the day of trial. However, there is no order memorializing the
court’s ruling in the record. The Town renewed its motion on the day of trial.
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       to have been collected without authority, or of any sum alleged to have been
       excessive or in any manner wrongfully collected, until a claim for refund or credit
       has been duly filed with the Secretary, according to the provisions of law in that
       regard, and the regulations of the Secretary established in pursuance thereof.

The Town essentially contends that Mr. Cobb’s complaint is an attempt to be reimbursed for the
payment of his tax obligation – which he failed to challenge through the IRS’s administrative
process – to the Town in violation of these statutes.

        Upon our review of the record, we find no error in the circuit court exercising jurisdiction
over Mr. Cobb’s complaint under the facts of this case. First, Mr. Cobb does not contest that the
federal government has set up a structure to collect and enforce taxes due the federal
government. However, the present case does not call into question the government’s collection
of taxes, generally, or the amount sought by the IRS from Mr. Cobb. Specifically, Mr. Cobb does
not contest that the monies collected were owed and he acknowledged that he did not invoke any
administrative remedy to seek a refund from the government pursuant to 26 U.S.C. § 7422.
Importantly, there was no challenge for Mr. Cobb to make against the IRS pursuant to this statute
because he did not allege that the IRS did anything faulty in its assessment. Thus, the federal
statutes upon which the Town relies are inapplicable to the situation presented in this case. As
the circuit court concluded, therefore, Mr. Cobb’s claim does not arise under federal statutes; it is
a claim invoking the doctrine of unjust enrichment, and was properly before the circuit court.
Thus, we reject the Town’s first assignment of error.

      The Town’s second assignment of error challenges the circuit court’s finding that the
Town was unjustly enriched by Mr. Cobb’s payment of the taxes. We review the Town’s
argument with the following standards in mind:

               In reviewing challenges to the findings and conclusions of the circuit court
       made after a bench trial, a two-pronged deferential standard of review is applied.
       The final order and the ultimate disposition are reviewed under an abuse of
       discretion standard, and the circuit court's underlying factual findings are
       reviewed under a clearly erroneous standard. Questions of law are subject to a de
       novo review.

Syl. Pt. 1, Pub. Citizen, Inc. v. First Nat. Bank in Fairmont, 198 W.Va. 329, 480 S.E.2d 538
(1996).

        Again relying on 26 U.S.C. §§ 3403 and 7422, the Town argues that the failure to remit
taxes can result in an assessment of penalties and interest on the employer. In addition, the tax
code creates a separate incentive for compliance by allowing a civil penalty against those
individuals who are required to collect and pay the employer’s taxes – in this case, Mr. Cobb.
The Town reiterates that the IRS imposed the civil penalty on Mr. Cobb and he did not contest it.
The Town argues that allowing Mr. Cobb to seek reimbursement from the Town for the penalty
he was assessed violates 26 U.S.C. § 3403 in that the court ruling has essentially made the Town
liable for his payment, which undermines the administration of the federal tax system.



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        “Unjust enrichment” refers, in part, to the “retention of a benefit conferred by another,
who offered no compensation, in circumstances where compensation is reasonably expected.”
Black’s Law Dictionary 1771 (10th ed. 2014). Additionally, this Court has stated that “if benefits
have been received and retained under such circumstance that it would be inequitable and
unconscionable to permit the party receiving them to avoid payment therefor, the law requires
the party receiving the benefits to pay their reasonable value.” Realmark Developments, Inc. v.
Ranson, 208 W.Va. 717, 721-22, 542 S.E.2d 880, 884-85 (2000) (quoting Copley v. Mingo
County Board of Education, 195 W.Va. 480, 466 S.E.2d 139 (1995)). Under the facts of this
case, the Town received the benefit of monies being credited by the IRS as a result of Mr.
Cobb’s payment, his obligation to make the payment notwithstanding. Importantly, while the
Town spends considerable effort to convince this Court that Mr. Cobb was the guilty party who
was the target of the IRS’s enforcement, the Town must also acknowledge that it was aware that
the payments had not been made and could have been liable as well. Accordingly, under the facts
of this case, we find no error in the circuit court’s finding that the Town was unjustly enriched by
Mr. Cobb’s payment to the IRS.

        Third, the Town argues that the Mr. Cobb’s recovery should have been barred by the
doctrine of “unclean hands.”5 The Town argues, as it does above, that Mr. Cobb willfully
violated the tax code, was targeted by the IRS for his failure to remit the taxes, and chose not to
challenge the IRS’s enforcement. Under these facts, the Town argues that Mr. Cobb should not
have been permitted to sue the Town for reimbursement. We reject the Town’s argument. As we
have stated above, both parties acknowledged their role in the non-payment of the taxes, causing
the circuit court to find that both parties had “unclean hands.” Given that finding, which is well-
supported by the evidence, we find no error in the circuit court awarding Mr. Cobb partial
reimbursement for the amounts that he paid to the IRS.6

        The Town’s final assignment of error is that the circuit court erred in limiting the
penalties and interest incurred by the Town to the time that Mr. Cobb served as mayor. Mr. Cobb
took over as mayor in August of 2008.7 The Town states that, once it discovered in early 2011,
that Mr. Cobb was paying other obligations of the Town before paying the employment taxes,
the Town made arrangements to deal with the debt owed. Mr. Cobb resigned in July of 2011.
The Town states that it took until November of 2013 to pay all of the back taxes, interest, and
penalties caused by Mr. Cobb’s poor decision-making, which totaled $9,543.22.

       Mr. Cobb responds that the Town’s argument should be rejected because (1) the recorder
was responsible for presenting bills for payment and she never presented any tax bills; (2) Mr.

       5
         The doctrine of “clean hands” is defined as “[t]he principle that a party cannot seek
equitable relief or assert an equitable defense if that party has violated an equitable principle,
such as good faith.” Black’s Law Dictionary 306 (10th ed. 2014).
       6
          Mr. Cobb could similarly argue that the Town’s “unclean hands” bars it from disputing
its equitable obligation to reimburse him.
       7
         The parties do not dispute that the Town had tax problems prior to Mr. Cobb’s tenure
that were caused by his predecessor.
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Cobb was not aware of the tax issue until he received the notice from the IRS, which he brought
to Town council’s attention; (3) it was permissible for Mr. Cobb to resign from the mayor
position when he did; and (4) there was no logical reason that the circuit court should not have
offset the amount owed to include only the time he served as mayor. More importantly, however,
is that the appendix record does not indicate that the Town filed a counterclaim against Mr. Cobb
in an effort to collect from him the amounts it allegedly paid after his resignation. Accordingly,
we cannot conclude that the circuit court erred in calculating the damages as it did, given the
pleadings and evidence before it.

       For the foregoing reasons, we affirm the Circuit Court of Webster County’s “Opinion and
Order” entered on April 14, 2015.

                                                                                        Affirmed.

ISSUED: May 20, 2016

CONCURRED IN BY:

Chief Justice Menis E. Ketchum
Justice Robin Jean Davis
Justice Brent D. Benjamin
Justice Margaret L. Workman
Justice Allen H. Loughry II




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