6321 - Fraudulent Conveyances Part 3 Page 5

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Tax Lien - IRS Lien - Lien Discharge
Lien Appeals
Lien Filing Requirements
Lien Filing Requirements cont.
Certificates - Claim for Damages
Claim for Damages cont.
Judicial/Nonjudicial Foreclosures
Redemptions
Lien Processing
Internal Revenue Code 6321
State Law 6321
Internal Revenue Code 6322
Internal Revenue Code 6323
Internal Revenue Code 6324
Internal Revenue Code 6325
Internal Revenue Code 6326
Internal Revenue Code 6320
Internal Revenue Code 6327
Internal Revenue Code 6330
Certificate of Discharge from Tax Lien
Certificate of Subordination of Tax Lien
Lien Notice Requirements and Appeals
Tax Lien Certificate
6325 Regulations
Action to quiet title
Burden of Proof
Collateral Estoppel
Discharge of Bankruptcy
Effect of Partial Abatement
Certificate of release of tax lien
Certificate of Discharge
Claim for Damages
Choate Requirement - State Law
Suit to Cancel Lien
Certificate of Subordination
Discharge
Effect of Discharge
7425 Statute
7425 Regulations
Judicial Sales
Non-judicial Sales
Notice of Sale
Notice Requirement
Period of Redemption p1
Period of Redemption p2
Redemption Payment
Release of Right of Redemption
Scope of Redemption
After Foreclosure Result
Foreclosure Sales
6320-Applicability of Statute
6321 - After Aquired Property p1
6321 - After Aquired Property p2
6321 - After Aquired Property p3
6321 - After Aquired Property p4
6321 - Applicability of Statute
6321 - Collection Due Process Hearings
6321 - Annuities
6321 - Bank Deposits p1
6321 - Bank Deposits p2
6321 - Bankruptcy p1
6321 - Bankruptcy p2
6321 - Bankruptcy p3
6321 - Bankruptcy p4
6321 - Bankruptcy p5
6321 - Bankruptcy p6
6321 - Conveyances to Related Parties p1
6321 - Conveyances to Related Parties p2
6321 - Conveyances to Related Parties p3
6321 - Conveyances to 3rd Parties p1
6321 - Conveyances to 3rd Parties p2
6321 - Conveyances to 3rd Parties p3
6321 - Conveyances to 3rd Parties p4
6321 - Community Property p1
6321 - Community Property p2
6321 - Community Property p3
6321 - Employee Pension Plans
6321 - Creation of Lien p1
6321 - Creation of Lien p2
6321 - Creation of Lien p3
6321 - Creation of Lien p4
6321 - Creation of Lien p5
6321 - Debts Owed to the Taxpayer p1
6321 - Debts Owed to the Taxpayer p2
6321 - Debts Owed to the Taxpayer p3
6321 - Debts Owed to the Taxpayer p4
6321 - Debts Owed to the Taxpayer p5
6321 - Debts Owed to the Taxpayer p6
6321 - Escrow Accounts
6321 - Foreign Property
6321 - Forfeited Property
6321 - Fraudulent Conveyances Part1 p1
6321 - Fraudulent Conveyances Part1 p2
6321 - Fraudulent Conveyances Part1 p3
6321 - Fraudulent Conveyances Part1 p4
6321 - Fraudulent Conveyances Part1 p5
6321 - Fraudulent Conveyances Part1 p6
6321 - Fraudulent Conveyances Part1 p7
6321 - Fraudulent Conveyances Part1 p8
6321 - Fraudulent Conveyances Part1 p9
6321 - Fraudulent Conveyances Part1 p10
6321 - Fraudulent Conveyances Part1 p11
6321 - Fraudulent Conveyances Part1 p12
6321 - Fraudulent Conveyances Part2 p1
6321 - Fraudulent Conveyances Part2 p2
6321 - Fraudulent Conveyances Part2 p3
6321 - Fraudulent Conveyances Part2 p4
6321 - Fraudulent Conveyances Part2 p5
6321 - Fraudulent Conveyances Part2 p6
6321 - Fraudulent Conveyances Part3 p1
6321 - Fraudulent Conveyances Part3 p2
6321 - Fraudulent Conveyances Part3 p3
6321 - Fraudulent Conveyances Part3 p4
6321 - Fraudulent Conveyances Part3 p5
6321 - Fraudulent Conveyances Part3 p6
6321 - Funds on Deposit p1
6321 - Funds on Deposit p2
6321 - Funds on Deposit p1
6321 - Homesteaded Property p1
6321 - Homesteaded Property p2
6321 - Homesteaded Property p3
6321 - Insurance p1
6321 - Insurance p2
6321 - Insurance p3
6321 - Insurance p4
6321 - Licenses 2 - p1
6321 - Licenses 2 - p2
6321 - Licenses 2 - p3
6321 - Legal Obligations
6321 - Partnerships p1
6321 - Partnerships p2
6321 - Partnership Property
6321 - Other State Created Exemptions
6321 - Property Rights of 3rd Parties p1
6321 - Property Rights of 3rd Parties p2
6321 - Property Rights of 3rd Parties p3
6321 - Prior Law p1
6321 - Prior Law p2
6321 - Property rights of a nondeclared spouse p1
6321 - Property rights of a nondeclared spouse p2
6321 - Property rights of a nondeclared spouse p3
6321 - Property rights of a nondeclared spouse p4
6321 - Property Seized During Arrest
6321 - Stolen Property
6321 - Rent
6321 - Stock Certificates
6321-Unperfected interests p1
6321-Unperfected interests p2
6321-Unperfected interests p3
6321-Unperfected interests p4
6321-Unperfected interests p5
6321-Tangible property in the taxpayer's possession
6321-Trusts for third parties p1
6321-Trusts for third parties p2
6321-Trusts p1
6321-Trusts p2
6321-Trusts p3
6321-Trusts p4
6321-Trusts p5
6321-Trusts p6
6321-Trusts p7
6321-Property transferred during divorce (2) p1
6321-Property transferred during divorce (2) p2
6321-Real property p1
6321-Real property p2
6321-Real property p3
6321-Real property p4
6321-Real property p5
6321-Real property p6
6321-Real property p7
6321-Real property p8
6321-Relinquishments and disclaimers
6332 - Annotations- Exclusiveness of Remedy
6332 - Annotations- Evidence of Debts
6332 - Annotations- Garnishment
6332 - Annotations- Levy and Demand
6332 - Annotations- Insurance Policy 1 p1
6332 - Annotations- Insurance Policy 1 p2
6332 - Annotations- Insurance Policy 1 p3
6332 - Annotations- Insurance Policy 2
6332 - Annotations- Interest and Penalties
6332 - Annotations- Leasehold Interest
Taxpayer's Property in Possession of Thrid Party p1
Taxpayer's Property in Possession of Thrid Party p2
Taxpayer's Property in Possession of Thrid Party p3
6322-Constitutionality
6322-Limitations p1
6322-Limitations p2
6322-Prior law
6322-Relation-back doctrine
6322-Release of liens
6322-State law
6322-Waiver
6322 - Nevada

 

Fraudulent Conveyances Part3 page5

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United States of America , Plaintiff-Appellee v. Jules W. Noble, Defendant-Appellant, Esther K. Noble, et al., Defendants

(CA-6), U.S. Court of Appeals, 6th Circuit, 98-2236, 12/22/98, Dismissing the appeal of a District Court decision, 98-2 USTC 50,642

[Code Sec. 7402 ]

Jurisdiction: Appealable order: Appeal from nonfinal order.--Jurisdiction was lacking over an individual's appeal from a district court decision that was not final with respect to a claim against him for fraudulent conveyance of real estate. Summary judgment had been granted against him in the district court only with respect to unpaid income taxes.

[Code Sec. 7482 ]

Jurisdiction: Notice of appeal: Defective notice.--An individual's notice of appeal was defective since it failed to designate the name of the court to which the appeal was taken.

Before: NELSON, SILER and DAUGHTREY, Circuit Judges.

Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.

ORDER

This matter is before the court upon initial consideration of appellate jurisdiction.

A review of the documents before the court indicates that by order entered July 24, 1998 the district court denied a motion for default judgment against Esther K. Noble. In the same order, the court granted summary judgment against Jules W. Noble regarding unpaid income taxes but denied summary judgment on the fraudulent conveyance claim. Jules K. Noble filed a Fed. R. Civ. P. 60(b) motion for relief from the partial dismissal and relief was denied by order entered September 30, 1998. A notice of appeal from the partial dismissal and the order denying the motion for relief was filed by Jules W. Noble on October 30, 1998.

This court lacks jurisdiction in this appeal. An order disposing of fewer than all the claims or parties involved in an action is not appealable absent a Fed. R. Civ P 54(b) certification. See Liberty Mut. Ins. Co. v. Wetzel, 424 U.S. 737, 742-45 (1976); Solomon v. Aetna Life Ins. Co., 782 F.2d 58, 59-60 (6th Cir. 1986). The final decision of the district court has not been entered during the pendency of this appeal; therefore, this court lacks jurisdiction. See Gillis v. United States Dep't of HHS, 759 F.2d 565, 569 (6th Cir. 1985). Rule 60(b) relief of the partial decision was not available because the order was not a final or appealable order. See Fayetteville Investors v. Commercial Builders, Inc., 936 F.2d 1462, 1469 (4th Cir. 1991). Moreover, the notice of appeal is defective in that it does not designate the name of the court to which the appeal is taken as required by Fed. R. App. P. 3(c). See United States v. Webb, 157 F.3d 451, 453 (6th Cir. 1998) (per curiam).

It is ordered that the appeal is dismissed.

 

 

 

United States of America , Plaintiff v. Jules W. Noble, Esther Noble, Great Lakes National Bank, and Constitutional Church of America , Defendants

U.S. District Court, West. Dist. Mich. , So. Div., 1:97 CV 1053, 7/23/98

[Code Secs. 6203 and 6321 ]

Individuals subject to tax: Constitutional arguments, meritless: Form 4340: Valid assessment: Lien for taxes.--An individual whose tax protestor arguments were deemed meritless was liable for unpaid taxes, interest and penalties. The Sixteenth Amendment and Art. I, sec. 8 of the U.S. Constitution authorize a direct nonapportioned tax upon U.S. citizens. The IRS's assessment of unpaid taxes was valid and enforceable. It offered as evidence a Form 4340, Certificate of Assessment and Payment, for the tax years in issue, and the taxpayer failed to raise a genuine issue of material fact concerning the tax liability. Additionally, the government held a valid tax lien against all of the husband's property interests.

[Code Sec. 6323 ]

Lien for taxes: Fraudulent conveyance.--The government was denied summary judgment on the issue of whether a delinquent taxpayer had fraudulently conveyed his interest in real estate to a church. It failed to establish that the transfer of the property rendered him insolvent or that he intended to defraud his creditors.

OPINION

ENSLEN, Chief Judge:

This matter is before the Court on Defendant Jules W. Noble's Motion to Dismiss, filed March 24, 1998 (Dkt. #3), and Plaintiff's Motions for Summary Judgment against Defendant Jules W. Noble, filed May 12, 1998 (Dkt. #13), and for Default Judgment against Defendant Esther K. Noble, filed May 26, 1998 (Dkt. #16). For the reasons which follow, Defendant's Motion is denied and Plaintiff's Motions are granted in part and denied in part.

FACTS

On December 17, 1997, Plaintiff filed the present action. Plaintiff seeks the following relief: (1) to recover for unpaid federal income taxes, interest, and penalties in the amount of $408,569.06; (2) to set aside an allegedly fraudulent conveyance by Defendant Jules W. Noble of real property located at 169 Honey Lane , Battle Creek , Michigan , 49015 ; and (3) to foreclose its federal tax liens against Defendant Jules W. Noble's interests. The tax liability arose from Defendant Jules W. Noble's failure to pay his taxes for the periods ending December 31, 1973, December 31, 1974, December 31, 1975, and December 31, 1984. On October 4, 1976, Defendants Jules W. Noble and Esther K. Noble acquired real property located at 169 Honey Lane , Battle Creek , Michigan , 49015 . On February 10, 1977, Defendants Jules W. Noble and Esther K. Noble, purportedly conveyed by quit claim deed, for $1.00 and other valuable considerations, the Honey Lane Property to the Constitutional Church of America. At the time of the transfer, Defendant Jules W. Noble was allegedly insolvent. On March 27, 1991, the Internal Revenue Service ("IRS") filed with Calhoun County a Notice of Federal Tax Lien naming the Constitutional Church of America as the alter-ego and/or the nominee of Defendant Jules W. Noble.

DISCUSSION

Defendant Jules W. Noble seeks dismissal, pursuant to Federal Rule of Civil Procedure 12. Plaintiff seeks summary judgment under Federal Rule of Civil Procedure 56 against Defendant Jules W. Noble. Plaintiff also seeks default judgment against Defendant Esther K. Noble, pursuant to Federal Rule of Civil Procedure 55.

A. Defendant's Motion to Dismiss

Defendant Jules W. Noble argues that Plaintiff lacks standing. In his Motion to Dismiss, Defendant has submitted canned tax protestor arguments that have been repeatedly rejected and are completely devoid of merit. For over eighty years, the Supreme Court has recognized that the Sixteenth Amendment and Article I, section 8 of the United States Constitution authorizes a direct nonapportioned tax upon United States citizens. Brushaber v. Union Pac. R.R. [1 USTC 4], 240 U.S. 1, 12-19 (1916); United States v. Mundt [94-2 USTC 50,366], 29 F.3d 233,237 (6th Cir. 1994) (citing United States v. Collins [91-2 USTC 50,554], 920 F.2d 619, 629 (10th Cir. 1990)). Moreover, Congress may create and provide for the administration of an income tax. Mundt [94-2 USTC 50,366], 29 F.3d at 237. Congress has provided that the United States may sue in federal court to recover for federal tax liability. See Id.; United States v. Lussier [91-1 USTC 50,164], 929 F.2d 25, 27 (1st Cir. 1991). Accordingly, Defendant Jules W. Noble's Motion to Dismiss is denied.

B. Plaintiff's Motions for Summary Judgment and for Default Judgment

1. Summary Judgment

Under Federal Rule of Civil Procedure 56(c), summary judgment is proper if the pleadings, depositions, answers to interrogatories and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. City Management Corp. v. U.S. Chemical Co., 43 F.3d 244, 250 (6th Cir. 1994). The initial burden is on the movant to specify the basis upon which summary judgment should be granted and to identify portions of the record which demonstrate the absence of a genuine issue of material fact. Pierce v. Commonwealth Life Ins. Co., 40 F.3d 796, 800 (6th Cir. 1994) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). The burden then shifts to the non-movant to come forward with specific facts, supported by the evidence in the record, upon which a reasonable jury could find there to be a genuine fact issue for trial. Bill Call Ford, Inc. v. Ford Motor Co., 48 F.3d 201, 205 (6th Cir. 1995) (citing Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986)). If, after adequate time for discovery on material matters at issue, the non-movant fails to make a showing sufficient to establish the existence of a material disputed fact, summary judgment is appropriate. Celotex Corp., 477 U.S. at 323.

Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences are jury functions. Adams v. Metiva, 31 F.3d 375, 382 (6th Cir. 1994). The evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in the non-movant's favor. Celotex Corp., 477 U.S. at 323 (citing Anderson, 477 U.S. at 255). The factual record presented must be interpreted in a light most favorable to the non-movant. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The Court "cannot resolve issues of fact, but is empowered to determine only whether there are issues in dispute to be decided in a trial on the merits." Gutierrez v. Lynch, 826 F.2d 1534, 1536 (6th Cir. 1987).

a. Defendant Jules W. Nobles Tax Liability

The taxpayer has the burden to show an assessment is incorrect. Helvering v. Taylor [35-1 USTC 9044], 293 U.S. 507, 515 (1935); United States v. Walton [90-2 USTC 50,429], 909 F.2d 915, 918 (6th Cir. 1990). A general denial of liability is insufficient to meet the taxpayer's "burden of nonpersuasion." See Anastasato v. Commissioner [86-2 USTC 9529], 794 F.2d 884, 888 (3rd Cir. 1986); Avco Delta Corp. v. United States [76-2 USTC 9570], 540 F.2d 258, 262 (7th Cir. 1976). A showing that federal taxes have been assessed and that balances remain due on such assessment is good and sufficient proof of tax liability. Helvering [35-1 USTC 9044], 293 U.S. at 515; Walton [90-2 USTC 50,429], 909 F.2d at 918. "Certificates of assessments and payments are generally regarded as being sufficient proof, in the absence of evidence to the contrary, of the adequacy and propriety of notices and assessments that have been made." Gentry v. United States [92-1 USTC 50,225], 962 F.2d 555, 557 (6th Cir. 1992).

In support of its Motion, Plaintiff attached Forms 4340, Certificates of Assessment and Payment for the 1973, 1974, 1975, and 1984 tax years. Defendant Jules W. Noble has not come forward with evidence to show a genuine issue of material fact as to his tax liability. Accordingly, Plaintiff's Motion is granted as to Defendant Jules W. Noble's tax liability. Further, the Court finds that Plaintiff holds a valid federal tax lien against all of Defendant Jules W. Noble's property interests.

b. Defendant Jules W. Nobles Alleged Fraudulent Conveyance

To establish a fraudulent conveyance of the real property located at 169 Honey Lane , Battle Creek , Michigan , 49015 , Plaintiff must prove that the transfer of the property would have rendered Defendant Jules W. Noble insolvent at the time the transfer was made, or that Defendant Jules W. Noble intended to defraud creditors. Mich. Comp. Laws Ann. 566.11, et seq.; City Mgmt. Corp. v. United States Chem. Corp., 43 F.3d 244, 253 (6th Cir. 1994); see also John Ownbey Co. v. Commissioner [81-1 USTC 9309], 645 F.2d 540, 545 (6th Cir. 1981) (interpreting Tennessee law). The party seeking to set aside the conveyance must prove the existence of fraud by clear and convincing evidence. City Mgmt. Corp., 43 F.3d at 253.

Plaintiff has come forward with no factual evidence to suggest that the value of Defendant Jules W. Noble's assets was less than the amount needed to pay his debts as they became due and owing, i.e. that he was rendered insolvent by the transfer. Moreover, while the surrounding circumstances show strong indications of an actual intent to defraud, Plaintiff has failed to show that no issue of fact remains on this claim. On the contrary, Constitutional Church of America and Defendant Jules W. Noble have come forward and challenged whether the transfer was fraudulent. Accordingly, Plaintiff's Motion for Summary Judgment on the claim that Defendant Jules W. Noble fraudulently transferred property located at 169 Honey Lane , Battle Creek , Michigan , 49015 is denied.

2. Default Judgment

The procedural steps contemplated by the Federal Rules of Civil Procedure following a defendant's failure to plead or defend as required by the Rules begin with the entry of a default by the clerk upon a plaintiff's request. Fed. R. Civ. P. 55(a). Then, pursuant to Rule 55(c), the defendant has an opportunity to seek to have the default set aside. Fed. R. Civ. P. 55(c). If that motion is not made or is unsuccessful, and if no hearing is needed to ascertain damages, judgment by default may be entered by the Court. Fed. R. Civ. P. 55(b). However, no judgment shall be entered against an infant or incompetent person unless represented in the action by a general guardian, committee, conservator, or other such representative who has appeared therein. Fed. R. Civ. P. 55(b); United Coin Meter Co. v. Seaboard Coastline R.R., 705 F.2d 839, 843 (6th Cir. 1983). Plaintiff has not shown that Defendant Esther K. Noble is a competent adult or that she is represented by a general guardian, committee, conservator, or other such representative. Accordingly, Plaintiff's Motion for Default Judgment is denied.

CONCLUSION

For the reasons stated in this Opinion, Defendant Jules W. Noble's Motion to Dismiss is denied. Plaintiff's Motion for Summary Judgment against Defendant Jules W. Noble is granted in part and denied in part as stated in this Opinion. Plaintiff's Motion for Default Judgment against Defendant Esther K. Noble is denied.

 

 

 

United States of America , Plaintiff v. James C. Dunkel, Mary Grace McIntyre Dunkel, Virginia Dunkel, Illinois Department of Revenue and Alpine Bank of Illinois , Defendants

U.S. District Court, No. Dist. Ill. , West. Div., 97 C 50228, 7/20/98

[Code Sec. 6321 ]

Lien for taxes: Property subject to: Fraudulent conveyance: Summary judgment: Questions of fact: Transferor's solvency.--In an action brought by the IRS to foreclose tax liens on real property owned by a delinquent taxpayer, the issue of whether the taxpayer was insolvent when he conveyed the property to his former wife was a question of material fact that precluded summary judgment that the conveyance was fraudulent. The taxpayer testified that, at the time he made the conveyance, the value of his assets exceeded his tax obligations; under state ( Illinois ) law, a property owner is competent to render an opinion as to the value of his property.

[Code Sec. 6321 ]

Lien for taxes: Property subject to: Summary judgment: Questions of law: Extinguished interest: Separation agreement.--In an action brought by the IRS to foreclose tax liens on real property that a delinquent taxpayer had transferred to his former wife, the wife was not entitled to judgment as a matter of law. Any interest that the taxpayer had in the property was not extinguished by a separation agreement that he entered into after the conveyance.

[Code Sec. 6323 ]

Lien for taxes: Property subject to: Fraudulent conveyance: Summary judgment: Questions of law: Collateral estoppel: State court proceedings: Parties: Privity.--In an action brought by the IRS to foreclose tax liens on real property that a delinquent taxpayer transferred to his former wife, the wife was not entitled to judgment as a matter of law. A prior state court decision that dismissed with prejudice an action to declare the conveyance fraudulent did not estop the IRS from litigating the issue, since it was not a party in that case or in privity with the third party who brought the suit.

[Code Sec. 6325 ]

Lien for taxes: Property subject to: Summary judgment: Questions of law: Release of lien.--In an action brought by the IRS to foreclose tax liens on real property that a delinquent taxpayer transferred to his former wife, the wife was not entitled to judgment as a matter of law. An agreement under which the IRS released some of its claims against the taxpayer did not apply to the property at issue.

[Code Sec. 6502 ]

Lien for taxes: Property subject to: Summary judgment: Questions of law: Statute of limitations: Collection activities.--In an action brought by the IRS to foreclose tax liens on real property that a delinquent taxpayer transferred to his former wife, the wife was not entitled to judgment as a matter of law. Since the action to reduce the taxpayer's assessments to judgment was timely filed, IRS collection efforts were not barred by the statute of limitations.

MEMORANDUM OPINION AND ORDER

REINHARD, Judge:

Plaintiff, the United States of America , filed a complaint, naming as defendants, James C. Dunkel, Mary Grace McIntyre Dunkel, Virginia Dunkel, the Illinois Department of Revenue and the Alpine Bank of Illinois , seeking to foreclose certain federal tax liens against real property located at 6475 Sentinel Road , Rockford , Illinois . Plaintiff has filed a motion for summary judgment, and Mary Grace McIntyre Dunkel has opposed that motion and filed a cross-motion for summary judgment. 1 Jurisdiction and venue are proper in this court as the real property at issue is located in this district and division.

The following material facts are taken from the statements of fact submitted by the parties pursuant to Local General Rules 12M and 12N and are not in dispute. 2 The tax liens at issue arose from federal income tax assessments for the years beginning in 1981 and continuing through 1992 against James Dunkel. The assessment for the 1981 tax year was based on James Dunkel's refusal to pay income tax for that year and due on April 15, 1982.

James Dunkel entered into a property settlement agreement with his former wife, Virginia Dunkel, dated January 28, 1982. Pursuant to the agreement, James Dunkel was required to pay Virginia Dunkel approximately $325,000.00 in quarterly installments of about $7,300.00, to pay for Virginia and their three children's medical, dental and optical expenses and to pay for college expenses for each of the children.

On February 8, 1982, James Dunkel married McIntyre Dunkel. At that time, McIntyre Dunkel was aware of James Dunkel's obligations to his former wife and his children. On about August 31, 1982, James Dunkel, by quitclaim deed, conveyed the property at 6475 Sentinel Road to McIntyre Dunkel for no consideration. James Dunkel continued to reside at 6475 Sentinel Road after the conveyance. McIntyre Dunkel made the payments on the loan, insurance and taxes. According to James Dunkel's trial testimony in his criminal prosecution for tax evasion, he conveyed the property to McIntyre Dunkel "to protect [his] family." Also in 1982, James Dunkel sold many of his collectible cars and conveyed the remainder to McIntyre Dunkel. The marriage of James Dunkel and McIntyre Dunkel was dissolved on March 26, 1985.

On January 6, 1986, the government made an assessment against James Dunkel for unpaid income tax for the year 1981 in the amount of $36,746.00. On October 22, 1990, an additional assessment was made against James Dunkel for the 1981 tax year in the amount of $114,313.52, which included $22,763.00 in tax, $4,560.00 in estimated tax penalty, $48,237.38 in negligence penalty and $38,753.14 in interest. Between October 1985 and May 1993, the government made numerous assessments for unpaid taxes, penalties and interest for the years 1982 through 1992. The government sent notices of the assessments and demand for payment to James Dunkel on or within sixty days of each assessment. There remains due and owing the amount of $920,275.73 plus interest and other additions as of May 4, 1998.

Plaintiff has moved for summary judgment, contending that the conveyance of the 6475 Sentinel Road property was fraudulent and should, therefore, be set aside under one or both alternatives established by Illinois law: fraud-in-fact or fraud-in-law. McIntyre Dunkel also filed an objection to plaintiff's motion for summary judgment in which she contends plaintiff is not entitled to summary judgment because there are questions of material fact. Specifically, she first argues that there is a question of fact as to whether James Dunkel had any interest in the property to which a lien could attach. Further, she contends there is a question of material fact as to whether James Dunkel had the intent to delay or hinder his creditors, as to whether the conveyance of the property left him unable to pay his debts, and as to the amount of James Dunkel's debts and assets at the time of the conveyance.

McIntyre Dunkel also moves for summary judgment raising the following contentions: (1) plaintiff released its interest in the property via a release of forfeiture agreement; (2) plaintiff is barred by the applicable statute of limitations because it did not file its foreclosure action until more than eleven years after its 1981 assessment in January 6, 1986; (3) James Dunkel's interest in the property, if any, was extinguished pursuant to a property settlement agreement between Jones Dunkel and Mary McIntyre Dunkel entered in court on April 9, 1985; (4) there are no facts to conclude that McIntyre Dunkel was the nominee of James Dunkel; and (5) plaintiff is collaterally estopped from litigating the issue of a fraudulent conveyance because the Circuit Court of Winnebago County, Illinois, in an action by Virginia Dunkel against McIntyre Dunkel dismissed the case with prejudice.

A court may grant summary judgment only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Essex v. United Parcel Serv., Inc., 111 F.3d 1304, 1308 (7th Cir. 1997). In evaluating a summary judgment motion, the court must resolve all inferences in the light most favorable to the nonmoving party. Id. To withstand summary judgment, the nonmovant must demonstrate that the record as a whole permits a rational factfinder to rule in his favor. Id. The question is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law. Id.

McIntyre Dunkel's Motion for Summary Judgment

The bases for McIntyre Dunkel's motion for summary judgment consist of affirmative matters that she contends prevent plaintiff from prevailing in this case as a matter of law. The court will address each of these separately.

First, the release of interest signed by Assistant United States Attorney McKenzie was limited to the interest claimed via the previous forfeiture agreement entered by McIntyre Dunkel and James Dunkel. It expressly refers to a release of any interest in the real property described in the "Forfeiture Agreement." Further, it makes no mention of any interest arising under or related to any tax liens. Thus, the release of interest in no way eradicates plaintiff's claim in this case based on tax liens.

Second, McIntyre Dunkel contends this cause is barred by the statute of limitations. The court agrees with plaintiff's assertion as to the applicable statute of limitations. Under 26 U.S.C. 6502(a), which applies to plaintiff's action against McIntyre Dunkel, there is no time limitation for collection if the action to reduce the tax assessments to judgment is timely. Because the action to reduce assessments to judgment was filed against James Dunkel in a timely manner, the action here to collect on that judgment is also timely.

Third, the court flatly rejects McIntyre Dunkel's contention that any interest James Dunkel may have had as of April 9, 1985 was extinguished by the separation agreement signed on March 26, 1985 as part of their dissolution of marriage. As plaintiff points out, James Dunkel had already conveyed the property to McIntyre Dunkel in July 1982. There was, therefore, no interest for James Dunkel to transfer per the separation agreement and court order. Furthermore, the whole purpose of this action is an effort to defeat any attempt by James Dunkel to convey the property to avoid collection of the judgment (or contemplated judgment) against him. Conveyance of the property alone does not preclude plaintiff's claim.

Fourth, McIntyre Dunkel argues she is entitled to summary judgment on plaintiff's nominee theory of recovery because there is no evidence to support such a claim. This argument misses the mark as plaintiff has not sought summary judgment on this theory and has no need to submit any evidence at this time. Because McIntyre Dunkel has not submitted any evidence showing she is not a nominee of James Dunkel, plaintiff has no obligation to do so.

Fifth, McIntyre Dunkel contends that plaintiff is collaterally estopped from litigating the issue of fraudulent conveyance as the Circuit Court of Winnebago County, Illinois, in an action by James Dunkel's former wife, Virginia Dunkel, claiming the conveyance was fraudulent, dismissed the action with prejudice. Aside from any other basis to reject this argument, the contention is lacking for the simple reason that plaintiff was not a party nor in privity to any party in the state court action. A plaintiff cannot be collaterally estopped by an earlier determination in a case in which the plaintiff was neither a party nor in privity with a party. General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1083 (7th Cir. 1997).

For the foregoing reasons, the court denies McIntyre Dunkel's motion for summary judgment.

Plaintiff's Motion for Summary Judgment

Plaintiff seeks summary judgment based on its theories of fraudulent conveyance under Illinois law. Plaintiff contends, alternatively, that it is entitled to judgment as a matter of law under either a theory of fraud-in-fact or fraud-in-law. The court denies summary judgment on either basis because a question of material fact common to both exists.

Under both theories, plaintiff's rely, in part, on the assertion that at the time James Dunkel conveyed the property to McIntyre Dunkel he was unable to pay his debts. The only evidence plaintiff points to in this regard is James Dunkel's prior testimony that at the time he conveyed the property his financial situation "was a little bit tight" and that he also conveyed some other property to McIntyre Dunkel at that time. In response, McIntyre Dunkel has submitted the affidavit of James Dunkel in which he asserts he had assets in the amount of about $925,000.00 as of 1981 and 1982 and that his tax obligation for 1981 did not leave him insolvent. While plaintiff contends James Dunkel's affidavit as to the value of his assets is meaningless because he cannot render an opinion as to value, under established Illinois law a property owner is competent to render an opinion as to the value of his property, see In re Marriage of Vucic, 216 Ill. App. 3d 692, 576 N.E.2d 406, 413 (2d Dist. 1991); Department of Transp. v. Central Stone Co., 200 Ill. App. 3d 841, 558 N.E.2d 742, 750 (4th Dist. 1990) (Landowner's opinion admissible as lay opinion of value.). Although the court does not necessarily accept as accurate all estimates of value contained within James Dunkel's affidavit, the court finds it sufficient overall to raise a question of material fact as to James Dunkel's ability to meet his debts at the time he conveyed the property to McIntyre Dunkel. Therefore, on that basis only the court denies summary judgment to plaintiff on both its fraud-in-fact and fraud-in-law claims. 3

1 Both Virginia Dunkel and the Illinois Department of Revenue have disclaimed any interest in the 6475 Sentinel Road property. On April 15, 1998, Magistrate Judge P. Michael Mahoney, pursuant to stipulation of the parties, entered an agreed order establishing Alpine Bank's priority of mortgage lien and providing that Alpine Bank's lien would be satisfied in full from the proceeds of a sale of 6475 Sentinel Road before any proceeds are distributed to plaintiff.

2 Without unnecessary elaboration, the court has ignored any factual assertions via the affidavit of James Dunkel that are inconsistent with prior statements made by James Dunkel as part of his sworn testimony. See Bank of Illinois v. Allied signal Safety Restraint Sys., 75 F.3d 1162, 1169 (7th Cir. 1996); Buckner v. Sam's Club, Inc., 75 F.3d 290, 292 (7th Cir. 1996).

3 The court recognizes that the under the fraud-in-fact claim, the issue of James Dunkel's indebtedness is only one of several factors that bear on the ultimate issue of actual intent to hinder, delay or defraud a creditor. See 740 ILCS 160/5. However, such a factor is material where, as here, there are other factors which do not necessarily support a finding of such intent.

 

 

 

United States of America , Plaintiff v. Dennis and Alison Laronga, Defendants

U.S. District Court, East. Dist. N.Y. , 89-CV-692(FB), 1/6/98

[Code Sec. 6321 ]

Lien for taxes: Property subject to: Property transferred: Fraudulent conveyance: Related parties: During divorce.--Genuine issues of material fact remained regarding whether the conveyance of real property from an individual to his former wife was fraudulent; therefore, the IRS's motion for summary judgment was denied. The IRS filed a tax lien after the husband was determined to be a responsible person liable for the trust fund recovery penalty for failure to pay over withheld employment taxes for his two companies. Although the divorce decree provided that the wife had exclusive possession of the marital residence, the husband resided in it at times and made improvements at his own expense. However, affidavits by the husband and wife stated that the conveyance was made in recognition of the husband's obligation to support his wife and minor children, which qualified as fair consideration under state ( New York ) law. Moreover, the burden of proving fair consideration did not shift to the husband since there was no showing that the transaction was clandestine or designed to conceal the nature and value of the consideration. Finally, despite the existence of an intrafamily transfer, there was no determination as a matter of law that the couple acted with actual intent to hinder, delay or defraud creditors since they did not have notice of the tax claims at the time of the conveyance.

Zachary W. Carter, United States Attorney, New York, N.Y. 11201, Karen A. Smith, Department of Justice, Washington, D.C. 20530, for plaintiff. James E. Robinson, Meyer, Meyer, & Metli, 28 Manor Road , Smithtown , N.Y. 11787 , for defendants.

MEMORANDUM AND ORDER

BLOCK, District Judge:

In this nine-year-old action for unpaid taxes, plaintiff United States of America ("the Government") moves for partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure seeking to set aside as fraudulent the 1982 conveyance of real property from defendant Dennis Laronga ("Laronga") to his former wife Alison Condie Laronga ("Condie"). Because the Court concludes that questions of fact exist regarding whether Condie gave fair consideration for the transfer, the Government's motion for summary judgment is denied.

BACKGROUND

This case, which was commenced on March 2, 1989, arises out of Laronga's failure to pay over the unpaid withheld income and FICA taxes for PWT Industries ("PWT") and S & L Transportation ("S & L"). Tax assessments were sent to Laronga on April 11, 1983 and September 12, 1983 for taxes owed by PWT, and July 29, 1985 for taxes owed by S & L. The taxes owed by PWT were for the period ending March 31, 1979 through the period ending December 31, 1981, and the taxes owed by S & L were for the period ending March 31, 1982. On March 8, 1996, the Court granted the Government's motion for partial summary judgment determining that Laronga was a responsible party and reducing the assessments against Laronga to judgment.

The Government now moves for partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, seeking to set aside Laronga's 1982 conveyance of the marital residence ("the residence") to Condie as fraudulent. To summarize the transaction briefly, on February 25, 1982, Laronga executed a deed conveying the marital residence located in Flushing , New York to his then-wife Condie. The deed contained boilerplate language reciting consideration of ten dollars and "other valuable consideration." Thereafter, the couple separated, and Laronga moved to Massachusetts for a period of six years. Following the transfer, Condie paid most of the utility and other bills, though some were paid by Laronga. In 1988, Laronga returned to New York and resided in a basement apartment in the residence for a period of two years. In October of 1990, he moved to College Point, Queens for a period of almost two years. While living in College Point, Laronga personally remodeled two of the bathrooms in the residence, installed a third, and made an addition to the kitchen, all at his own expense. In July of 1992, he returned to the basement apartment, where he resided until Condie moved to California in November of 1995. At that time, Laronga moved into the main portion of the residence, where he apparently continues to reside with the two children of the marriage, although he claims that he is not paying any of the expenses connected with the upkeep of the residence. In the meantime, in July of 1993, Laronga and Condie were divorced and the Judgment of Divorce, while acknowledging that Condie was in sole title of the marital residence, nonetheless provided that Condie was to have exclusive possession of the residence until the emancipation of the youngest child of the marriage.

In response to interrogatories served by the Government during the pendency of this action, both Laronga and Condie indicated that the consideration for the transaction was Condie's relinquishment of marital rights in connection with her agreement to discontinue a divorce action. In an affidavit submitted in response to this motion, Laronga further indicated that the conveyance was made "in recognition of [Laronga's] obligation to support [his] wife and children and in consideration of [Condie's] forbearance with respect to bringing an action for divorce and seeking court-ordered payments for maintenance and child support as well as a distribution of [their] marital assets." Affidavit of Dennis Laronga at 5; see also Affidavit of Alison Laronga ("Condie Aff.") at 3. Laronga further indicated that "[t]he conveyance served the further purpose of providing a home for [Condie] and [their] two minor children and gave [Condie] the power to deal with the property as necessary in pursuance of that purpose." Id. at 6; Condie Aff. at 4.

DISCUSSION

I. Standard on a Motion for Summary Judgment

A motion for summary judgment may not be granted unless the court determines that there is no genuine issue of material fact to be tried and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-323 (1986). The burden is on the moving party to identify those portions of the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits that it believes demonstrates the absence of a genuine issue of material fact. See Celotex Corp., supra, at 323. All ambiguities must be resolved, and all inferences drawn, in favor of the nonmoving party. See Repp v. Webber, 1997 WL 793284, at *8 (2d Cir. Dec. 30, 1997). The judge's role in reviewing a motion for summary judgment is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986); see also Beatie v. City of New York , 123 F.3d 707, 710-711 (2d Cir. 1997).

Once the moving party has carried its burden, the opposing party "must do more than simply show that there is some metaphysical doubt as to the material facts. . . . [T]he non-moving party must come forward with 'specific facts showing that there is a genuine issue for trial.' " Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-587 (1986), quoting Fed. R. Civ. P. 56(e) (emphasis in original) (other citations omitted). Moreover, "[w]hen the moving party has pointed to the absence of evidence to support an essential element on which the party opposing summary judgment has the burden of proof, the opposing party, in order to avoid summary judgment, must show the presence of a genuine issue by coming forward with evidence that would be sufficient if all reasonable inferences were drawn in his favor, to establish the existence of that element at trial." United States v. Rem [94-2 USTC 50,537], 38 F.3d 634, 643 (2d Cir. 1994); see also Environmental Defense Fund v. United States , 1997 WL 289412, at *2 (S.D.N.Y. June 2, 1997).

II. The Law of Fraudulent Conveyances

As a preliminary matter, the Court observes that the question of whether the conveyance was fraudulent is determined by looking to applicable New York law. See United States v. McCombs [94-2 USTC 50,363], 30 F.3d 310, 323 (2d Cir. 1994); see also DeWest Realty Corp. v. Internal Revenue Serv. [76-2 USTC 9588], 418 F. Supp. 1274, 1278 (S.D.N.Y. 1976). The Government contends that the transaction violated two separate statutory provisions--New York Debtor & Creditor Law 273 and 276. The Court will address the Government's arguments in respect to each of these two provisions.

A. Debtor & Creditor Law 273

Debtor & Creditor Law 273 provides:

Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.

Debtor & Creditor Law 272 provides, in pertinent part, that "fair consideration" is given for property "[w]hen, in exchange for such property . . . as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied." The primary question before the Court, as framed by the parties, is whether the conveyance was supported by "fair consideration" as that term has been construed by the New York courts.

The Second Circuit has noted that "despite New York 's attempt to codify when 'fair 'consideration is given . . . the concept can be an elusive one that defies any one precise formula." McCombs [94-2 USTC 50,363], 30 F.3d at 326. "Indeed, '[w]hat constitutes fair consideration under [section 272] must be determined upon the facts and circumstances of each particular case.' " Id. (quoting Orbach v. Pappa, 482 F. Supp. 117, 119 (S.D.N.Y. 1979)); see also Matter of American Inv. Bank, N.A. v. Marine Midland Bank, N.A., 191 A.D.2d 690, 691, 595 N.Y.S.2d 537, 538 (2d Dep't 1993); Atlantic Bank of New York v. Toscanini, 145 A.D.2d 590, 536 N.Y.S.2d 132 (2d Dep't 1988). Despite the fact that the inquiry into fair consideration is necessarily fact-specific, the Government nonetheless urges that the Court determine as a matter of law that the consideration given by Condie for the conveyance was not "fair," and that the transaction was therefore fraudulent under New York law.

Although New York courts have held that a conveyance by a husband to a wife upon her promise that she would seek to reconcile their differences is not fair consideration for purposes of 273, see Corbin v. Litke, 105 Misc. 2d 94, 96-97, 431 N.Y.S.2d 800, 801-802 (Sup. Ct. Suffolk Co.1980), a husband's obligation to support his wife and children is an antecedent debt that qualifies as fair consideration. See HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1059-1060 (2d Cir. 1995); Federal Deposit Ins. Co. v. Malin, 802 F.2d 12, 18-19 (2d Cir. 1986); see also Safie v. Safie, 24 A.D.2d 502, 261 N.Y.S.2d 993 (2d Dep't 1965 ), aff'd 17 N.Y.2d 601, 215 N.E.2d 682, 268 N.Y.S.2d 561 (1966). As noted above, defendants indicated in their affidavits in opposition to this motion that the transaction was made in recognition of Laronga's obligation to support his wife and minor children and that following the transaction, he moved to Massachusetts for a period of six years. The parties were ultimately divorced in 1993. Although the judgment of divorce does provide for child support, it makes no provision for spousal maintenance; indeed, the portions of the divorce judgment related to spousal maintenance are all deleted. This lack of a provision for spousal maintenance arguably serves as some support for defendants' claim that the conveyance was made in recognition of Laronga's responsibilities in that regard. There is evidence in the record that the value of the property at the time of transaction was between $45,000 and $100,000. Cf. Kleinfeld v. Pedersen, 116 A.D.2d 970, 498 N.Y.S.2d 596 (4th Dep't 1986) (summary judgment granted to creditor and transfer between spouses set aside where record lacked, inter alia, information as to the value of the property transferred).

The Government nonetheless urges that the Court should conclude that there was no fair consideration as a matter of law because (1) Laronga lived in the residence from time to time during the parties' separation, made improvements to the residence at his own expense, and currently resides there with the children of the marriage; and (2) the divorce decree provided that Condie should have exclusive possession of the residence until the youngest child was emancipated. The Government also notes that the defendants' answers to interrogatories indicated that the only consideration for the transaction was Condie's agreement to discontinue divorce proceedings, suggesting that the affidavits submitted on this motion are self-serving, post hoc justifications for their fraudulent conduct. However, the Court is not inclined to reject these affidavits out of hand, as they are not necessarily inconsistent with the defendants' answers to interrogatories. See Hayes v. New York City Dep't of Corrections, 84 F.3d 614, 619-620 (2d Cir. 1996). Rather, it is evident that the issues raised by the motion are largely factual and involve matters of credibility. It is well established that a court should not engage in credibility determinations in resolving a motion for summary judgment. See, e.g., Hetchkop v. Woodlawn at Grasmere, Inc., 116 F.3d 28, 33 (2d Cir. 1997).

Further, the Court rejects the Government's position that the parties' respective burdens of proof require judgment in its favor as a matter of law. As presumptions and matters related to burdens of proof are considered substantive matters, they are also governed by New York law. See McCombs [94-2 USTC 50,363], 30 F.3d at 323-324. Under New York law, the burden of proof to establish that a conveyance was made without fair consideration is ordinarily on the creditor. See ACLI Gov't Sec., Inc. v. Rhoades, 653 F.Supp. 1388, 1391 (S.D.N.Y. 1987); see also American Inv. Bank, 191 A.D.2d at 692, 595 N.Y.S.2d at 538. However, it is true, as the Government points out, that certain New York courts have held that if the evidentiary facts regarding the nature and value of the consideration are within the control of the transferee, he burden of coming forward with evidence regarding the fairness of the consideration shifts to the transferee. ACLI Gov't Sec., 653 F. Supp. at 1391. Furthermore, when an intrafamily transaction has occurred and there is an absence of tangible consideration, there is an even heavier burden upon the transferee to establish fair consideration for the transfer. Id.

However, the Second Circuit has indicated that the burden of proving fair consideration should not be shifted to the grantee, even in the case of an intrafamily transfer, unless one of two conditions is present: either an absence of any tangible consideration, or "a clandestine transfer of property designed to conceal the nature and value of the consideration." McCombs [94-2 USTC 50,363], 30 F.3d at 325-326. As noted above, the Court concludes that questions of fact exist as to whether the transaction was supported by fair consideration. Moreover, there has been simply no showing on the record here that the transaction at issue was "clandestine," or was designed to conceal the nature and value of the consideration. The Government appears to be urging the position that the transaction is inherently suspect because it was between a husband and wife; however, as in McCombs, "[i]n the absence of any of the above factors, [the Court] can find no overriding basis under New York law to create a presumption of fraud in this case solely because the conveyance was between family members." Id. at 326. On the limited record here, the Court discerns no basis for shifting the burden of proof to the defendants for purposes of this motion. Accordingly, as the Government has failed to satisfy its burden of demonstrating the absence of a genuine issue of material fact as to its 273 claim, its motion for summary judgment on that basis is denied. Cf. Merman v. Miller, 82 A.D.2d 826, 439 N.Y.S.2d 428 (2d Dep't 1981 ).

B. Debtor & Creditor Law 276

Debtor & Creditor Law 276 provides:

Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.

The burden of proving "actual intent" falls on the party that seeks to set aside the conveyance, and it must be proven by clear and convincing evidence. McCombs [94-2 USTC 50,363], 30 F.3d at 328. Actual intent "may be inferred: (a) where the transferor has knowledge of the creditor's claim and knows that he is unable to pay it; (b) where the conveyance is made without fair consideration; or (c) where the transfer is made to a related party (i.e., husband to wife)." In re Fair, 142 B.R. at 633; see also McCombs [94-2 USTC 50,363], 30 F.3d at 328 (" 'The fraudulent nature of a conveyance may be inferred from the relationship among the parties to the transaction and the secrecy of the sale, or from inadequacy of consideration and hasty, unusual transactions.' ") (quoting In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1041 (2d Cir. 1984)).

In this case, both defendants contend that they did not have notice of the tax claims at the time of the conveyance, which preceded the first of the subject tax assessments by almost fourteen months. Indeed, S & L's tax liability, which was for the period ending March 31, 1982, had not yet accrued at the time of the conveyance in February of 1982. As noted above, the Court concludes that questions of fact exist regarding whether Condie gave fair consideration for the transaction. Under these circumstances, despite the existence of an intrafamily transfer, the Court cannot determine as a matter of law that the defendants acted with "actual intent. . . . to hinder, delay, or defraud" creditors. Accordingly, the Government's motion for summary judgment is denied as to that claim as well, and its request for attorney's fees under 276-a, which is contingent upon a finding of actual intent, is similarly denied as premature. Finally, in light of the foregoing disposition of the Government's motion for summary judgment, its related request for a judgment foreclosing its liens in the subject real property must similarly be denied at this time, as the determination of whether Laronga in fact owned the real property at the time that tax liability was assessed against him must await a trial of the fraudulent conveyance issue.

CONCLUSION

For the reasons set forth above, the Government's motion for partial summary judgment pursuant to Rule 56 is denied.

SO ORDERED.

 

 

 

United States of America , Plaintiff-Appellee v. Lawrence A. Westley, Cecelia W. Westley, Defendants-Appellants

(CA-6), U.S. Court of Appeals, 6th Circuit, 98-6054, 3/21/2001, Affirming in part, reversing in part and remanding a District Court decision, 98-2 USTC 50,545

[Code Secs. 6321 and 6901 ]

Fraudulent conveyances: Corporate assets: Shareholders: State law.--A delinquent corporation's transfer of property to its shareholders shortly before it filed for bankruptcy was void as a fraudulent conveyance under state (Tennessee) law. The government's failure to timely collect the corporation's liabilities from the transferees did not destroy its claim of transferee liability under state law because the statute merely provided the government with a procedure by which to collect the delinquent tax. Since the taxpayers did not challenge the district court's finding of constructive fraud, they conceded that the property transfer was a fraudulent conveyance under Tennessee law.

[Code Sec. 6871 ]

Bankruptcy: Discharge of tax liability: Unlisted fraudulent debt: Untimely proof of claim.--Although a property transfer to the shareholders of a bankrupt corporation was found to be a fraudulent conveyance under state (Tennessee) law, their liability as the corporation's transferees was discharged during their bankruptcy because the government failed to file a timely proof of claim. When the district court permitted them to amend their bankruptcy schedule to include the liability, which was unlisted and, thus, a Bankruptcy Code section 523(a)(3)(B) debt, the government was required to request a determination of dischargeability upon receiving notice of the amended schedule. Its failure to do so precluded its ability to collect on the debt.

Before: KENNEDY, NELSON and BATCHELDER, Circuit Judges.

Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.

BATCHELDER, Circuit Judge:

This case presents the question of the extent of transferee liability for a corporation's unpaid federal income taxes when the shareholders received a distribution of corporate assets that liquidated the corporation. Such a question is usually straightforward, but this case has been unnecessarily complicated by the Government's dilatory collection efforts to recover the unpaid corporate income tax liability of Supreme Mortgage and Realty Company, Inc. ("Supreme Inc.") from its corporate shareholders.

I.

Mr. and Mrs. Westley, along with a Mr. Willis, were the sole shareholders in Supreme Inc. 1 On May 9, 1983, the three shareholders approved a plan to liquidate Supreme Inc.'s assets and terminate the corporation. Supreme Inc. filed its Notice of Corporate Dissolution with the I.R.S. on June 2, 1983. The Westleys claim that the sole purpose for this liquidation was to avoid a substantial amount of income tax that would have accrued from the sale of Supreme Inc.'s mortgage servicing contracts. See 26 U.S.C. 337. This tax-saving effort was unrelated to the assessed tax deficiencies resulting from Supreme Inc.'s earlier tax returns.

In order to comply with section 337, the shareholders were required to liquidate Supreme Inc. within 12 months of the vote to authorize the liquidation. Therefore, on May 4, 1984, the assets were distributed to the shareholders in proportion to their stock holdings, and Supreme Inc. was liquidated. Mr. Westley received a distribution of $284,263.48; Mrs. Westley, $263,958.95; and Mr. Willis, $1,635,339. The three shareholders then directly invested their distributions to form Supreme Mortgage and Realty Company, a Tennessee partnership ("Supreme Partnership"). The Supreme Partnership continued to operate as the corporation had operated--out of the same location, doing essentially the same business, and with the same employees.

At the time that the shareholders were liquidating Supreme Inc., they were aware that the Government was auditing Supreme Inc.'s tax returns for the years 1979, 1980, and 1981. Supreme Partnership's financial statements indicate that, while the partners were disputing the legitimacy of the proposed deficiencies, a contingency for the payment of $517,549 for Supreme Inc.'s back taxes was allocated. Specifically, Note 10 to the Supreme Partnership's financial statement explains the tax situation as of December 31, 1984:

The Federal income tax returns of Supreme Mortgage and Realty Company, Incorporated have been examined for the three fiscal years ended September 30, 1981 and the Internal Revenue Service has proposed additional assessment plus penalty of approximately $517,549 for which provision has been made. The Corporation has been liquidated on May 4, 1984 and the assets were distributed and the liabilities assigned to the "former stockholders" who are the general partners of Supreme Mortgage and Realty Company, Partnership. The "former stockholders" do not agree with the proposed adjustments and are protesting a major portion of the adjustment. The "former stockholders" (Supreme, Incorporated), on advice of legal counsel have filed a protest contesting the tax liability. At this time, it is impossible to predict the ultimate outcome of these matters. Any additional liabilities resulting from an unfavorable ruling by the Tax Courts or from settlement with the Internal Revenue Service would result in a charge to the partners' capital accounts related to their initial capital injection into the partnership.

It is unclear exactly when the Government finalized its determination of deficiencies against Supreme Inc. and what steps Supreme Inc., through its former shareholders, took to protest the deficiencies. It is undisputed, however, that the deficiencies were not paid, and a petition for redetermination of the tax deficiencies was filed with the United States Tax Court. The Government moved to dismiss Supreme Inc.'s petition in the Tax Court on the ground that it was untimely. The Tax Court agreed and dismissed the case for lack of jurisdiction on May 10, 1988. Thereafter, on September 7, 1988, the Government entered a formal assessment against Supreme Inc. in excess of $880,000. However, the Government took no immediate steps to collect on the outstanding assessment.

Apparently, sometime prior to July 25, 1991, the Government proposed to collect from the Westleys the unpaid federal income taxes owed by the liquidated Supreme Inc. In response to this proposition, the Westleys' lawyer sent a letter on July 25, 1991, to the IRS agent assigned to the case. That letter challenged the Government's ability to collect Supreme Inc.'s corporate tax liability directly from the Westleys. Again, the record shows the Government did not respond to the attorney's letter, and from 1991 to 1997, the Government apparently took no action to collect Supreme Inc.'s taxes from the Westleys. In 1997, the Government filed the suit that is the subject of this appeal, claiming that Supreme Inc.'s distribution of assets to its shareholders in 1984 was a fraudulent conveyance making the Westleys liable as transferees for the unpaid taxes.

There is one additional wrinkle. During the time that the Government was not actively pursuing the collection of Supreme Inc.'s taxes, the Westleys became insolvent. In 1994, they filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code. The case was treated as a no-asset case, and the Westleys' debts were discharged on May 2, 1994.

II.

Initially, the Westleys moved the district court to dismiss the Government's complaint on the grounds that (1) the statute of limitations under the Tennessee Uniform Fraudulent Conveyance Act had run out, and, alternatively, (2) that the district court did not have jurisdiction because the proper forum was the bankruptcy court. The district court denied their motion. In response, the Government moved the district court for an order that the discharge in bankruptcy did not preclude prosecution of the complaint in the district court, and that motion was granted.

The parties then each filed a motion for summary judgment. The district court entered an order granting the Government's motion and denying the Westleys' motion. See United States v. Westley [98-2 USTC 50,545], No. 97-2030, 1998 WL 427375 (W.D. Tenn. June 18, 1988 [1998]). In that order, the district court held that the distribution of assets to the three shareholders of Supreme, Inc. (the Westleys and Mr. Willis) was a fraudulent conveyance of the assets of the corporation; the court ordered that the conveyance of the assets to the Westleys be set aside. The district court entered a final judgment on June 24, 1998, dismissing the case.

Apparently unaware of the final judgment entered on June 24, 1998, the Government moved the district court for an entry of final judgment seeking an order for the recovery of specific dollar amounts from the Westleys. The district court denied this motion as moot on July 22, 1998, and that same day, the Government moved for reconsideration because the district court had not addressed its request for a specific money judgment. On July 23, 1998, the Westleys filed their notice of appeal from the final order of June 24, 1998, dismissing the case. Later that day, the district court granted the Government's motion for reconsideration and entered an amended judgment against Mr. Westley for $412,904.52 and against Mrs. Westley for $383,411.34, plus interest on each judgment, computed from September 7, 1988.

On July 28, 1998, the Westleys filed their opposition to the Government's motion to reconsider, which the district court had granted on July 23, 1998. They argued that filing their notice of appeal deprived the district court of jurisdiction to amend the judgment. The Westleys also filed a motion on August 4, 1998, asking the district court to set aside the amended judgment. On August 7, 1998, the district court set aside the amended judgment, restored the original judgment nunc pro tunc, and gave the Westleys until August 21, 1998, to file a response.

The Government then moved this Court to dismiss the appeal for lack of jurisdiction because the district court had not yet entered a final order. Alternatively, the Government argued that the case should be remanded for the limited purpose of allowing the district court to rule on the outstanding motion for amended judgment. We denied the Government's motion, holding that the June 24, 1998, judgment purporting to dismiss the case in its entirety was a final judgment. The Government then sought certification from the district court that it was inclined to grant their pending motion. The district court responded that it was not inclined to grant the motion.

The Westleys appeal the district court's summary judgment order, claiming the court erred in holding that the distribution of assets from Supreme Inc. was a fraudulent conveyance and setting aside the 1984 distribution of assets. The Westleys' appeal is timely, and we have jurisdiction to consider this case on the merits.

III.

We review a district court's grant of summary judgment de novo. See Allen v. Michigan Dep't of Corrections, 165 F.3d 405, 409 (6th Cir. 1999). Summary judgment is proper if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). When reviewing a motion for summary judgment, the evidence, all facts, and any inferences that may be drawn from the facts must be viewed in the light most favorable to the nonmoving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam)).

IV.

A. Direct Liability

Supreme Inc. was incorporated under the laws of the State of Tennessee. It is undisputed that the 1988 assessment was entered against Supreme Inc. as a result of the corporation's failure to pay the full amount of its corporate taxes in the tax years 1979, 1980, and 1981. We note, to be perfectly clear, that the 1988 tax assessments did not arise from any failure by the Westleys to pay their personal income taxes, nor were the Westleys personally assessed for the outstanding tax deficiencies.

The shareholders of a corporation are generally not liable for the debts of a properly formed corporation unless the shareholders' own actions create a basis for liability, e.g., conduct that allows a court to pierce the corporate veil. See TENN. CODE ANN. 48-16-203(b) ("A shareholder of a corporation is not personally liable for the acts or debts of the corporation except that the shareholder may become personally liable by reason of the shareholder's own acts or conduct.") While we express no opinion on whether or not the facts of this case would have allowed the district court to pierce the corporate veil between Supreme Inc. and the Westleys, we note that the Government has not even attempted to argue that the corporate veil should be pierced. The Government, therefore, cannot argue that the Westleys are directly liable for the debts of Supreme Inc.

B. Transferee Liability

The Government claims that the Westleys are liable for Supreme Inc.'s back taxes under a "transferee liability" theory. As the Tenth Circuit explained, the transferee's liability "stems from the fact that she holds property as a transferee in which [the transferor's] creditors have an interest because the transfer results in [the transferor's] insolvency." United States v. Floersch [60-1 USTC 9399], 276 F.2d 714, 718 (10th Cir. 1960). The nature of this "transferee liability" differs from other types of secondary liability, such as the liability incurred by a co-signer or guarantor of a debt:

There is no relation between secondary liability, as ordinarily understood, and transferee liability. Secondary liability is a personal liability which may be satisfied from all the assets of the one secondarily liable. Transferee liability, on the other hand, imposes no personal liability. It subjects only the property in the hands of the transferee to the debts of the transferor. It is a proceeding in rem against the property or fund which the transferee received from the transferor burdened with his debts.

Id.; accord Commissioner v. Henderson's Estate [45-1 USTC 9185], 147 F.2d 619 (5th Cir. 1945). Because of the in rem nature of transferee liability, the Government is limited to attempting to satisfy Supreme Inc.'s outstanding income tax liability from the property conveyed to the Westleys by Supreme Inc. That the Westleys received cash distributions from Supreme Inc., instead of real property or other tangible property, does not affect our analysis. See Bowlin v. Commissioner [60-1 USTC 9172], 273 F.2d 610 (6th Cir. 1960) (upholding tax court decision requiring wife of taxpayer to surrender cash she received from taxpayer's insurance policies because the transfer was a fraudulent conveyance under Tennessee law).

The legal underpinning for holding a transferee liable is found in the state law of the relevant jurisdiction. See Commissioner v. Stern [58-2 USTC 9594], 357 U.S. 39 (1958). In Stern, the United States Supreme Court recognized that the federal courts had, up to that point, followed the applicable state statutes when the Government sought to collect unpaid taxes from persons other than the defaulting taxpayer. In affirming this practice, the Court held "that, until Congress speaks to the contrary, the existence and extent of liability should be determined by state law." Id. at 45. Thus, in the absence of a federal statute to the contrary, state law controls the determination of the Westleys' liability.

C. 26 U.S.C. 6901

Congress has not enacted any new, substantive provisions that would alter the practice of referring to state law. The tax code does, however, have one provision that addresses transferee liability. See 26 U.S.C. 6901. Section 6901 allows the Government to invoke a summary procedure for collecting taxes from a transferee; however, the period of limitations for assessing liability against the transferee under 6901 expires one year after the expiration of the period of limitation for assessment against the transferor. See 26 U.S.C. 6901(c)(1). Because the Government did not timely invoke 6901, it cannot now proceed under 6901.

However, whether or not the Government invoked 6901 makes very little difference at this juncture. The Stern court specifically held that 26 U.S.C. 311, recodified as 6901, "neither creates nor defines a substantive liability but provides merely a new procedure by which the Government may collect taxes." Stern [58-2 USTC 9594], 357 U.S. at 42. Thus, while the timely invocation of 6901 might have assisted the Government in its collection efforts against the Westleys, 2 the Government's failure to proceed under that section does not vitiate the substantive liability of the transferees if such liability exists under state law. See Hall v. United States [68-2 USTC 9665], 403 F.2d 344 (5th Cir. 1968) (distinguishing an action under 6901 from an action in rem to set aside a fraudulent conveyance ancillary to collecting a judgment against the taxpayer-transferor); see also Kaiser v. Steadman [99-2 USTC 50,861], 1999 U.S. Dist. LEXIS 15327, at *40 (S.D. Ohio Sept. 9, 1999) (noting that the Government did not proceed under 6901 and holding that the action to set aside the fraudulent conveyances of certain real property is "an in rem action to set aside fraudulent conveyances of property rather than an in personam action to make the transferees personally liable").

D. Fraudulent Conveyance

The Government's only cause of action against the Westleys is found in the laws of the state where the distribution to the Westleys occurred. The Government alleges that Supreme Inc., a Tennessee corporation, fraudulently conveyed its assets to the Westleys, also residents of Tennessee, to avoid paying its taxes. Thus, the Uniform Fraudulent Conveyance Act ("UFCA") of Tennessee controls. 3

In a recent, unpublished opinion, the district court in the Eastern District of Tennessee considered Tennessee's version of the UFCA in precisely this context. See United States v. Freudenberg [99-2 USTC 50,623], 1999 WL 501006 (E.D. Tenn. June 9, 1999). The district court's discussion is instructive:

Where a taxpayer has allegedly fraudulently transferred his property prior to the filing of federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the state in which the property is located. See, Commissioner v. Stern [58-2 USTC 9594], 357 U.S. 39, 45 (1958); and United States v. Westley [98-2 USTC 50,545], 1998 W.L. 427375 (W.D.Tenn.). Thus, Tennessee's law applies to this case:

*****

The plaintiff must prove fraud (actual or constructive) by a preponderance of the evidence. James v. Joseph, et al., 1 S.W.2d 1017, 1019 (Tenn. 1928); Middle Tenn. Electric Membership Corp. v. Neely, 1988 W.L. 86342 (Tenn.App.1988); United States v. Kerr [78-2 USTC 9827], 470 F.Supp. 278, 281 (E.D.Tenn.1978). However, if there are "badges of fraud" which cast suspicion on the transaction, the burden of proof shifts to the defendant to explain the transaction and show that it was not fraudulent. Stevenson v. Hicks, 176 B.R. 466 (W.D.Tenn. 1995), listed a number of "badges of fraud" identified over the years by the Tennessee appellate courts: The transferor is in a precarious financial condition; he knew there was or soon would be a large money judgment rendered against him; inadequate consideration was given for the transfer; secrecy or haste existed in carrying out the transfer; a family or friendship relationship existed between the transferor and the transferee; the transfer included all or substantially all of the transferor's nonexempt property; the transferor retained a life estate or other interest in the property transferred; the transferor failed to produce available evidence explaining or rebutting a suspicious transaction; and there was a lack of innocent purpose or use for the transfer. See, 176 B.R. at 470.

Freudenberg [99-2 USTC 50,623], 1999 WL 501006, at *2. Thus, under Tennessee law the intent to defraud can be either actual or constructive. If the court finds either actual or constructive intent, the conveyance is declared fraudulent, and the remedies of 66-3-310 are available to the Government.

In this case, the district court concluded that the liquidation of Supreme Inc.'s assets and distribution of those assets to the Westleys was a fraudulent conveyance. The district court based that conclusion both on constructive intent, because the liquidation left Supreme Inc. unable to pay its outstanding tax liability, and on actual intent, because the transaction bore several of the "badges of fraud" that throw suspicion on a transaction.

The Westleys do not contest the district court's finding of constructive fraud. They, in fact, concede that the distribution from Supreme Inc. to the Westleys left the corporation insolvent. Thus, under Tenn. Code. Ann. 66-3-305, this conveyance was fraudulent. The Westleys do, however, argue that the district court's finding of actual fraud under Tenn. Code. Ann. 66-3-308 was erroneous because they made provisions for payment of the taxes in the creation of the Supreme Partnership. But, even if the district court erred in finding actual intent, that error is harmless because a fraudulent conveyance under either 66-3-305 or 66-3-308 is sufficient to set aside the transfer of property from Supreme Inc. Because the distribution of assets from Supreme Inc. to the Westleys left the corporation unable to pay its taxes, it was, by definition, a fraudulent conveyance under Tennessee law, and the district court did not err in so holding.

E. Collection of Supreme Inc.'s Taxes

The Westleys focus the bulk of their arguments on reasons why they believe the Government should be precluded from recovering in this case. First, the Westleys argue that the Government is precluded from pursuing the equitable remedy of setting aside the fraudulent conveyance because the Government has not exhausted all remedies at law. Citing to a Sixth Circuit case, Hyde Properties v. McCoy [75-1 USTC 9470], 507 F.2d 301 (6th Cir. 1974), they argue the Government should be precluded from pursuing the Westleys in equity because the Government failed to exhaust all the remedies available to it at law, namely, invoking the summary procedure of 26 U.S.C. 6901 against the Westleys, exhausting all legal remedies against the Supreme Partnership 4, and failing to seize any of Supreme Inc.'s assets that may be in the hands of subsequent transferees.

The Westleys' reliance upon Hyde Properties is misplaced. In that case, Hyde Properties had purchased some property from a corporation undergoing financial difficulties. The corporation was failing behind with all of its creditors, including the federal government. The corporation decided to sell a building it owned to Hyde Properties. Hyde Properties partially paid for the building by executing two $25,000 promissory notes. One of the corporation's shareholders, a Mr. McCoy, wanted to sell his interest in the corporation, so the corporation redeemed McCoy's interest in exchange for the Hyde Properties' promissory notes. Just before the notes became due, the Government sought to levy against the notes to satisfy the corporation's unpaid taxes, arguing that the conveyance to McCoy was fraudulent. Hyde Properties filed an interpleader action because it was unsure whom to pay--Mr. McCoy or the federal government. The jury determined that the conveyance was not fraudulent. However, the district court granted the government's motion for JNOV and ordered that the funds be handed over to the government. McCoy appealed from this ruling, arguing that he had been deprived of his right to a jury trial. In analyzing the question, we concluded that the threshold issue was whether McCoy was entitled to a jury trial under the Seventh Amendment. See id. at 304. It is within this context that we held:

A creditor under Tennessee law has two possible remedies for a fraudulent conveyance--he can have the transfer set aside or annulled, or he can ignore the conveyance and levy an execution upon the property. The first alternative is exclusively within the power of equity. The second option is a legal remedy based on the theory that a fraudulent conveyance, though valid between the parties, is void as to creditors. Because such a transfer is void, a court of law may grant a creditor either a levy of attachment or execution. Although a creditor has a choice of proceeding either at law or in equity, we are of the view that for the purposes of determining a right to a jury trial the creditor must proceed at law unless such a remedy is inadequate. Without this requirement, it is clear that a creditor could decide to pursue his relief in equity and, thereby, deny to his adversary the right to a jury under the Seventh Amendment. To prevent a party from thus controlling the constitutional rights of his opponent, the legal remedy must be inadequate before the equitable means of redress can be employed.

Id. at 305-06 (internal citations omitted and emphasis added).

The Westleys' argument that the government cannot pursue them under a fraudulent conveyance theory stretches the holding of Hyde Properties too far. The Westleys quote Hyde Properties out of context--this case does not present the question of the Westleys' right to a jury trial--and their argument is without merit. See also United States v. Perrina, 877 F.Supp. 215 (D.N.J. 1994) (holding that the government's failure to proceed under 26 U.S.C. 6901 did not bar the government's right to recoup from the transferee the value of assets fraudulently transferred by the tax debtor).

The Westleys' second and third arguments are intertwined with the undisputed fact that they reinvested the distribution from Supreme Inc. into the Supreme Partnership. They argue that under Tennessee's UFCA, the government is limited to two remedies--to set aside the transfer or to levy against the actual property transferred. See TENN. CODE. ANN. 66-3-310; see also Freudenberg [99-2 USTC 50,623], 1999 WL 501006, at *3. Therefore, they say, the government cannot obtain a money judgment from them because that remedy is not available under the Tennessee UFCA. Finally, the Westleys argue that any liability they might have had as a result of receiving the property from Supreme Inc. was a debt discharged in their 1994 bankruptcy case.

1. The nature of the debt. The Government argues that, as transferees of a fraudulent conveyance, the Westleys are personally liable for Supreme Inc.'s unpaid taxes. Therefore, the Government contends, the debt is one for a tax that is not dischargeable in bankruptcy. We disagree.

The transferee of fraudulently conveyed property can be compelled to return the property to satisfy the transferor's outstanding tax debts, but he does not assume the role of the taxpayer. Commentator Laurence Casey explains, "The transferee is not a debtor for the taxpayer's liability; he is by virtue of receipt of property of the taxpayer, subject to an independent liability in his own person, payable out of his own estate, under the trust fund doctrine and similar theories." 4 Laurence F. Casey, Casey Federal Tax Practice 12.4 (1995). Our sister circuits, when faced with this issue have held that transferee liability is not personal liability for the tax, but rather, a proceeding in rem against the transferred property. See Commissioner v. Henderson's Estate [45-1 USTC 9185], 147 F.2d 619, 620-21 (5th Cir. 1945); United States v. Floersch [60-1 USTC 9399], 276 F.2d 714, 717 (10th Cir. 1960).

The reason for this distinction is important. If the Government were allowed to attach the personal assets of the Westleys to satisfy the tax debts of a corporation from which they received a transfer of property, that action would be tantamount to holding the Westleys, as shareholders, personally liable for the tax debts of the corporation. Such a result is plainly improper. See DeWest Realty Corp. v. I.R.S. [76-2 USTC 9588], 418 F.Supp. 1274, 1279 (S.D.N.Y. 1976) ("To allow the government to levy against the transferee's personal property or any property not conveyed by the transferor (Realty) would completely distort the meaning of 'extent' as interpreted by state law, eliminate the effect of the Stern decision, and essentially convert transferee liability into personal liability for the tax debts of another. Such a result is at odds with case law and commentary, and indeed, would raise serious constitutional problems.")

We therefore conclude that, as transferees of Supreme Inc.'s assets, the Westleys' obligation to the Government is a personal debt in the amount of the property they received from Supreme Inc. Thus, the question becomes whether the Westleys' debt was discharged in the 1994 bankruptcy proceedings.

2. Discharge in bankruptcy. Ten years after receiving the fraudulent conveyance from Supreme Inc., the Westleys filed a Chapter 7 bankruptcy petition. As a result of those proceedings, the bankruptcy court granted the Westleys a discharge under 11 U.S.C. 727 on May 2, 1994. It is undisputed that the Westleys did not list the Government as a creditor in the schedules filed in the bankruptcy petition. It is also undisputed that when the Westleys became aware of the Government's claim, they filed a motion in the bankruptcy court to reopen their case, and obtained an order stating:

It is therefore ordered and notice is hereby given that the debtor(s)'instant motion is granted, that the creditor(s) shown at the bottom of this order (or attachment) [the Internal Revenue Service] is/are added to the debtor(s)' schedules and that such creditor(s) shall have until August 18, 1997 to file any objections to determine dischargeability that may be required to be to be filed under 11 U.S.C. 523(c) (and/or any complaints objecting to discharge of the debtor(s) under 11 U.S.C. 727(a)). In the absence of filing such complaint(s), after the expiration of the deadline, the debtor(s) shall be entitled to a discharge of the added debt(s), unless a debt is of a type not addressed by a routine chapter 7 discharge, in which event either the debtor(s) or the affected creditor(s) may file an appropriate complaint to determine dischargeability.

See In re Westley, No. 94-200005-B, (Bankr. W.D. Tenn. June 6, 1997) (order granting debtors motion to amend schedule to add creditor). Finally, it is undisputed that the Government filed nothing in the bankruptcy court in response to that order.

The district court held that the Westleys' debt had not been established prior to the discharge in bankruptcy because the debt did not exist until the district court entered its order of June 17, 1998, holding that a fraudulent conveyance had in fact occurred. We disagree. The transfer of property from Supreme Inc. to the Westleys occurred in 1984, 10 years before the Westleys filed bankruptcy. The obligation to return the property arose when the fraudulent transfer occurred; the district court's order of June 17, 1998, merely made that obligation enforceable through the courts. See 11 U.S.C. 101(5)(A) ("In this title--'claim' means--(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; . . ."). Because the claim existed prior to the Westleys filing for bankruptcy, it was subject to discharge in the 1994 bankruptcy action.

A section 727 discharge forgives all debts that are not excepted under section 523. In pertinent part, section 523 provides as follows:

523. Exceptions to discharge

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;

(3) neither listed nor scheduled under section 52(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit--

(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or

(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;

(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;

*****

(c)(1) Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), (6), or (15) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), (6), or (15), as the case may be, of subsection (a) of this section.

The Government contends that because the Westleys' debt is the result of a fraudulent conveyance, it falls within the exceptions to discharge set forth in 523(a)(2), (4) or (6)--which we shall refer to, for ease of reference, as "fraudulently incurred debts"--a contention which is undisputed here. However, the Government further contends that because this is a fraudulently incurred debt, it is not dischargeable. As we shall explain, the Government is mistaken.

The Westley's debt is described by section 523(a)(3)(B). That is, it is unlisted, and of a kind specified in paragraphs (2), (4) or (6) of section 523(a). We recognize that there is a danger in converting the "exception to the exception" language of section 523 into a simple statement of what that language affirmatively provides, but we are willing to take the risk. With regard to fraudulently incurred debts, section 523 provides that even unlisted fraudulently incurred debts will be discharged if the creditor obtains notice or actual knowledge of the bankruptcy in time to file a proof of claim and a request for determination of dischargeability. See 11 U.S.C. 523(a)(2), (3)(B), (4), (6) and (c)(1).

In a recent case, this court held that the bankruptcy court did not err in refusing to reopen a Chapter 7 no-asset case to permit the debtor to amend his schedules to add a previously omitted debt of the kind described in section 523(a)(3)(A). See Zirnhelt v. Madaj (In re Madaj), 149 F.3d 467, 470 (6th Cir. 1998). In a Chapter 7 no-asset case, we explained, there is typically no deadline for filing a proof of claim; see Fed.R.Br.P. 2002(e); hence, "there is no date by which a proof of claim must be filed in order to be 'timely.' Whenever the creditor receives notice or acquires actual knowledge of the bankruptcy, he may file a proof of claim, [and] that claim will be timely." In re Madaj, 149 F.3d at 469. We went on to explain that "[b]ecause 523(a)(3)(A) excepts the unscheduled debt from discharge 'unless such creditor had notice or actual knowledge of the case in time for such timely filing,' the moment the creditor receives notice or knowledge of the bankruptcy case, 523(a)(3)(A) ceases to provide the basis for an exception from discharge. Consequently, the debt is at that point discharged." Id. at 470. Although Zirnhelt involved a debt described in section 523(a)(3)(A)--unlisted debts other than fraudulently incurred debts--Zirnhelt's holding that in a Chapter 7 no-asset case there is no date by which a proof of claim must be filed in order to be timely applies as well to debts described in section 523(a)(3)(B)--fraudulently incurred debts. Both sections provide that if the creditor receives notice or obtains actual knowledge of the bankruptcy in time to file a proof of claim, the unlisted debt will not be excepted from discharge; section 523(a)(3)(B) further provides that if the creditor holding an unlisted fraudulently incurred debt receives notice in time to file a request for determination of dischargeability, even that debt will not be excepted from discharge.

The ultimate holding in Zirnhelt, however, was that because it was undisputed that the debt at issue was not otherwise nondischargeable, that is, "the debt at issue, had it been timely filed, would not have been included in any category of debts that are excepted from discharge by 523," id. at 472, reopening the bankruptcy case to permit the late scheduling of that debt would have no effect whatever on the discharge. We reasoned:

If the Creditors before us had acquired knowledge of the bankruptcy prior to the entry of the discharge order, the debt would not have been excepted from discharge because the Creditors had actual knowledge in time to file a proof of claim. Their learning of the bankruptcy after the entry of the discharge order did not transmogrify the debt into one that is excepted from discharge under some provision of the Code other than 523(a)(3)(A). Whether or not the Debtors reopen their case and amend their schedules to list this debt, there will still be no date by which proofs of claim would have to be filed in order to be timely; because the Creditors have actual knowledge of the bankruptcy, 523(a)(3)(A) does not except this debt from discharge. Hence, the reopening of the Debtors' Chapter 7 case to permit the amendment of the schedules can have no effect whatsoever. The debt in question, listed or not, is discharged.

Id.

Our ultimate holding in Zirnhelt dealt only with debts not otherwise nondischargeable--that is, debts described in section 523(a)(3)(A)--and we were careful in that case to distinguish debts that, had they been timely filed, would have fallen into a category of debts that are excepted from discharge by section 523. Fraudulently incurred debts--that is, debts of the kind specified in paragraphs (2), (4) and (6) of section 523(a)--are specifically excepted from discharge except as provided in section 523(a)(3)(B). The Westleys' debt is such a debt.

Under the reasoning of Zirnhelt, it would not be error for a bankruptcy court to permit a debtor to reopen his case and amend his schedules to list a previously omitted debt of the kind described in section 523(a)(3)(B). In the Westleys' case, the bankruptcy court did exactly that, and sent the Government notice that the debt had now been scheduled, and that the Government had a specific time within which to file a proof of claim and a request for a determination of dischargeability. Section 523(c)(1) provides that even previously unlisted debts of the kind specified in paragraphs (2),(4) and (6) of section 523(a) will be discharged unless, on request of the creditor, the court determines that those debts are excepted from discharge. The bankruptcy court's order is clear--it placed the burden on the Government to request a determination of dischargeability within the time frame provided or lose its ability to collect upon the debt at all. See also Mead v. Helm, No. 88-1015, 1989 WL 292, at *5 (6th Cir., Jan. 4, 1989) ("[A] creditor must initiate bankruptcy court proceedings to determine the dischargeability of a debt under section 523 of the Code. If the creditor fails to act, the debt is discharged pursuant to section 523(c) of the Code.") Consistent with its pattern throughout the long history of this disputed liability, the Government simply failed to take any action at all. Indeed, to this very day the Government has never attempted to request a determination of dischargeability of this debt, and it clearly would be barred from doing so now.

3. Money Judgment. The final issue raised by the parties is whether the district court could enter a money judgment against the Westleys to remedy the fraudulent conveyance because the actual property of Supreme Inc. is no longer in the hands of the Westleys. We note at the outset that the district court order before us is limited to setting aside the fraudulent conveyance; although the district court did issue an order for a money judgment, that order was later rescinded, and the original judgment was restored nunc pro tunc. While it appears that Tennessee law would allow for the imposition of a money judgment under these circumstances, see, e.g., Orlando Residence, Ltd. v. Nashville Lodging Co., No. 01A-01-9606-CH-00256,1996 WL 724915 (Tenn. Ct. App. May 19, 1997), we do not need to reach that question because whatever obligation the Westleys may have had to return property or pay money back to Supreme Inc., has been discharged in their Chapter 7 bankruptcy proceeding.

 

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