Bona Fide Purchaser for
Value Page 1

American
Insurance Company, Plaintiff v.
New York City
Health and Hospitals Corporation, Defendant.
New York City
Health and Hospitals Corporation, Interpleader Plaintiff v. Levinson
& Santoro Electric Corporation, et al., Interpleader Defendants.
U.S.
District Court, So.
Dist.
N.Y.
; 99 Civ. 3891 (LAP), 265 FSupp2d 434,
July 8, 2003
.
[ Code
Sec. 6323]
Tax liens: Priority: Interpleader fund: Assignment of property
interest. --
An assignment
made by a delinquent taxpayer to an insurance company of certain
contract funds constituted a complete transfer of the taxpayer's
interest in those funds to the insurer pursuant to state (
New York
) law. Because the assignments effectively transferred the taxpayer's
property interest in the funds before the government's federal tax lien
could attach to the interpleaded monies, the insurer's claim had
priority over the government's lien. However, the insurer's contention
that it was entitled to priority over the tax lien because it qualified
as a "purchaser" under federal law was rejected. The evidence
did not establish that it met the adequate and full consideration
standard of Code
Sec. 6323(h)(6).
MEMORANDUM
AND ORDER
PRESKA, District Judge: Interpleader defendant the
United States
(the "Government") and plaintiff American Insurance Company
("American") have cross-moved for summary judgment in this
action concerning funds due Levinson & Santoro Electric Corporation
("L&S") under certain contracts with
defendant-interpleader plaintiff New York Health and Hospitals
Corporation ("NYHHC"). At issue is whether the Government or
American has a priority claim to the interpleader fund.
BACKGROUND
The following facts are undisputed unless otherwise noted. In March 1987
and April 1994, L&S and certain others executed and re-executed a
General Indemnity Agreement (collectively, the "Indemnity
Agreements") as a precondition to American's issuance of payment
and performance bonds on behalf of L&S in connection with certain
construction projects. (American Rule 56.1 Statement ¶1). The Indemnity
Agreements granted American certain rights including "an assignment
of all monies due, or to be come due, to L&S in connection with
bonded and unbonded projects, as well as a separate security interest in
all monies due, or to become due, to L&S in connection with the
bonded and unbonded projects." (
Id.
at ¶ ¶2-3). In the fall of 19 95, L&S advised American that it
needed financial assistance to complete its work under various
construction contracts, and as a result, in December 1995, American and
L&S entered into an agreement (the "Assistance
Agreement"). (
Id.
at ¶ ¶7-8). Under the Assistance Agreement, American "provided
financial assistance to L&S for the completion of various bonded
projects...." (
Id.
at ¶8). On December 20, 1995, "as part of the consideration to
American for the Assistance Agreement," L&S executed certain
assignments (the "Assignments") "cumulative with
American's existing rights under the [previously entered into] Indemnity
Agreements, expressly assigning to American L&S' right to all
contract funds in connection with various bonded and unbonded
projects." (
Id.
at ¶9). Specifically, L&S provided American "with an express
assignment of its rights to receive existing or future Contract
Funds" for two projects, the Queens Hospital Project and the
Bellevue Project. (
Id.
at ¶ ¶10-11). The Assignments, by their express terms, are
"irrevocable" and provide that L&S "immediately
assigns, transfers and sets over to" American "all right,
title and ownership to all contract funds of any nature," whether
those funds "are due now or shall, in the future, become due"
for the Queens Hospital and Bellevue Projects. (American Rule 56.1
Statement at ¶ ¶13-14, 16-17). American states that in reliance on the
Assignments and other agreements, it provided financial assistance to
L&S and incurred "losses, costs, fees and expenses in the total
amount of $11,741,485.90." (
Id.
at ¶ ¶15, 18-19). The Government disputes the accuracy of this amount,
arguing that American only provided financial assistance and/or incurred
losses of no more than $7,050.71. (Gov. Response to American's Rule 56.1
Statement ¶ ¶15, 19).
L&S' tax liability for the tax periods ending September 30, 1995 and
December 31, 1995 was assessed on March 11, 1996 and May 20, 1996,
respectively. (Ex. A to the Declaration of David J. Kennedy, sworn to on
July 30, 2002
). On
January 16, 1997
, the Internal Revenue Service (the "IRS") filed a federal tax
lien against L&S in the amount of $753,393.33. (Gov. Rule 56.1
Statement ¶1). On
March 10, 1997
, American served NYHHC with the Assignments. (American Rule 56.1
Statement ¶ ¶20-21). It is undisputed that as of that date, certain
funds were due and owing to L&S under the Queens Hospital contract,
although the Government disputes that American has proven that any funds
were due and owing under the Bellevue Contract 1
and that any funds under either contract remain due and owing L&S. (
Id. ¶22; Gov. Response to American Rule 56.1 Statement ¶ ¶23-25).
American commenced the instant action against NYHHC in 1999 in the
Supreme Court of New York, New York County, and the case was
subsequently removed to federal court. By notice of motion filed on or
about
July 31, 2002
, the Government moved for summary judgment in the amount of $758,174.73
plus interest from
July 8, 2002
. American filed its cross-motion for summary judgment on or about
August 21, 2002
. The Government argues that American does not qualify as either a
purchaser or a holder of a security interest and that, therefore, the
federal tax lien has a priority claim to the interpleader fund. In
support of this argument, the Government points out that American has
admitted that it did not file any U.C.C. financing statements with
regard to the Assignments, thus defeating any claim that American holds
a perfected security interest. In response, American argues that,
contrary to the Government's characterization of its position, American
does not base its claim on a security interest, but rather on the theory
that it owns the monies due L&S based upon the Assignments. American
argues that under
New York
law, the Assignments --executed in 1995 --made the funds the property of
American and that, therefore, the federal tax lien against L&S
--filed in 1997 --could not attach to the funds. 2
In addition, or alternatively, American argues that it qualifies as a
purchaser under 26 U.S.C. §6323(a) with an interest superior to that of
the Government. American also adds a final argument regarding a
subrogation claim under Article 3-A of the New York Lien Law for the
approximately $7000 it expended on L&S' behalf.
DISCUSSION
I. Summary Judgment Standard
"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 facts as to which there is no such issue warrant judgment
for the moving party as a matter of law." Chambers v. TRM Copy
Centers Corp., 43 F.3d 29, 36 (2d Cir. 1994); see Fed. R.
Civ. P. 56(c); see generally Celotex Corp. v. Catrett, 477
U.S. 317 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242
(1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S. 574 (1986). An issue of fact is genuine when "a reasonable
jury could return a verdict for the nonmoving party," and facts are
material to the outcome of the particular litigation if the substantive
law at issue so renders them. Anderson, 477
U.S.
at 248.
The burden of establishing that no genuine factual dispute exists rests
on the party seeking summary judgment. Chambers, 43 F.3d at 36.
"In moving for summary judgment against a party who will bear the
ultimate burden of proof at trial," however, "the movant's
burden will be satisfied if he can point to an absence of evidence to
support an essential element of the nonmoving party's claim." Goenaga
v. March of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir.
1995); accord Gallo v. Prudential Residential Servs., 22
F.3d 1219, 1223-24 (2d Cir. 1994) ("The moving party may obtain
summary judgment by showing that little or no evidence may be found in
support of the nonmoving party's case."). The moving party, in
other words, does not bear the burden of disproving an essential element
of the nonmoving party's claim.
If the moving party meets its burden, the burden shifts to the nonmoving
party to come forward with "specific facts showing that there is a
genuine issue for trial." Fed. R. Civ. P.56(e); accord Rexnord
Holdings, Inc. v. Bidermann, 21 F.3d 522, 525-26 (2d Cir. 1994). The
nonmoving party must "do more than simply show that there is some
metaphysical doubt as to the material facts." Matsushita,
475
U.S.
at 586. Instead, the nonmovant must "`come forward with enough
evidence to support a jury verdict in its favor, and the motion will not
be defeated merely ... on the basis of conjecture or surmise."' Trans
Sport v. Starter Sportswear, 964 F.2d 186, 188 (2d Cir. 1992)
(citation omitted).
On cross-motions for summary judgment, the court applies the same
standard as that for individual motions and treats the facts in the
light most favorable to the non-moving party. See Aviall, Inc.
v. Ryder Sys., 913 F.Supp. 826, 828 (S.D. N.Y. 1996). "Simply
because the parties have cross-moved, and therefore have implicitly
agreed that no material issues of fact exist, does not mean that the
court must join in that agreement and grant judgment as a matter of the
law for one side or the other. The court may conclude that material
issues of fact do exist and deny both motions."
Id.
(internal citation omitted). See also Heublein, Inc. v. United
States [ 93-2
USTC ¶50,397], 996 F.2d 1455, 1461 (2d Cir. 1993).
II. Analysis
As noted at the outset, resolution of these motions turns on which party
has a priority claim to the interpleader fund. Federal law determines
the priority of competing liens, governed by the traditional rule of
"first in time is first in right." See United States
v. City of New Britain [ 54-1
USTC ¶9191], 347 U.S. 81, 85-86 (1954); United States v. Hage
[ 76-1
USTC ¶9459], 417 F.Supp. 74, 76 (N.D. N.Y. 1976). As against a
federal tax lien, a state lien can take priority only if, in addition to
being first in time, it is choate, or fully established, before the
federal lien attaches. See Don King Prods., Inc. v. Thomas
[ 91-2
USTC ¶50,474], 945 F.2d 529, 533 (2d Cir. 1991) ("A choate
lien is one in which the identity of the lienor, the property subject to
the lien and the amount of the lien are established."); United
States v. 110-118 Riverside Tenants Corp. [ 90-2
USTC ¶50,493], 886 F.2d 514, 518 (2d Cir. 1989); Hage [ 76-1
USTC ¶9459], 417 F.Supp. at 76-77. A federal tax lien attaches to
"all property and rights to property, whether real or
personal," belonging to the taxpayer, here, L&S. 26 U.S.C. §6321.
The nature of the taxpayer's property interest is determined by state
law, here the law of the State of
New York
. Thus, in order to make a determination as to priority, I must first
consider when each party's rights to the interpleader fund arose. See
Jaffie Contracting Co. v. Doff, No. 94 Civ. 2670, 1995
U.S.
Dist. LEXIS 11765, at *9 (S.D. N.Y. Aug. 16, 1995). A federal tax lien
arises at the time of assessment. 26 U.S.C. §6322.
The dates of assessment for L&S' tax liability were
March 11, 1996
and
May 20, 1996
.
As stated above, American bases its claim to the interpleader fund
primarily on the Assignments it executed with L&S for the
Queens
Hospital and Bellevue Projects. American argues that the Assignments
conveyed L&S' property interest in the funds to American and that,
therefore, the federal tax lien could not attach to the funds. I find
that the language of the Assignments in this case --providing that
L&S "immediately assigns, transfers and sets over to"
American "all right, title and ownership to all contract funds of
any nature," whether those funds "are due now or shall, in the
future, become due" for the Queens Hospital and Bellevue Projects
--constituted a complete assignment under New York law of all rights
under the Queens Hospital and Bellevue contracts to American because
L&S and American "intended a complete and immediate transfer of
the interest at the time of the [A]ssignment[s]." Jaffie
Contracting, 1995 U.S. Dist. LEXIS 11765, at *10; see also Continental
Oil Co. v.
United States
[ 71-1
USTC ¶9296], 326 F.Supp. 266, 269 (S.D. N.Y. 1971). Under the
Assignments, American received "a complete transfer of the entire
interest of the assignor in the particular subject of assignment,
whereby the assignor is divested of all control over the thing
assigned." Continental Oil [ 71-1
USTC ¶9296], 326 F.Supp. at 269 (quoting 3 N.Y. Juris. Assignments
§28) (quotation marks omitted). It is undisputed that the Assignments
were executed in December of 1995, while the IRS did not assess the
taxes against L&S until 1996 and file its federal tax lien until
January of 1997. Accordingly, I find that American is entitled to
priority because the Assignments effectively transferred L&S'
property interest in the funds before the Government's federal tax lien
could attach. 3
I have also considered American's argument that it qualifies as a
"purchaser" under federal law. A federal tax lien imposed by Section
6321 is not valid "as against any purchaser [or] holder of a
security interest ... until notice thereof ... has been filed by the
Secretary," 26 U.S.C. §6323(a),
and thus, if American qualified as a purchaser, it would be entitled to
priority over the federal tax lien. As defined by 26 U.S.C. §6323(h)(6),
a "purchaser" is "a person who, for adequate and full
consideration in money or money's worth, acquires an interest (other
than a lien or security interest) in property which is valid under local
law against subsequent purchasers without actual notice." The
requirement of adequate and full consideration is what sets a purchaser
apart from a regular assignee and is a matter of federal law. See
United States v. Paladin [ 82-1
USTC ¶9360], 539 F.Supp. 100, 103 (W.D. N.Y. 1982); see also
26 C.F.R. 301.6323(h)-1(f)(3) ("the term `adequate and full
consideration in money or money's worth' means a consideration in money
or money's worth having a reasonable relationship to the true value of
the interest in property acquired"). While American states that it
"provided good and valuable consideration for the Assignments,
based on the monies advanced by American under the Assistance Agreement
exceeding $11,741,485.90," (American Memo. at 12), I find there is
insufficient evidence in the record supporting American's claim that it
meets the "adequate and full consideration" standard. American
has put in a spreadsheet of payments made on L&S' behalf, (Ex. A to
the Declaration of Stacey M. Fleming, sworn to
October 17, 2002
("Fleming Reply Decl.")), and claims that these payments
"demonstrat[e] the exchange of adequate and full consideration for
the Assignments." (Fleming Reply Decl. at ¶4). While the
spreadsheet indicates that some payments were made on the date the
Assignments were executed, the payments appear to relate to work on the
Mt.
Sinai
Electrical
Multipurpose
Building
, and not for either the
Queens
or Bellevue Hospital Projects. (Ex. A to Fleming Reply Decl. at 2-3).
Accordingly, I find that American has not demonstrated that it qualifies
as a purchaser.
Finally, L&S has submitted papers attesting to settlement
negotiations between the L&S and the Government, in the apparent
hope that the Court will reduce the amount of the federal tax lien.
However, L&S takes no position on whether American or the Government
should be entitled to a priority claim to the interpleader fund. In
response, the Government argues that L&S' submissions should be
stricken from the docket as violating Fed. R. Evid. 408. Having found
that American has a priority claim to the interpleader fund, I decline
to make a finding on this issue.
CONCLUSION
For the foregoing reasons, the Government's motion for summary judgment
is denied. American's motion for summary judgment is granted to the
extent that I find American is entitled to a priority claim to the
interpleader fund. Counsel shall confer and inform the Court by letter
no later than
July 14, 2003
of the steps necessary to resolve the action.
SO ORDERED
1
However, the Government does not dispute that American made demands on
NYHHC for payment under both the Queens Hospital and Bellevue contracts.
(Gov. Response to American's Rule 56.1 Statement ¶ ¶26-29).
2
In support of this argument, American points to a case decided in the
Supreme Court of the State of
New York
,
Nassau
County
, to which the Government was not a party. I agree with the Government
that the conclusions reached by the court in that case are irrelevant
for purposes of this case.
3
Because I find that American is entitled to a priority claim to the
interpleader fund, I decline consideration of American's subrogation
claim pursuant to Article 3-A of the New York Lien Law.
[99-2 USTC
¶50,861] Jo Ellen Kaiser, Administrator of the Estate of Joseph H.
Hans, Plaintiff v. Shirley A. Stedman, et al., Defendants
U.S.
District Court, So. Dist.
Ohio
, East. Div., C:2-95-1074, 9/9/99
[Code Sec.
6321 ]
Liens and levies: Fraudulent conveyances: Badges of fraud: Conveyance
made in consideration of dissolution of marriage.--The government
failed to prove that real estate transfers made by a delinquent taxpayer
before his death were fraudulent. Although sufficient badges of fraud
existed in connection with the transfers to shift the burden to the
transferees to show that the transfers were valid, including the
intimate relationship between the transferor and the primary transferee,
the parties' extensive cash dealings, the transferor's possession and
control over the property following the transfer and the use of nominees
or fictitious parties in the transactions, the transferee rebutted the
presumption of fraud with her allegation that the transfers were made in
consideration of the dissolution of her common-law marriage to the
taxpayer and pursuant to a related decree.
[Code Sec.
6323 ]
Priority of liens: Bona fide purchaser for value: Form of notice:
Notice or knowledge of lien.--An individual who bought land from a
delinquent taxpayer's wife was a bona fide purchaser for value whose
interest was superior to a tax lien on the property. The government
failed to show that she knew that the taxpayer's conveyance of the
property to his wife was allegedly fraudulent. The IRS also filed
inadequate notice of the lien since a reasonable inspection would not
have revealed the lien's existence, and it failed to clearly identify
that the property was held by the taxpayer's wife.
[Code
Secs. 6323 and 6502 ]
Liens and levies: Real estate: Fraudulent conveyance: Action to set
aside conveyance: Foreclosure: Collection after assessment: Statute of
limitations: Sovereign immunity: Federal and state law.--Although
issues of material fact precluded summary judgment that the government
was entitled to foreclose against real property that a delinquent
taxpayer transferred to others before his death, the foreclosure action
was timely. The government's sovereign status exempted it from
compliance with the limitations period applicable to the state (
Ohio
) fraudulent conveyance statute. Furthermore, since it instituted timely
collection actions under Code
Sec. 6502 against the taxpayer, the government was not bound by the
six-year statute of limitations of Code
Sec. 6502 in its efforts to enforce a levy against the transferees. M.
Weintraub (CA-6), 80-1
USTC ¶9172 , followed.
[Code Sec.
6323 ]
Nominees: Theory not viable under state law: State law controlling:
Summary judgment: Issue of material fact.--The U.S. was not entitled
to partial summary judgment in its levy enforcement action with respect
to its claim that tax liens attached to real property under the nominee
doctrine. Neither the U.S. Court of Appeals for the Sixth Circuit nor
state (
Ohio
) courts had recognized the applicability of that doctrine as part of
Ohio
law. Furthermore, the government could not circumvent state law to apply
the nominee theory since
Ohio
law directly controlled a determination of whether a delinquent
taxpayer's transfers could be set aside as fraudulent. The
U.S.
also failed to demonstrate conclusively that, under
Ohio
law, a corporation owned by the transferee had no separate existence
from her. Since genuine issues of material fact existed as to that
claim, the government could not pierce the corporate veil.
[Code Sec.
6323 ]
Liens and levies: Fraudulent conveyances: State (
Ohio
) law.--Property conveyances made by a delinquent taxpayer before
his death could be considered fraudulent as to the government, even
though his deficiencies were first assessed after the transfers. Since
part of the taxpayer's deficiency arose during the tax year in which the
transfers occurred, the government was deemed a present creditor for
taxes due at the end of that year, and a future creditor as to
subsequent tax years. Consequently, the government could invoke the
Ohio
fraudulent conveyance act to set aside the transfers as long as it could
show that they were made with the intent to defraud the IRS.
[Code Sec.
6901 ]
Direct transferee liability: In rem action: Judgment liens.--The
Code Sec. 6901
limitations period did not apply to the government's levy
enforcement suit against real property that a delinquent taxpayer
transferred to others before his death because the suit was an in rem
action to set aside the transfers, rather than an in personam
action to hold the transferees liable for his debts. The government also
had a valid and simultaneously enforceable judgment lien against the
taxpayer.
MEMORANDUM AND ORDER
PROCEDURAL HISTORY
HOLSCHUH,
District Court Judge:
This action
was originally filed on
October 12, 1995
in the Court of Common Pleas, Franklin County, Ohio by Plaintiff Jo
Ellen Kaiser,
admin
istrator of the Estate of Joseph H. Hans. Plaintiff has named as
Defendants: Shirley Stedman, Garland by the Sea, Ltd.
("Garland"), S. Ann Douglas, 1
National Wood Products, Inc., 2
Federal Home Loan Mortgage, Olga Tokar, Maxine Ruzich, Catherine Hans,
the Franklin County Treasurer, the Department of Taxation for the State
of Ohio, 3
the United States, the City of Columbus, Rino Borean, Meredith Dale
Oglesby, and Nancy K. Oglesby. The action was removed to this Court by
Defendant United States on
October 31, 1995
. (R. 1.)
Plaintiff in
this action is the daughter of Mr. Joseph Hans, who died intestate on
March 17, 1994
. Plaintiff, in her role as the
admin
istrator of Mr. Hans's estate, initiated an action in Franklin County,
Ohio Probate Court on
September 27, 1994
. In the Probate Court, Plaintiff filed an inventory of the estate
listing $4800 in personal property and two parcels of real estate,
20.1467 acres of land on Reynoldsburg-New Albany Road (the "New
Albany property") and a residence at 5648 Indian Mound Court: (the
"Indian Mound property"). Defendant Shirley Stedman filed an
exception to the inventory in which she claimed that she owned the two
parcels of land which had been included in the inventory filed by
JoEllen Kaiser.
In this
action, Plaintiff Kaiser seeks to quiet title in the two parcels of real
property at issue in the probate proceeding. Plaintiff Kaiser has
alleged that these two parcels were fraudulently transferred by the
decedent to Defendant Stedman. With regard to the
New Albany
property, title was subsequently transferred by Stedman to Defendant
Garland. 4
With regard to the Indian Mound property, title was transferred in 1977
to the Billy G Corporation, a company owned by William H. Garland, and
then back to Defendant Stedman. In 1983, the Indian Mound property was
the subject of a land contract between Stedman and Defendant Nancy
Oglesby for the purchase price of $109,585.
The named
defendants are alleged to have interests in the two parcels of real
property. Plaintiff has alleged seven causes of action: the first claim
is brought under Ohio Rev. Code §§2721.03 and 1336.01, et seq.
and 28 U.S.C. §2410, the second claim is for fraud, the third claim
added M. Dale Oglesby and Nancy K. Oglesby (husband and wife) as
defendants, the fourth claim is brought under Ohio Rev. Code §2127.40,
the fifth claim alleges that Defendant Stedman is the nominee of
decedent, the sixth claim alleges that Defendant Garland by the Sea is
the nominee or alter-ego of Stedman, and the seventh claim added
Defendants Rino Borean and S. Ann Douglas as nominees of the decedent.
Defendant
United States
has asserted counterclaims against Plaintiff and cross-claims against
Defendant Stedman and Defendant Garland to set aside the allegedly
fraudulent conveyances and to foreclose certain federal tax liens and
judgment liens upon the property. Defendant
United States
also added the Oglesbys as third party defendants and Rino Borean and S.
Ann Douglas (trustee) as nominees. Defendant United States has alleged
seven claims: in Count One, the United States seeks to foreclose on
federal tax assessments and judgments; in Counts Two and Three, the
United States seeks a finding that certain conveyances to Defendants
Stedman and Garland were fraudulent; in Count Four, the United States
seeks a lien against Defendant Nancy Oglesby; in Count Five, the United
States alleges that Nancy Oglesby is the nominee of Defendant Stedman
and the decedent; in Count Six, the United States alleges that
Defendants Borean and Douglas are nominees of Defendant Stedman and the
decedent; and in Count Seven, the United States seeks a finding that
certain conveyances to Defendants Borean and Douglas were fraudulent.
Defendants
Meredith Dale Oglesby and Nancy Oglesby have also asserted counterclaims
against Plaintiff and cross-claims against Defendant Stedman seeking
specific performance or, in the alternative, compensatory damages and
attorney fees.
Defendants
Stedman and
Garland
filed a motion to dismiss on
October 10, 1996
and a motion for summary judgment on
October 22, 1997
. Pursuant to Plaintiff's request, a hearing was held on the motions on
August 18, 1998
. On
August 21, 1998
, the Court issued an opinion granting in part and denying in part these
two motions. The Court granted the motions of Defendant Stedman and
Garland
as to Plaintiff's claims brought pursuant to Ohio Revised Code §§1336.01
and 2721.03 and purporting to be brought pursuant to 28 U.S.C. §2410.
As to Plaintiffs claims under Ohio Revised Code §2127.40, the Court
granted the motions of Stedman and Garland to the extent Plaintiff
sought to set aside the allegedly fraudulent conveyances on behalf of
the estate or heirs of the decedent, but denied the motions to the
extent the claims were brought in Plaintiff's role as
admin
istrator on behalf of creditors of the estate.
This action is
now before the Court on a motion for partial summary judgment filed by
the United States on August 29, 1997, (R. 91), an October 22, 1997
motion by Defendants Stedman and Garland for summary judgment against
the United States, (R. 98), and the October 19, 1998 motion of
Defendants Dale and Nancy Oglesby to dismiss or for summary judgment
against the United States and Plaintiff Kaiser, (R. 126). 5
The
United States
has also filed a motion for oral argument on its motion for partial
summary judgment on the grounds of the complexity of the factual issues
presented. (R. 120.) Based upon the representations of counsel at the
latest status conference held in this case, it appears that oral
argument is no longer desired by the parties. Even if the Court is
mistaken in its understanding that the parties no longer desire oral
argument, the Court finds that, despite the voluminous evidence on the
record, oral argument is unnecessary and would further delay resolution
of the pending motions. The motion for hearing is therefore denied.
FACTS
The decedent,
Joseph Hans, purchased the Indian Mound property in February of 1967, a
few days before he married Sally O. Hartlerode. (
U.S.
Ex. 2;
U.S.
Ex. 50.) In October of 1967, Mr. Hans quitclaimed a one-half interest to
Sally. (
U.S.
Ex. 3.) In March of 1969, an adjacent .708 acre tract was purchased by
Mr. Hans and placed in Sally's name. (
U.S.
Ex. 4.) On
May 15, 1967
Mr. Hans executed another quitclaim deed on the Indian Mound property,
releasing his interest in favor of Sally. (
U.S.
Ex. 5.)
In January
1974, Mr. Hans purchased the
New Albany
property, consisting of 20.1467 acres of raw land. (
U.S.
Ex. 23.) Title to the property was placed in Sally's maiden name. (
U.S.
Ex. 23.) The land was acquired so that a residence could be constructed
on it, and between February and October of 1974, several improvements to
the land were made, including brush clearing, landscaping, and the
building of a pond, bridge, and a driveway. (Stedman Dep. at 25-26,
U.S.
Ex. 42.)
In October
1974, Sally filed for divorce from Mr. Hans. (
U.S.
Ex. 50.) On
February 11, 1975
, a decree of divorce was entered which provided that Sally was awarded
the
New Albany
property, the Indian Mound property, and the adjacent .708 acre tract. (
U.S.
Ex. 51.) Shirley Stedman testified at her deposition that during the
divorce proceeding, Sally and Mr. Hans reached a "side
agreement" in which they agreed that Sally would transfer title to
the three parcels back to Mr. Hans. (Stedman Dep. at 128,
U.S.
Ex. 42.) Pursuant to this agreement, Sally prepared and delivered to Mr.
Hans deeds for the Indian Mound property and the
New Albany
property. The .708 acre tract was inadvertently not placed in either
deed. (Stedman Dep. at 128,
U.S.
Ex. 42.) At Mr. Hans's request, Sally left the grantee clauses of both
deeds blank and Mr. Hans did not record the deeds at that time. (Stedman
Dep. at 130-32, 211-12,
U.S.
Exs. 42, 43.)
In January or
February of 1974, Defendant Shirley Stedman, who had previously worked
for Mr. Hans as a legal assistant, moved into the Indian Mound
residence. (Stedman Dep. at 120-23, 285,
U.S.
Exs. 42, 43.) Initially, her duties were to care for Mr. Hans's son,
Joey, who was 13 or 14 at the time. Soon thereafter, Ms. Stedman and Mr.
Hans became intimate and she began to work again as Mr. Hans's legal
assistant. (Stedman Dep. at 133-34,
U.S.
Ex. 42.)
On June 2,
1975, Sally, then divorced from Mr. Hans, recorded deeds purporting to
transfer title to the Indian Mound property, the New Albany property,
and the .708 acre tract to Laura Archer, Sally's daughter from another
marriage. (
U.S.
Exs. 6, 24.) On June 25, 1975, Mr. Hans recorded the two deeds he had
previously received from Sally for the Indian Mound property and the New
Albany property, after allegedly inserting "S. Ann Douglas 6
and Joseph Hans, Trustees" in the grantee clauses of both deeds. (
U.S.
Exs. 7, 25.) Mr. Hans did not record a deed for the .708 acre tract.
In November of
1975, Mr. Hans and Sally each filed suit claiming title to the three
parcels. On
March 22, 1977
, after a consolidated appeal, the Court of Appeals of
Franklin
County
held that Mr. Hans was entitled to specific performance as to the Indian
Mound property and the
New Albany
property, but not the .708 acre tract. See Hans v. Hans, No.
76AP-853, slip op. (Ohio Ct. App. Mar. 22, 1977) (U.S. Ex. 53.) On
remand, the Court of Common Pleas entered a judgment on
September 1, 1977
declaring that the deed transferring the .708 acre tract from Sally to
Laura Archer was valid and that the deeds transferring the
New Albany
property and the Indian Mound property from Sally to S. Ann Douglas and
Mr. Hans were valid. See Hans v. Hans, No. 75CV-07-2961, slip op.
(Franklin Cty. C.P.
Ct.
Sept. 1, 1977
) (
U.S.
Ex. 16.)
On
January 9, 1976
, Mr. Hans was contacted by an agent with the Criminal Investigation
Division ("CID") of the Internal Revenue Service for the
purpose of conducting an interview with respect to his omission of
income for the 1972, 1973, and 1974 tax years. (
U.S.
Exs. 57, 58.) Further contacts between the CID and Mr. Hans occurred in
March of 1976. (
U.S.
Exs. 57, 58.) On
November 8, 1976
, Mr. Hans was advised that the IRS would be contacting third parties
due to his failure to cooperate. (
U.S.
Exs. 57, 58.) Ms. Stedman testified at her deposition that she became
aware of the IRS investigation perhaps in late 1977 or early 1978.
(Stedman Dep. at 136-37,
U.S.
Ex. 42.)
On
March 25, 1977
, three days after the Court of Appeals decision finding that Mr. Hans
was entitled to the Indian Mound property and the
New Albany
property, Mr. Hans and Ms. Stedman filed a petition for dissolution of
their alleged common law marriage. (
U.S.
Ex. 56.) The petition alleged that Mr. Hans and Ms. Stedman had been
holding themselves out as husband and wife since
November 5, 1976
. (
U.S.
Ex. 56.) Ms. Stedman alleges that she and Mr. Hans entered into the
common law marriage at her insistence because in late 1976, she
discovered she was pregnant. (Stedman Dep. at 11-12,
U.S.
Ex. 42.) About a month after the beginning of the alleged common law
marriage, Ms. Stedman decided to terminate the pregnancy. (Stedman Dep.
at 15 Ex. 42; Stedman & Garland Ex. 8.) Mr. Hans and Ms. Stedman
filed for a dissolution after four months of purported common law
marriage.
The separation
agreement submitted to the court provided that Ms. Stedman was to
receive the Indian Mound property and the
New Albany
property, and that Ms. Stedman would be responsible for the $225 monthly
mortgage payments on the Indian Mound property. (
U.S.
Ex. 56.) During the pendency of the dissolution action, however, deeds
were recorded which transferred title to the Indian Mound property to
third parties.
Although the
property was titled in the name of "S. Ann Douglas and Joseph Hans,
Trustees," Mr. Hans alone recorded a quit-claim deed in April of
1976 transferring the Indian Mound party to Rino Borean, a cement
contractor who supplied concrete for a small bridge built on the
New Albany
property. (
U.S.
Ex. 9; Borean Dep. at 12,
U.S.
Ex. 49.) Mr. Borean testified at his deposition that Mr. Hans told him
that Mr. Hans was "getting ready to get a divorce," and asked
Mr. Borean to put the property in his name "until [Mr. Hans] got
through this mess." (Borean Dep. at 17, 20,
U.S.
Ex. 49.) Although the deed states a consideration of one dollar
"and other good and valuable considerations," (U.S. Ex. 9), at
Mr. Borean's deposition, he could not recall paying any consideration
other than one dollar. (Borean Dep. at 25,
U.S.
Ex. 49.)
During the
pendency of the dissolution proceeding, title to the Indian Mound
property was conveyed to Billy G Corporation, a company owned by William
Garland, by means of three deeds: (1) a deed from Rino and Shirley
Borean to Billy G Corporation; (2) a deed from S. Ann Douglas and Joseph
Hans as trustees to Billy G Corporation; and (3) a deed from Joseph Hans
and Shirley Stedman Hans to Billy G Corporation. (
U.S.
Exs. 10, 11, 12.) These three deeds were all recorded on
April 22, 1977
and each deed stated consideration in the amount of one dollar "and
other valuable consideration." (
U.S.
Exs. 10, 11, 12.)
Mr. Borean
testified that prior to the transfer to Billy G Corporation, Mr. Hans
called him and told him, " 'I'm having someone come over there.'
" (Borean Dep. at 26,
U.S.
Ex. 49.) Mr. Garland came to Mr. Borean's house and Mr. Borean signed
the papers. (Borean Dep. at 26,
U.S.
Ex. 49.) Mr. Borean does not recall giving any consideration for the
transfer to Billy G Corporation other than one dollar. (Borean Dep. at
25,
U.S.
Ex. 49.) Mr. Borean testified that he conveyed the property for one
dollar because he considered the property to be owned by Mr. Hans, and
further that the transaction "was between Joe [Hans] and Mr.
Garland." (Borean Dep. at 27,
U.S.
Ex. 49.) Mr. Borean never lived on the Indian Mound property, and never
considered himself the owner of the Indian Mound property. (Borean Dep.
at 10, 31,
U.S.
Ex. 49.)
On
September 26, 1976
, a deed was recorded transferring a one-half interest in the
New Albany
property from Mr. Hans to Mr. Borean. (
U.S.
Ex. 26.) The deeds states consideration of one dollar "and other
good and valuable considerations." (
U.S.
Ex. 26.) Mr. Borean testified that, although he agreed to place the
Indian Mound property in his name, he was not aware that the
New Albany
property had been transferred to his name. (Borean Dep. at 22,
U.S.
Ex. 49.)
The Ohio Court
of Common Pleas entered the decree of dissolution of the common law
marriage of Mr. Hans and Ms. Stedman on
May 2, 1977
. (
U.S.
Ex. 56.) Within a few weeks after entry of dissolution and after title
was transferred to Billy G Corporation, deeds were recorded which
transferred title of the Indian Mound property and the
New Albany
property to Ms. Stedman's name.
Title to the
Indian Mound property was conveyed to Ms. Stedman by means of three
deeds: (1) a quitclaim deed from Billy G Corporation to Mr. Hans; (2) a
quitclaim deed from Mr. Hans to Ms. Stedman; and (3) a quitclaim deed
from Billy G Corporation to Ms. Stedman. (
U.S.
Exs. 13, 14, 15.) The first two deeds transferring the Indian Mound
property were recorded in May of 1977, and the third was recorded in
June of 1977. (
U.S.
Exs. 13, 14, 15.)
Title to the
New Albany
property was transferred to Ms. Stedman by means of two deeds, a
quitclaim deed from Mr. Hans to Ms. Stedman recorded in May of 1977, and
a quitclaim deed from Rino and Shirley Borean to Ms. Stedman recorded in
September of 1977. (
U.S.
Exs. 27, 33.) Mr. Borean has no recollection of signing the quitclaim
deed transferring his interest to Ms. Stedman, or receiving
consideration from her. (Borean Dep. at 30,
U.S.
Ex. 49.) Mr. Borean never lived on the
New Albany
property, and never considered himself the owner of the property.
(Borean Dep. at 10, 30-31,
U.S.
Ex. 49.)
Despite the
dissolution of the marriage, Mr. Hans and Ms. Stedman continued to live
together for 17 more years, until his death in 1994. (Stedman Dep. at
17-18, 24-25, 185, 289-300,
U.S.
Exs. 42, 43.) Ms. Stedman testified at her deposition that she continued
to work with Mr. Hans in his law practice, and that she was paid for her
work. (Stedman Dep. at 19, 100-18,
U.S.
Ex.42;
U.S.
Ex. 59.) Ms. Stedman testified that she was paid in cash, cashiers'
checks and money orders, that she never received a payroll check, and
that no Form 1099 or other governmental tax documents were ever issued
that would show that she was, in fact, paid by Mr. Hans for working as
his legal assistant. (Stedman Dep. at 19-20, 114,
U.S.
Ex. 42.)
At the time of
the dissolution of the common law marriage on
May 2, 1977
, there was no residence on the
New Albany
property. (Stedman Dep. at 25-26,
U.S.
Ex. 42.) On
May 5, 1977
, three days after the decree of dissolution was entered, a building
permit was filed for the
New Albany
residence, listing Mr. Hans as the owner. (
U.S.
Ex. 60.) In September of 1977, Mr. Hans and Ms. Stedman jointly signed a
$65,000 promissory note to obtain a construction loan. (
U.S.
Ex. 61.) Construction of the
New Albany
residence began in June of 1977. (Stedman Dep. at 260,
U.S.
Ex. 43.) On
June 23, 1997
, a $50,000 mortgage from Ms. Stedman to National Wood Products Inc. on
the
New Albany
property was recorded. (
U.S.
Ex. 28.) Ms. Stedman testified at her deposition that the mortgage was
recorded to protect Herman Fry of National Wood Products, that there was
no $50,000 debt owed to National Wood Products, Inc., and no payments
were made on the purported $50,000 mortgage. 7
(Stedman Dep. at 51-55, 65-69,
U.S.
Ex. 42.)
Ms. Stedman
testified that she paid all of the construction bills by cash, money
orders or cashiers' checks. (Stedman Dep. at 61-62, 88-90,
U.S.
Ex. 42.) Ms. Stedman testified that Mr. Hans had "contributed"
to at least some of the cost of the house. (Stedman Dep. at 201-02,
U.S.
Ex. 43.) Thomas Culp, an owner of National Wood Products, the company
that supplied the wood for the
New Albany
residence, testified that he dealt with and was paid by Mr. Hans, not
Ms. Stedman. (Culp Dep. at 8-10,
U.S.
Ex. 48.) Mr. Hans signed an "Affidavit of owner and/or original
contractor," which stated that the architect was paid in full. (
U.S.
Ex. 63.) The address for the real estate tax bill for the
New Albany
property was Mr. Hans's business address on High Street. (
U.S.
Ex. 64.) Mr. Hans and Ms. Stedman moved into the
New Albany
residence in July of 1978. (Stedman Dep. at 260, 298-300,
U.S.
Ex. 43.)
On
January 21, 1980
, Ms. Stedman executed a quitclaim deed transferring the
New Albany
property to "
Garland
by the Sea, Ltd." (
U.S.
Ex. 37.) The deed was not recorded until
March 13, 1980
. (
U.S.
Ex. 37.) "Garland by the Sea, Ltd." is listed on the deed as a
"company incorporated under the laws of the Commonwealth of the
Bahamas
." (
U.S.
Ex. 37.) Ms. Stedman testified that, despite this purported transfer,
she considers the New Albany property to be her property, and that the
title is only nominally in the name of Garland by the Sea, Ltd. (Stedman
Dep. at 162-63, 169, U.S. Ex. 42.) In 1984, she signed "
Garland
by the Sea, Ltd." on a warranty deed in which a strip of the
New Albany
property was conveyed to
Franklin
County
, but she reported the $19,000 sale price on her individual tax return.
(
U.S.
Exs. 38, 39; Stedman Dep. at 163-67,
U.S.
Ex. 42.)
On
April 7, 1978
, two mortgages on the
New Albany
property were recorded: a $23,000 mortgage in favor of Catherine Hans
(now deceased), mother of Mr. Hans; and a $15,000 mortgage in favor of
Maxine Ruzich. (
U.S.
Exs. 35, 36.) Ms. Stedman admits that she did not receive any money from
Mrs. Ruzich, but alleges that she received the $15,000 from Steve
Ruzich, Mrs. Ruzich's husband. (Stedman Dep. at 43,
U.S.
Ex. 42.) Ms. Stedman admits that she never informed Mrs. Ruzich that a
mortgage had been placed in her name. (Stedman Dep. at 44-47,
U.S.
Ex. 42.) Maxine Ruzich had no knowledge of the purported loan or
mortgage. (Ruzich Dep. at 12, 29-30, 34-36, 50-51,
U.S.
Ex. 44.) Mrs. Ruzich testified that her husband never mentioned loaning
money to Ms. Stedman, that she and her husband did not socialize or
conduct business with Mr. Hans or Ms. Stedman, that she never saw any
interest income from Ms. Stedman on her tax returns, that she would have
noticed if $15,000 was taken out of her joint checking account with her
husband, and that during the
admin
istration of her husband's estate, there were no papers indicating that
her husband had loaned money to Ms. Stedman. (Ruzich Dep. at 37-38,
43-45, 53,
U.S.
Ex. 44.)
On
April 11, 1978
, another mortgage on the
New Albany
property was recorded: a $15,000 mortgage in favor of Olga Tokar, Ms.
Stedman's mother. (
U.S.
Ex. 34.) Ms. Stedman admits that, contrary to the terms of the mortgage,
she did not receive any money from her mother. (Stedman Dep. at 36,
U.S.
Ex. 42.) Ms. Stedman alleges that she received the money from her
father, who is now deceased. (Stedman Dep. at 36,
U.S.
Ex. 42.) No documentation of the loan, other than the mortgage, was ever
made, and Ms. Stedman's father is the only person alleged to have
knowledge of the loan. (Stedman Dep. at 41,
U.S.
Ex. 42.) Ms. Tokar had no knowledge of the loan. Her husband never
mentioned it to her, she never saw $15,000 removed from her joint
checking account with her husband, and never saw any interest payments
from Ms. Stedman on her tax returns. (Tokar Dep. at 29, 30, 34, 36,
U.S.
Ex. 45.)
Based upon the
criminal investigation that began in January 1976, a Grand Jury for the
Southern District of Ohio returned a tax-related four count indictment
against Mr. Hans on
April 8, 1980
. After an evidentiary ruling adverse to the Government, the jury
returned a verdict of not guilty on two counts, and was deadlocked on
the other two counts. The Sixth Circuit Court of Appeals reversed the
district court's evidentiary ruling. See
United States
v. Hans, 684 F.2d 343, 346 (6th Cir. 1982). The district court then
dismissed the indictment based upon Mr. Hans's claim of double jeopardy,
United States v. Hans, 548 F. Supp. 1119, 1126 (S.D. Ohio 1982),
and the Government declined to appeal the dismissal.
During the
time of the criminal investigation and criminal trial for the tax years
1972 to 1974, Mr. Hans was litigating his civil tax liabilities for tax
years 1975 to 1983 in the United States Tax Court. See Hans v.
Commissioner [CCH Dec. 41,397(M)], 48 TCM (CCH) 766, 767 (1984); Hans
v. Commissioner [CCH Dec. 41,424(M)], 48 TCM (CCH) 885 (1984). The
civil Tax Court cases were decided in the Government's favor. After
completion of the Tax Court cases, the IRS assessed the taxes and filed
notices of federal tax liens against Mr. Hans. (
U.S.
Exs. 65, 66.) The IRS also filed notices of federal tax liens against
Garland
by the Sea, Ltd., with respect to the
New Albany
property, and against Ms. Stedman and Rino Borean as nominees with
respect to the Indian Mound property. (
U.S.
Exs. 67, 68.) During this time, the IRS attempted, unsuccessfully, to
locate other assets of Mr. Hans that could be seized. (
U.S.
Ex. 69.)
The IRS filed
the nominee lien against the Indian Mound property on
August 24, 1983
. (
U.S.
Ex. 68.) On September 27, 1983, a land contract between Ms. Stedman and
Nancy Oglesby on the Indian Mound property was recorded. (
U.S.
Ex. 20.) Dale Oglesby and Mr. Hans signed the land contract as
witnesses. (
U.S.
Ex. 20.) The land contract stated a purchase price of $109,585. (
U.S.
Ex. 20.) The land contract provided for an initial payment of $9,585 and
eighteen monthly payments of $700, with the balance to be paid on May 1,
1985. (
U.S.
Ex. 20.)
Payments on
the land contract were made by check from a joint account of Dale and
Nancy Oglesby. (
U.S.
Ex. 71.) Although Ms. Stedman was the only payee listed on the checks,
several of the checks were endorsed by Mr. Hans as well as Ms. Stedman.
(
U.S.
Ex. 71.) Ms. Stedman testified that Mr. Hans's signature may be on those
checks because she asked him to cash the checks for her. (Stedman Dep.
at 192-93,
U.S.
Ex. 43.)
Ms. Oglesby
made the $700 monthly payments through
April 1, 1985
. (D. Oglesby Dep. at 52,
U.S.
Ex. 46.) The Oglesbys did not, however, pay the remaining balance on May
1, 1985. Instead, Dale Oglesby alleges that the Oglesbys were permitted
to make a one-time payment of $17,000 and on October 15, 1986, began to
make monthly payments of $1000 instead of $700. (D. Oglesby Dep. at 52,
U.S.
Ex. 46; Stedman & Garland Ex. 11.)
In early 1990,
the Oglesbys decided to purchase the Indian Mound property outright, and
determined from their records that they would need to pay $30,000 to
purchase the property. (D. Oglesby Dep. at 53-54,
U.S.
Ex. 46.) Mr. Hans, however, told them that they would need to pay
$85,000 to purchase the property. (D. Oglesby Dep. at 54,
U.S.
Ex. 46.) In February of 1990, the Oglesbys made arrangements to obtain a
loan from a bank. (D. Oglesby Dep. at 53-55,
U.S.
Ex. 46.) A title search conducted in anticipation of the purchase
revealed the existence of the IRS nominee lien on the property. (D.
Oglesby Dep. at 15-16, 45-46,
U.S.
Ex. 46.) Mr. Oglesby testified that after the IRS lien was discovered,
Mr. Hans told Mr. Oglesby that he was not "ready to fight this
battle yet" and instructed Mr. Oglesby not to make any further
payments until he could convey clear title. (D. Oglesby Dep. at 15-16,
40-41,
U.S.
Ex. 46.) When asked why the Oglesbys stopped making payments one year
prior to learning about the IRS lien, Mr. Oglesby testified that Mr.
Hans may have permitted them to stop making payments in 1989 because the
Oglesbys were starting a new business at that time. (D. Oglesby Dep. at
55,
U.S.
Ex. 46.) The Oglesbys continue to reside at the Indian Mound residence,
but have made no payments on the contract since March 5, 1989, and have
made no rental payments on the property. (Def. Stedman Ex. 11; D.
Oglesby Dep. at 51, 55-56,
U.S.
Ex. 46.)
On June 21,
1985, the
United States
filed suit against Mr. Hans to reduce to judgment the assessments for
tax years 1975 to 1983. Four years later, on April 25, 1989, the
district court entered a judgment in favor of the
United States
for tax years 1976 to 1983. The district court held against the
United States
with respect to the 1975 year on the ground that the claim was barred by
the statute of limitations. On December 14, 1989, the Sixth Circuit
Court of Appeals reversed, holding that the 1975 year was not
time-barred. See United States v. Hans [90-2 USTC ¶50,600], 921
F.2d 81, 82 (6th Cir. 1990). On March 15, 1993, the district court
entered a final judgment against Mr. Hans with respect to the 1975 to
1983 income tax assessments. (
U.S.
Ex. 72.) The
United States
served collection discovery upon Mr. Hans on May 26, 1993, but there was
no response. (Riordan Aff. ¶¶2-3, U.S. Ex. 73.)
On March 17,
1994, Mr. Hans died of cancer at the age of 63 while still living with
Ms. Stedman in the
New Albany
residence. (
U.S.
Ex. 74.) In April of 1995, Jo Ellen Kaiser, Mr. Hans's daughter and the
admin
istrator of his estate, filed an inventory in the probate court of
Franklin
County
claiming the
New Albany
realty and the Indian Mound realty as property of Mr. Hans's estate. Ms.
Stedman filed exceptions to the inventory. The estate thereafter filed
an action in the
Common Pleas Court
for
Franklin
County
.
DISCUSSION
The
United States
argues that it is entitled to judgment on the following claims: Count
Two for the fraudulent conveyance to Shirley Stedman; Count Four for the
lien of Nancy and Dale Oglesby; Count Five against Shirley Stedman as
nominee of Mr. Hans; and Count Six against Defendant Garland as nominee
of Shirley Stedman. Plaintiff Kaiser supports the motion for partial
summary judgment filed by the
United States
.
Defendants
Stedman and
Garland
contest the motion for partial summary judgment filed by the
United States
on the grounds that genuine issues of material fact preclude an entry of
judgment as a matter of law. Defendants Stedman and Carland also assert
that they are entitled to summary judgment on the claims against them
because there exists no genuine issues of material fact relating to
several elements of the claims, and the
United States
cannot prove all of the essential elements of the claims.
I.
STANDARD OF REVIEW
Summary
judgment motions are governed by Rule 56 of the Federal Rules of Civil
Procedure. Rule 56(c) provides:
[Summary
judgment] . . . shall be rendered forthwith 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
judgment as a matter of law.
"[T]his
standard provides that the mere existence of some alleged factual
dispute between the parties will not defeat an otherwise properly
supported motion for summary judgment; the requirement is that there be
no genuine issue of material fact." Anderson v.
Liberty Lobby, Inc., 477
U.S.
242, 247-48 (1986) (emphasis in original); Kendall v. Hoover Co.,
751 F.2d 171, 174 (6th Cir. 1984).
Summary
judgment will not lie if the dispute about a material fact is genuine;
"that is, if the evidence is such that a reasonable jury could
return a verdict for the nonmoving party." Anderson, 477
U.S.
at 248. The purpose of the procedure is not to resolve factual issues,
but to determine if there are genuine issues of fact to be tried. See
Lashlee v. Sumner, 570 F.2d 107, 111 (6th Cir. 1978). Therefore,
summary judgment will be granted "only where the moving party is
entitled to judgment as a matter of law, where it is quite clear what
the truth is . . . [and where] no genuine issue remains for trial, . . .
[for] the purpose of the rule is not to cut litigants off from their
right of trial by jury if they really have issues to try." Poller
v. Columbia Broadcasting Sys., 368 U.S. 464, 467 (1962) (quoting Sartor
v. Arkansas Natural Gas Corp., 321 U.S. 620, 627 (1944)); accord
County of Oakland v. City of Berkley, 742 F.2d 289, 297 (6th Cir.
1984).
In making this
inquiry, the standard to be applied by the Court mirrors the standard
for what was formerly referred to as a directed verdict. See Celotex
Corp. v. Catrett, 477
U.S.
317, 323 (1986); Anderson, 477
U.S.
at 250.
"The
primary difference between the two motions is procedural; summary
judgment motions are usually made before trial and decided on
documentary evidence, while directed verdict motions are made at trial
and decided on the evidence that has been admitted." Bill
Johnson's Restaurants, Inc. v. NLRB, 461
U.S.
731, 745, n.11 (1983). In essence, though, the inquiry under each is the
same: 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.
Anderson,
477
U.S.
at 251-52. Accordingly, although summary judgment should be cautiously
invoked, it is an integral part of the Federal Rules, which are designed
"to secure the just, speedy and inexpensive determination of every
action." Celotex, 477
U.S.
at 327 (quoting Fed. R. Civ. P. 1).
In a motion
for summary judgment the moving party bears the "burden of showing
the absence of a genuine issue as to any material fact, and for these
purposes, the [evidence submitted] must be viewed in the light most
favorable to the opposing party." Adickes v. S.H. Kress &
Co., 398
U.S.
144, 157 (1970) (footnote omitted); accord Adams v. Union Carbide
Corp., 737 F.2d 1453, 1455-56 (6th Cir. 1984). Inferences to be
drawn from the underlying facts contained in such materials must also be
considered in the light most favorable to the party opposing the motion.
See
United States
v. Diebold, Inc., 369
U.S.
654, 655 (1962); Watkins v.
Northwestern Ohio
Tractor Pullers Ass'n, 630 F.2d 1155, 1158 (6th Cir. 1980).
Additionally, "unexplained gaps" in materials submitted by the
moving party, if pertinent to material issues of fact, justify denial of
a motion for summary judgment. Adickes, 398
U.S.
at 157-60.
If the moving
party meets its burden and adequate time for discovery has been
provided, summary judgment is appropriate if the opposing party fails to
make a showing sufficient to establish the existence of an element
essential to that party's case and on which that party will bear the
burden of proof at trial. See Celotex, 477
U.S.
at 322. The existence of a mere scintilla of evidence in support of the
opposing party's position is insufficient; there must be evidence on
which the jury could reasonably find for the opposing party. See
Anderson, 477
U.S.
at 252.
When a motion
for summary judgment is made and supported as provided in this rule, an
adverse party may not rest upon the mere allegations or denials of the
adverse party's pleading, but the adverse party's response, by
affidavits or as otherwise provided in this rule, must set forth
specific facts showing that there is a genuine issue for trial. If the
adverse party does not so respond, summary judgment, if appropriate,
shall be entered against the adverse party.
Fed.
R. Civ. P. 56(e).
II.
CROSS-MOTIONS FOR SUMMARY JUDGMENT BY THE UNITED STATES AND DEFENDANTS
STEDMAN AND
GARLAND
The
United States
made the first tax assessment at issue in this case in 1979. A federal
tax lien arises upon assessment and attaches to all property and rights
to property belonging to the taxpayer, here, Mr. Hans. See 26
U.S.C. §§6321 , 6322. At the time of the first assessment, however,
deeds had been filed by Mr. Hans transferring the
New Albany
property and the Indian Mound property to Ms. Stedman. Ms. Stedman
therefore argues that the
New Albany
property and the Indian Mound property did not belong to Mr. Hans at the
time of the assessments, and that the lien did not attach to these
properties.
The
United States
puts forth two bases for foreclosing on the
New Albany
property and the Indian Mound property. First, the
United States
argues that the transfers made by Mr. Hans were fraudulent and therefore
voidable under the laws of the State of
Ohio
. Second, the
United States
argues that Ms. Stedman holds title to these properties merely as a
nominee of Mr. Hans. Based upon either of these alternative theories,
the
United States
contends that the
New Albany
property and the Indian Mound property remained the property of Mr.
Hans, and that the liens therefore attached to the two pieces of
property.
Defendants
Stedman and
Garland
argue that the fraudulent conveyance claims are barred by the
Ohio
statute of limitations, and that the
United States
has not shown that it is entitled to judgment as a matter of law on any
of its claims. Defendants Dale and Nancy Oglesby also contest the motion
for partial summary judgment filed by the
United States
.
A.
Statute of Limitations
Defendants
Stedman and
Garland
assert that the
Ohio
fraudulent conveyance claims brought by the
United States
are barred by the applicable statute of limitations. 8
The
United States
argues that as sovereign, it is not bound by state statutes of
limitation. See United States v. Summerlin [40-2
USTC ¶9633 ], 310 U.S. 414, 415 (1940) ("It is well settled
that the United States is not bound by state statutes of limitation or
subject to the defense of laches in enforcing its rights.").
Defendants Stedman and Garland assert that when the United States seeks
to enforce a right created solely by a state statute, the United States
must be bound by the state statute of limitations, citing United
States v. Vellalos [92-1
USTC ¶50,227 ], 780 F. Supp. 705, 708 (D. Haw. 1992), appeal
dismissed, 990 F.2d 1265 (9th Cir. 1993). 9
In Vellalos,
the district court held that the extension of Summerlin to
actions brought pursuant to state real property statutes would
improperly strip away state authority to create real property law. See
[92-1 USTC
¶50,227 ], 780 F. Supp. at 708. The
United States
argues that the holding in Vellalos is bad law as it is contrary
to Summerlin. The
United States
asserts that Vellalos has been widely criticized, and that the Vellalos
court is the only court in the nation to hold that the
United States
is subject to state statutes of limitation set forth in state versions
of the Uniform Fraudulent Transfer Act. See cases cited in U.S.
Supp. Brief at 13.)
The Sixth
Circuit has rejected the reasoning of Vellalos, holding that the
United States
is not subject to the statute of limitations set forth in
Kentucky
's version of the Uniform Fraudulent Conveyance Act. See
United States
v. Isaac, No. 91-5830, 1992 WL 159795, at *2 (6th Cir.
July 10, 1992). Following the Sixth Circuit's decision in Isaac,
the United States District Court for the Northern District of Ohio held
that the
United States
is not bound by the limitations period applicable to
Ohio
's fraudulent conveyance statute. See Goldstein v. United States
[93-2 USTC
¶50,478 ], No. 1:91CV-0969, 1993 WL 388702, at *3 n.1 (N.D. Ohio
July 7, 1993). Pursuant to Isaac, this Court also finds that the
United States
is not bound by
Ohio
's statute of limitations. See 1992 WL 159795 at *2.
The
United States
is subject, however, to statutes of limitations to which it binds
itself. See Mullilain [Mullikin] v.
United States
[92-1
USTC ¶50,020 ], 952 F.2d 920, 926 (6th Cir. 1991). Under the United
States Tax Code, the
United States
in most cases is required to assess a taxpayer's liability within three
years of the filing date for the tax year at issue. See 26 U.S.C.
§6501(a) (West Supp. 1998). The United States must initiate collection
of the tax, by levy or by a court proceeding, within six or ten 10
years after the date of assessment. See 26 U.S.C. §6502(a) (West
Supp. 1998).
In the civil
tax case against Mr. Hans, the Sixth Circuit held that the
United States
had taken timely action against Mr. Hans for the tax years 1975 through
1983. See Hans [90-2
USTC ¶50,600 ], 91 F.2d at 82. A question remains, however, as to
whether the
United States
has taken timely action under the Tax Code against the transferees of
Mr. Hans's property. The answer to this question depends upon the means
undertaken to recover from the transferees. The
United States
may proceed against transferees pursuant to 26 U.S.C. §6901 , foreclose
on its tax liens, or foreclose on the judgment lien it obtained in 1993.
11
Pursuant to 26
U.S.C. §6901 , income tax liabilities against transferees may be
assessed and collected "in the same manner and subject to the same
provisions and limitations" as the tax liabilities of the
transferor taxpayer. 26 U.S.C. §6901(a) (1989). Section
6901 provides that the period of limitations for assessment against
the initial transferee is one year following the expiration of the
period of limitation for assessment against the transferor. See
26 U.S.C. §6901(c)(1) (1989). If, before the expiration of the period
of limitation for the assessment of the transferee, a court proceeding
for the collection of the tax liability has begun against the
transferor, then the period of limitation for assessment against the
transferee expires one year after the return of execution in the court
proceeding. See 26 U.S.C. §6901(c).
Although an
action against the transferees in this case under 26 U.S.C. §6901 may
be barred by the applicable statute of limitations, the United States
has represented to the Court that it is not proceeding against Ms.
Stedman pursuant to §6901, (U. S. Supp. Mem. of Dec. 3, 1998 at 6-7, R.
133), and Defendants Stedman and Garland concede that the §6901
limitation period is not applicable. (Stedman & Garland Dec. 7, 1998
Supp. Mem. at 7, R. 134.) The Court therefore will not apply the §6901
limitation period to the government's claims.
The complaint
filed by the United States in this action states that its claims are
brought "to set aside the fraudulent conveyances of real property
made by Joseph H. Hans, and to foreclose federal tax liens and judgment
liens upon such property;" (U.S. Ans. and Counterclaims at 5-6, R.
6). An action to set aside the conveyances is an alternative to the
provisions for direct transferee liability in §6901. See
United States
v. Percina, 877 F. Supp. 215, 217 (D. N.J. 1994). The
United States
does not seek through this action to impose personal liability on the
transferees. The action brought by the
United States
is an in rem action to set aside fraudulent conveyances of property
rather than an in personam action to make the transferees personally
liable for Joseph Hans's taxes. See Hall v. United States [68-2
USTC ¶9665], 403 F.2d 344, 345-46 (5th Cir. 1969).
The
United States
may also bring an action to foreclose on its tax liens. A federal tax
lien arises upon assessment and attaches to all property and rights to
property belonging to a taxpayer. See 26 U.S.C. §§6321, 6322.
The Tax Code provides that the lien "shall continue until the
liability for the amount so assessed . . . is satisfied or becomes
unenforceable by reason of lapse of time." 26 U.S.C. §6322. Once
valid, the lien survives as long as liability for the underlying tax is
enforceable. See United States v. Hodes [66-1 USTC ¶9232], 355
F.2d 746, 748 (2d Cir. 1966).
As previously
stated, the
United States
is required to initiate collection efforts against a taxpayer within six
or ten years of the date of assessment. See 26 U.S.C. §6502(a).
The United States initiated collection against Mr. Hans within the
period stated in §6502, but did not file claims against the transferees
until December 11, 1995, sixteen years after the earliest relevant
assessment against Mr. Hans in 1979.
In United
States v. Updike [2 USTC ¶533], 281 U.S. 489 (1930), the Supreme
Court held that the then six-year limitation period on collection
proceedings was applicable to an action to collect corporate taxes
brought against stockholders as transferees of the defunct corporation's
assets:
[T]he present
suit, though not against the corporation but against its transferees to
subject assets in their hands to the payment of the tax, is in every
real sense a proceeding in court to collect a tax. The tax imposed upon
the corporation is the basis of the liability, whether sought to be
enforced directly against the corporation or by suit against its
transferees.
Updike
[2 USTC ¶533], 281
U.S.
at 368. Having found that the action against the transferees was one to
collect a tax, the Supreme Court held that the statute fixing the
limitations period for collection proceedings was applicable. See id.
at 368-69. Because the
United States
failed to bring a collection proceeding against the corporation within
the limitation period, the
United States
was precluded from bringing a collection proceeding against the
transferee stockholders. See id. The transferees of Mr. Hans in
the action before this Court argue that the
United States
is barred from bringing a collection action against them because it
failed to initiate this action within the required period after
assessment against Mr. Hans. See id.; 26 U.S.C. §6502(a). 12
The
United States
argues that Updike is distinguishable from the case before this
Court because in Updike, no timely action was filed against the
transferor. The Supreme Court in Updike held that because the
period of limitation had run in favor of the corporation, it had also
run in favor of the transferees. See [2 USTC ¶533], 281
U.S.
at 369. The
United States
therefore reasons that because it brought an action against Mr. Hans
within the limitation period, its action against the transferees is
timely. The Fifth Circuit made this same distinction in Hall v.
United States [68-2 USTC ¶9665], 403 F.2d 344, 346 (5th Cir. 1969).
In Hall, the United States sought to set aside conveyances
fraudulently made to transferees, but did not make assessments against
the transferees within the six year period of §6502. The Fifth Circuit
held that the statute of limitation in §6502 was inapplicable. See
Hall [68-2 USTC ¶9665], 403 F.2d at 346. The court in Hall
found that the case was distinguishable from Updike for two
reasons. First, in Updike there was no timely suit against the
transferor, and the action against the transferee was the first effort
at collection of the tax liability. Second, the court made a distinction
between a suit to collect a tax from a third party successor to the
assets of the taxpayer corporation, and a suit against a transferee
under conveyances made to defraud the United States as a judgment
creditor. See Hall [68-2 USTC ¶9665], 403 F.2d at 347. The court
held that the action against a successor is a suit to collect taxes, and
the suit against a transferee is a suit to follow assets in order to
collect a judgment. See id. The court found that the successor
action would be barred by §6502, but that the limitation period in §6502
is not applicable to the transferee action. See id.
Similarly, in United
States v. Brickman [97-1 USTC ¶50,350], 906 F. Supp. 1164, 1169
(N.D. Ill. 1995), the district court held that once the United States
obtained judgment against the transferor, the statute of limitations in
§6502 stops running, and the United States can enforce judgment at any
time. Based upon this reasoning, the
United States
argues that its action against the transferees is timely.
The
United States
can also proceed under 26 U.S.C. §6332, which provides that "any
person in possession of . . . property subject to levy upon which a levy
has been made shall, upon demand . . . surrender such property . . . to
the Secretary." 26 U.S.C. §6332(a). Section 6332 further provides
that a person in possession who fails to surrender the property is
personally liable for the tax liability underlying the levy. See
26 U.S.C. §6332(c). The Sixth Circuit has held that the six year
limitation period of §6502 is not applicable to actions bought under §6332.
See United States v. Weintraub [80-1 USTC ¶9172], 613 F.2d 612,
620 (6th Cir. 1979). The Sixth Circuit in Weintraub further held
that where a timely collection is brought against a taxpayer, there is
no time limitation on §6332 actions against third parties to enforce
liability:
[T]he only
limitation of §6502 is that the levy be made or proceeding in court
begun against the taxpayer within six years of the assessment. There is
no time limit whatsoever on an action against the taxpayer to enforce a
timely levy or judgment obtained in a timely filed court proceeding.
Id.
at 620-21. The court found that §6502
requires only that a collection action against the taxpayer be brought
within six years of the assessment, and that there is no time limit in
the Tax Code to enforce a timely levy or judgment obtained in a
timely collection proceeding. See id. The court reasoned that
even if §6502 could be construed to apply to §6332, the limitation
period would be complied with by taking timely collection action against
the transferor. See id. at 621.
Defendants
Stedman and
Garland
now concede that the limitations period for the government to proceed
against the transferee is the limitations period for the government to
proceed against the transferor. (Stedman and Garland Dec. 7, 1998 Supp.
Mem. at 6, R. 134.) Defendants Stedman and
Garland
further concede that because the government has a valid judgment which
it can assert against Mr. Hans' estate, there is no limitations bar
against the government's fraudulent conveyance claim against Ms. Stedman
as a transferee. (Stedman and Garland Dec. 7, 1998 Supp. Mem. at 6-7, R.
134.)
As to the
March 15, 1993 judgment lien obtained against Mr. Hans, such liens are
valid for twenty years, and the government's efforts to enforce the
judgment lien are also timely. See 28 U.S.C. §3201(c)(1). Unlike
other liens, tax liens do not merge into judgment liens and both the tax
liens and the judgment liens remain simultaneously enforceable. See
Bank of Celina [87-2 USTC ¶9440], 823 F.2d at 913.
The Court
finds that the
United States
has shown as a matter of law that its claims are not barred by a state
or federal statute of limitations.
B.
Merits of the Fraudulent Conveyance Claims
"Where a
taxpayer has fraudulently disposed of property prior to the existence of
federal tax liens, the
United States
has standing to seek relief under the fraudulent conveyance laws of the
particular State in which the property is located." United
States v. Hughel, 20 F. Supp.2d 1154, 1157 (S.D. Ohio 1997) (citing Commissioner
v. Stern [58-2 USTC ¶9594], 357 U.S. 39 (1958) and United States
v. Fernon [81-1 USTC ¶9287], 640 F.2d 609 (5th Cir. 1981)). The
United States
accordingly brings state law claims against Stedman,
Garland
, and the Oglesbys as transferees to alleged fraudulent conveyances made
prior to the existence of the federal tax liens.
The substance
of the
United
State
's fraudulent conveyance claim is governed by
Ohio
law. The transfers sought to be avoided took place in 1977. The law in
effect at that time was the Ohio Uniform Fraudulent Conveyances Act
("UFCA"). See Ohio Revised Code §1336.01 et seq.,
(
Anderson
1979) (repealed 1990). In order to clarify certain provisions of the
UFCA, the UFCA was replaced by the Ohio Uniform Fraudulent Transfer Act
("UFTA") in 1990. See
Ohio
Revised Code §1336.01 et seq., (
Anderson
1992). The
United States
argues that the UFCA, rather than the UFTA, is applicable in this case
because the UFTA is not retroactive. The bankruptcy division of this
Court has previously held that the UFTA is not retroactive, In re
Taubman, 160 B.R. 964, 989 (Bankr. S.D. Ohio 1993), and Defendants
Stedman and
Garland
concede that the UFCA provides the applicable law. (Stedman and Garland
Oct. 16, 1998 Mem. at 2 n.1, R. 125.) The Court will therefore apply the
UFCA rather than the UFTA.
The UFCA
provides that:
Where
a conveyance or obligation is fraudulent as to a creditor, such
creditor, when his claim has matured, may, as against any person except
a purchaser for fair consideration without knowledge of the fraud at the
time of the purchase, . . . :
(1)
Have the conveyance set aside or obligation annulled to the extent
necessary to satisfy the claim; or
(2)
Disregard the conveyance and attach or levy execution upon the property
conveyed.
Ohio
Rev. Code Ann. §1336.09(A) (Anderson 1979) (repealed 1990).
Defendants
Stedman and
Garland
argue that the 1977 transfers cannot be considered fraudulent as to the
United States
because the
United States
was not a creditor of Mr. Hans until it filed its first tax assessment
against him in 1979. However, Ohio Revised Code §1336.07, under which
the
United States
brings its claim, expressly applies to future creditors:
Every
conveyance made . . . 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 or future creditors.
Ohio
Rev. Code Ann. §1336.07 (
Anderson
1979) (repealed 1990). In addition, the
United States
is deemed a creditor for income taxes on the last day of the taxable
period, or at least no later than the date the return is originally due,
i.e., April 15 of the next year. See United States v. Adams
Bldg., Inc. [76-1 USTC ¶9221], 531 F.2d 342, 343 n.2 (6th Cir.
1976) (taxes are due and owing on the date on which a tax return is due
to be filed); In re Certified Credit Corp. [71-1 USTC ¶9446],
329 F. Supp. 1402, 1403-04 (S.D. Ohio 1971) (United States is creditor
of income tax debt upon close of tax year, or no later than date return
is due). Accordingly, in May 1977 when Mr. Hans transferred the two
properties to Ms. Stedman, the
United States
was a present creditor of Mr. Hans as to the 1975 and 1976 income taxes
and a future creditor as to the 1977 through 1983 income taxes. Thus,
the
United States
may invoke the remedies of the UFCA if it can show that Mr. Hans
transferred the properties to Ms. Stedman with actual intent to hinder,
delay, or defraud present or future creditors, including the IRS.
The party
asserting fraudulent intent in order to void a conveyance of property
pursuant to the Ohio UFCA bears the burden of proving the elements of
the fraud by clear and convincing evidence. See United States v.
Berman [89-2 USTC ¶9524], 884 F.2d 916, 921 (6th Cir. 1989); Household
Finance Corp. v. Altenberg, 214 N.E.2d 667, 669 (
Ohio
1966). The Supreme Court of Ohio has recognized, however, that with
respect to the issue of actual intent, direct proof may be impossible:
Due to the
difficulty in finding direct proof of fraud, courts of this state began
long ago to look to inferences from the circumstances surrounding the
transaction and the relationship of the parties involved.
Stein
v. Brown, 480 N.E.2d 1121, 1124 (
Ohio
1985).
In McKinley
Fed. S. & L. v. Pizzuro Enterprises, Inc., 585 N.E.2d 496, 500
(Ohio Ct. App. 1990), the
Ohio
appellate court noted that in fraudulent conveyance cases,
[C]ertain
traditionally designated "badges" or indicia of fraud,
circumstances which usually or frequently attend a conveyance designed
to hinder, delay, or defraud creditors, in concert with other suspicious
circumstances, have generally been held to be sufficient to show fraud
and invalidate the transfer of property.
These
"badges" of fraud include, but are not limited to: inadequate
consideration, transfer of the debtor's entire estate, insolvency
resulting from the transfer, the relationship of the parties, the
debtor's retention of an interest, benefit or control in the transferred
property, and a threat or pendency of litigation. See Wagner v.
Galipo, 646 N.E.2d 844, 849 (Ohio Ct. App. 1994); Cardiovascular
& Thoracic Surgery of Canton, Inc. v. DiMazzio, 524 N.E.2d 915,
918 (Ohio Ct. App. 1987); United States v. Mantarro, No. 88CV871,
1992 WL 551483, at *4 (N.D. Ohio June 19, 1992).
The
United States
argues that the following badges of fraud are present in this case:
relationship of the parties, threat of litigation, retention of
possession or control of the property, dealings in cash, the use of
nominees or fictitious parties, and inadequate consideration.
The Court
first notes that the two pieces of property were not transferred
directly from Mr. Hans to Ms. Stedman. In September of 1976, Mr. Hans
recorded a quitclaim deed transferring a one-half interest in the
New Albany
property to Rino Borean. (
U.S.
Ex. 26.) Title to the
New Albany
property was later conveyed to Ms. Stedman by means of two deeds, a
quitclaim deed from Mr. Hans to Ms. Stedman, and a quitclaim deed from
Rino Borean to Ms. Stedman. (
U.S.
Exs. 27, 33.) During the pendency of the dissolution action, deeds were
recorded which transferred title to the Indian Mound property to Rino
Borean, and then to the Billy G Corporation. (
U.S.
Exs. 10, 11, 12.) Following the entry of dissolution, quitclaim deeds
were recorded transferring title from the Billy G Corporation to Mr.
Hans, from Mr. Hans to Ms. Stedman, and from the Billy G Corporation to
Ms. Stedman. (
U.S.
Exs. 13, 14, 15.)
It is
undisputed that an intimate relationship existed between Mr. Hans and
Ms. Stedman, and Ms. Stedman alleges that they lived as husband and wife
for four months prior to the transfers. Moreover, following the alleged
dissolution, they lived together for 17 years until Mr. Stedman's death.
The undisputed evidence shows that there was a relationship between Mr.
Hans and Ms. Stedman, a badge of fraud under the UFCA.
As to the
threat of litigation, Mr. Hans was contacted by an agent of the Criminal
Investigation Division of the IRS on January 9, 1976, and on November 8,
1976, he was advised that the IRS would be contacting third parties due
to his lack of cooperation. Both of these contacts took place prior to
the transfer of the two properties in May of 1977. The undisputed
evidence shows that prior to the transfers, Mr. Hans was aware of a
criminal IRS investigation against him for unpaid taxes. The Court finds
that Mr. Hans's knowledge of the criminal IRS investigation prior to the
transfers constitutes a badge of fraud.
The evidence
further demonstrates that Mr. Hans retained possession or control of the
properties. On May 5, 1977, three days after the decree of dissolution
was entered, a building permit was filed for the
New Albany
residence, listing Mr. Hans as the owner. (
U.S.
Ex. 60.) In September of 1997, Mr. Hans and Ms. Stedman jointly signed a
$65,000 promissory note to obtain a construction loan for the
New Albany
residence. (
U.S.
Ex. 61.) Ms. Stedman admits that Mr. Hans paid for some of the cost of
constructing the residence, but she cannot remember which items he paid
for. (Stedman Dep. at 87,
U.S.
Ex. 42.) Thomas Culp, an owner of National Wood Products, the company
that supplied the wood for the
New Albany
residence, testified that he dealt with and was paid by Mr. Hans, not
Ms. Stedman. (Culp Dep. at 8-9, 12-13, 18,
U.S.
Ex. 48.) Mr. Hans, not Ms. Stedman, signed an "affidavit of owner
and/or original contractor," which stated that the architect was
paid in full. (
U.S.
Ex. 63.) The address for the real estate tax bill was Mr. Hans's
business address on High Street. (
U.S.
Ex. 64.) Mr. Hans and Ms. Stedman moved into the
New Albany
residence in July of 1978, and Mr. Hans continued to live there until
his death in 1994. (Stedman Dep. at 298,
U.S.
Ex. 43.) The Court finds that the evidence on the record shows that Mr.
Hans retained possession or control of the
New Albany
property after he transferred title to the property.
As to the
Indian Mound property, following the dissolution, Mr. Hans lived on the
property in the party house behind the main residence. (Stedman Dep. at
17,
U.S.
Ex. 42.) He later moved back into the main residence on the Indian Mound
property until both he and Ms. Stedman moved to the
New Albany
residence. (Stedman Dep. at 18, 298,
U.S.
Exs. 42, 43.) Pursuant to the land contract, Nancy Oglesby made payments
by check to Ms. Stedman, but many of the checks were endorsed by Mr.
Hans. (
U.S.
Ex. 71.) Ms. Stedman testified at her deposition that she probably asked
Mr. Hans to cash some of the checks for her, and that is why his
signature appears on the checks. (Stedman Dep. at 192-93,
U.S.
Ex. 43.) The Court finds that the evidence is equivocal regarding Mr.
Hans's alleged possession or control of the Indian Mound property.
There is
evidence in the record of dealings in cash. At the time of the allegedly
fraudulent transactions, neither Mr. Hans nor Ms. Stedman had savings or
checking accounts, and both dealt in cash. (Stedman Dep. at 20-21, 180,
U.S.
Exs 42, 43.) Ms. Stedman testified that Mr. Hans paid her in cash, and
that she borrowed money for the construction of the residence on the
New Albany
property, and kept the borrowed money in cash form. (Stedman Dep. at
62-63,
U.S.
Ex. 42.) Ms. Stedman further testified that she paid for the
construction bills by cash, money orders, or cashiers' checks. (Stedman
Dep. at 61-62, 88-90,
U.S.
Ex. 42.) The Court finds that the undisputed evidence shows dealings in
cash.
The record
also contains evidence of the use of nominees or fictitious parties. As
previously discussed, the properties were not transferred directly to
Ms. Stedman, but were first transferred to third parties, Rino Borean
and the Billy G Corporation. Mr. Borean testified at his deposition that
Mr. Hans asked him to place the Indian Mound property in his name
because Mr. Hans was about to go through a divorce. (Borean Dep. at 17,
20,
U.S.
Ex. 49.) Mr. Borean was not aware that Mr. Hans also placed the
New Albany
property in Mr. Borean's name. (Borean Dep. at 10, 30-31,
U.S.
Ex. 49.) Mr. Borean testified that he never took possession of either
the Indian Mound property or the
New Albany
property, and that he considered both of the properties to be owned by
Mr. Hans. (Borean Dep. at 10, 30-31,
U.S.
Ex. 49.) Mr. Borean testified that Mr. Hans later directed him to sign
the property over to Billy G Corporation, and Mr. Borean did so. Ms.
Stedman testified that Mr. Hans transferred the property to the Billy G
Corporation in order to facilitate a sale of the property to Mr.
Garland. (Stedman Dep. at 217,
U.S.
Ex. 43.) Ms. Stedman testified that the deal did not go through, so the
property was then transferred to Ms. Stedman pursuant to the dissolution
decree. (Stedman Dep. at 221,
U.S.
Ex. 43.) Ms. Stedman has offered no explanation, however, for the
transfers to Rino Borean. The Court finds that the undisputed evidence
shows the use of nominees or fictitious parties, a badge of fraud.
The
United States
also argues that inadequate consideration was given for the transfers.
As to the transfers to and from third parties, Mr. Borean and the Billy
G Corporation, there is no evidence of monetary consideration over one
dollar for each transaction.
It is
undisputed that no monetary consideration was given for the transfers to
Ms. Stedman. Ms. Stedman argues, however, that the transfers were made
pursuant to the divorce settlement between herself and Mr. Hans, and
that the dissolution of the common law marriage was consideration for
the transfers. Under the common law, a transfer made pursuant to a bona
fide separation agreement is for fair consideration. See Marine
Midland Bank-
New York
v. Batson, 332 N.Y.S.2d 714, 718 (N.Y. Sup.
Ct.
1972); Mitchell v. Wilmington Trust Co., 449 A.2d 1055, 1060
(Del. Ch. 1982) (conveyance is for fair and valuable consideration if
made in contemplation of divorce which is subsequently obtained).
The
United States
has offered evidence, however, tending to show that the separation
agreement and divorce settlement were not bona fide and made in good
faith. First, there is some dispute as to whether Ms. Stedman and Mr.
Hans actually entered into a common law marriage. They did not inform
their family or friends that they were holding themselves out as husband
and wife. (Stedman Dep. at 13-14, 182-83, 233-35, 264-66,
U.S.
Exs. 42, 43; Tokar Dep. at 23-25,
U.S.
Ex. 45.) The purported common law marriage lasted only four months,
allegedly beginning three days before the IRS's contact with Mr. Hans.
Second, it is not clear whether the dissolution proceeding was entered
into in good faith. If no valid marriage existed, then the agreement to
dissolve the marriage had no effect. An agreement to dissolve an
association that does not exist has no value, and cannot constitute
consideration. Even if Mr. Hans and Mr. Stedman had a valid common law
marriage, the circumstances surrounding the dissolution are suspect. The
petition for dissolution was filed three days after the court decision
finding that Mr. Hans was entitled to the Indian Mound property and the
New Albany
property. Moreover, Mr. Hans continued to live with Ms. Stedman for
seventeen years after the purported dissolution.
Ms. Stedman
attempts to explain the circumstances by alleging that she became
pregnant in 1976 and wanted to get married because of the child. Soon
after, Mr. Hans allegedly began drinking heavily, and Ms. Stedman
decided to terminate the pregnancy and the marriage. Following the
dissolution, Mr. Hans stopped drinking, and she allowed him to move back
in the house.
Although the
timing of these events makes Ms. Stedman's explanation suspect, Ms.
Stedman has produced some evidence showing that the marriage and
dissolution were valid. The Court therefore finds that the
United States
has not shown as a matter of law that no consideration was given for the
transfers. The
United States
has, however, demonstrated the following badges of fraud in relation to
the conveyances: relationship between the parties, threat of litigation,
retention of possession or control as to the
New Albany
property, dealings in cash, and the use of nominees or fictitious
parties.
Ohio
courts have held that evidence of a sufficient number of badges of fraud
can shift the burden to the transferor to show that the conveyance is
not fraudulent. See, e.g., Cardiovascular & Thoracic Surgery,
524 N.E.2d at 918; Cresho v. Cresho, 646 N.E.2d 183, 186 (Ohio
Ct. App. 1994); Baker & Sons Equipment Co. v. GSO Equip. Leasing,
Inc., 622 N.E.2d 1113, 1118 (Ohio Ct. App. 1993); see also Rabin
v. Delacruz, No. 94-3943,1996 WL 6531, at *4 (6th Cir. Jan. 8, 1996)
(applying Ohio's Uniform Fraudulent Transfer Act).
The Court
finds that the
United States
has demonstrated sufficient badges of fraud to shift the burden to Ms.
Stedman to show that the transfers were valid. Ms. Stedman has, to meet
that burden, offered evidence to rebut the presumption arising from the
badges of fraud surrounding the transfers, specifically that the
transfers were made in consideration of a dissolution of marriage and
pursuant to a decree of the Common Pleas Court of Franklin County, Ohio.
Although the
United States
has produced evidence sufficient to create a presumption of fraud on the
part of Mr. Hans, Ms. Stedman has produced some evidence to rebut the
presumption. The Court therefore finds that a genuine issue of material
fact exists as to whether Mr. Hans acted with intent to defraud the
United States
in transferring the properties to Ms. Stedman. The Court further notes
that the
United States
moves for summary judgment as a plaintiff on the UFCA claims. A
plaintiff moving for summary judgment has a heavy burden. See
Nicholas Acoustics & Specialty Co. v. H & M Constr. Co., 695
F.2d 839, 844 (5th Cir. 1980). Moreover, under
Ohio
law, a plaintiff seeking to void a conveyance in a UFCA case has the
burden to demonstrate fraud by clear and convincing evidence. See
Berman [89-2
USTC ¶9524 ], 884 F.2d at 921; Household Finance, 214 N.E.
2d at 669. The Court finds that a genuine issue of material fact exists
on the UFCA claims, and that the
United States
has not met its burden to demonstrate fraud as a matter of law by clear
and convincing evidence. The motion of the
United States
for summary judgment on the UFCA claims is therefore denied.
C.
Merits of Nominee Claims Against Defendant Stedman
As an
alternative to the UFCA claims, the
United States
contends that the tax liens at issue attach to the
New Albany
property and the Indian Mound property pursuant to the nominee doctrine.
The
United States
asserts that, under the nominee doctrine, the
United States
may foreclose on property titled in the name of a third party, where the
third party, or nominee, "is merely the titular, and not the
factual, owner of the property," and the true owner is a taxpayer
subject to a tax lien. United States v. Dusterberg, No.
C-2-95-976, 1997 WL 327395, at *2 (S.D. Ohio Mar. 12, 1997). The
United States
asserts that the tax lien on Mr. Hans's property attached to the Indian
Mound property and the
New Albany
property because Ms. Stedman held title to those properties as a nominee
of Mr. Hans.
The
United States
cites to federal case law in support of its assertion that federal tax
liens attach to property that is held by a taxpayer's nominee. See G.
M. Leasing Corp. v. United States [77-1
USTC ¶9140 ], 429 U.S. 338, 351 (1977); Shades Ridge Holding Co.
v. United States, 888 F.2d 725, 728 (11th Cir. 1989). It is clear,
however, that in the application of a federal revenue act, "state
law controls in determining the nature of the legal interest which the
taxpayer had in the property."
United States
v. [National] Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 722 (1984) (citing Aquilino v.
United States [60-2
USTC ¶9538 ], 363 U.S. 509, 513 (1960)). The Court must therefore
apply
Ohio
law in considering the
United States
' nominee theory.
In an
unreported opinion, a judge in this district has stated that
"[f]ederal courts recognize the nominee doctrine as part of
Ohio
law." Dusterberg, 1997 WL 327395, at *2. In support of this
statement, the court in Dusterberg cited to United States v.
Weber, No. 94-3253, 1995 WL 35636 (6th Cir. Jan. 30, 1995), and United
States v. Miller [96-2
USTC ¶50,445 ], No. 3:95CV7041, 1996 WL 571654 (6th Cir. July 18,
1996). This Court finds, however, that neither of the Sixth Circuit
cases cited in Dusterberg recognizes the nominee doctrine, as
asserted by the
United States
, as part of
Ohio
law.
In Weber,
the Sixth Circuit held that certain property transferred by the taxpayer
to a trust was subject to a federal tax lien because the trust did not
satisfy the elements of a valid trust under Ohio law, and because the
property was transferred with the intent to defraud creditors in
violation of Ohio Revised Code
§1336.07 . See 1995 WL 35636, at *2. The holding was
therefore based upon
Ohio
trust law and the
Ohio
fraudulent conveyance statute, not on the nominee doctrine.
In Miller,
the Sixth Circuit considered whether a corporation held title to certain
property as the nominee or alter ego of the taxpayer. The Sixth Circuit
first determined that the government had not shown that the corporation
was an alter ego of the taxpayer because it had failed to demonstrate
the factors necessary under
Ohio
law to pierce the corporate veil. See Miller [96-2
USTC ¶50,445 ], 1996 WL 571654, at *4. 13
The Sixth Circuit then considered whether the corporation was an alter
ego of the taxpayer under the factors set forth in
Michigan
law. See Miller [96-2
USTC ¶50,445 ], 1996 WL 571654, at *4-5. The Sixth Circuit
discussed whether the corporation was a nominee of the taxpayer, but
cited to a federal district court case applying
Montana
law. See [96-2
USTC ¶50,445 ], 1996 WL 571654, at *5 (citing Towe Antique Ford
Foundation v. IRS [92-1
USTC ¶50,115 ], 791 F. Supp. 1450 (D. Mont. 1992)). The Sixth
Circuit pointedly noted that the government "cite[d] no
Ohio
law in support of this [nominee doctrine] argument." Miller
[96-2 USTC
¶50,445 ], 1996 WL 571654, at *5.
In neither Weber
nor Miller did the Sixth Circuit recognize and apply the nominee
doctrine as part of
Ohio
law. Furthermore, this Court has found no reported federal opinions
recognizing the nominee doctrine under
Ohio
law. This Court therefore respectfully disagrees with the statement in Dusterberg
that federal courts recognize the nominee doctrine as part of
Ohio
law. As for
Ohio
case law, the
United States
has cited no
Ohio
court case applying the "nominee doctrine" as applied in the
Montana
case, Towe Antique Ford, and this Court has found no such case.
Moreover, the
Court has an alternative justification for questioning the applicability
of the nominee doctrine in this case. Where, as here, there is a
conveyance of real estate claimed to be fraudulent and where, as here,
Ohio statutory law not only provides the remedy (Ohio Rev. Code §1336.09),
but also sets forth the standards for when a transfer is deemed to be
fraudulent (Ohio Rev. Code §§1336.04, 1336.06, 1336.07), this Court is
of the opinion that the statutory requirements govern the transfer to
the exclusion of some other theory such as the nominee theory. As stated
previously,
Ohio
law--and not the law of some other state--controls the issue of whether
the Hans estate can claim a property interest in the disputed real
estate. The
United States
has not cited
Ohio
authority that would permit a circumvention of the UFCA where that
statute is applicable.
In short, the
United States has cited no Ohio law--and the Court has found none--that
stands for the proposition that in a case involving an allegedly
fraudulent transfer of real estate which could be set aside under Ohio
statutory provisions governing fraudulent transfers of real estate, the
government can proceed to circumvent the statutory provisions by relying
upon a "nominee" theory. The Court is of the opinion
that--absent
Ohio
case law to the contrary--this cannot be done. Accordingly, the Court
declines to consider or apply the nominee theory in the present case.
The Court notes, however, that the relevant factors for the nominee
theory set forth by the United States are virtually identical to those
necessary for a UFCA claim, and the Court has found that the United
States has not established as a matter of law the elements of a UFCA
claim. Thus, even if the Court found that the nominee theory was
applicable in this case, the
United States
would not be able to prevail on the claim on summary judgment.
The Court has
found that the
United States
has failed to meet its burden to establish as a matter of law the
elements necessary for a fraudulent conveyance claim under the UFCA. The
Court further finds that the nominee theory is not applicable in this
case. Accordingly, the
United States
' motion for partial judgment is denied as to both of these claims.
D.
Garland
as Nominee of Defendant Stedman
In Count Six,
the
United States
brings a claim against Defendant Garland as a nominee of Defendant
Stedman. The Court has held that the nominee doctrine, as asserted by
the
United States
against Defendant Stedman as a nominee of Mr. Hans, is not a viable
theory in
Ohio
. However, the means of piercing a corporate veil to hold owners of a
corporation liable for the actions of the corporation is sometimes
referred to as the nominee or alter ego doctrine. See supra note
13.
Ohio
law does permit the piercing of a corporate veil where the corporation
is the nominee or alter ego of its shareholders. See Belvedere
Condominium Unit Owners' Assn. v. R.E. Roark Cos., 617 N.E.2d 1075,
1086 (
Ohio
1993). Here, Defendant Stedman is the owner of
Garland
, a corporation, and the nominee or alter ego theory, as used in this
sense, may apply.
In order to
prove that it is entitled to pierce the corporate veil, the
United States
must demonstrate the following:
(1)
control over the corporation by those to be held liable was so complete
that the corporation has no separate mind, will, or existence of its
own;
(2)
control over the corporation by those to be held liable was exercised in
such a manner as to commit fraud or an illegal act against the person
seeking to disregard the corporate entity; and
(3)
injury or unjust loss resulted to the plaintiff from such control and
wrong.
Belvedere,
617 N.E.2d at 1086. Although there is evidence on the record to show
that
Garland
has no existence separate from its owner, Ms. Stedman, the Court cannot
say that the
United States
has demonstrated each of the required elements as a matter of law.
Because genuine issues of material fact exist as to these elements, the
Court cannot hold on summary judgment that the corporation is a nominee
or alter ego of Defendant Stedman and that the corporate veil can be
pierced. The
United States
' motion for summary judgment on this claim is therefore denied.
E. Recovery Value
Defendants
Stedman and Garland argue that if the United States prevails at trial,
the United States' interest in the property at issue should be limited
to the value of the property at the time of the transfers in 1977, with
the balance of the proceeds being returned to the current property
holders.
Defendants
Stedman and
Garland
first argue that the UFCA requires that the recovery value be limited to
the value of the property at the time of transfer. Former Section
1336.09 of the Ohio UFCA provides:
(1)
Where a conveyance or obligation is fraudulent as to a creditor, such
creditor, when his claim has matured, may . . .
(a)
Have the conveyance set aside or obligation annulled to the extent
necessary to satisfy his claim, or
(b)
Disregard the conveyance and attach or levy execution upon the property
conveyed.
Ohio
Rev. Code Ann. §1336.09 (
Anderson
1979) (repealed 1990). Defendants Stedman and
Garland
acknowledge that the statute is silent as to whether the creditor's
"claim" is measured at the time of conveyance or the time of
recovery. Defendants Stedman and
Garland
argue, however, that language contained in
Ohio
's UFTA, as well as case law interpreting the UFCA, suggests that the
time of conveyance is the relevant time.
Defendants
Stedman and
Garland
point to the following language in the Ohio UFTA, the statute
promulgated to clarify certain provisions of the Ohio UFCA:
(1)
Except as otherwise provided in this section, to the extent a transfer
is voidable in an action by a creditor . . ., the creditor . . . may
recover a judgment for the value of the asset transferred, as adjusted
under division (B)(2) of this section, or the amount necessary to
satisfy the claim of the creditor . . ., whichever is less. . . .
(2)
If the judgment under division (B)(1) of this section is based upon the
value of the asset transferred, the judgment shall be in an amount
equal to the value of the asset at the time of the transfer, subject
to adjustment as the equities may require.
Ohio
Rev. Code Ann. §1336.08(B) (Anderson Supp. 1998) (emphasis added).
The Ohio UFTA
provides for various remedies: avoidance of the transfer, attachment or
garnishment against property of the transferee, an injunction against
further disposition of the property, appointment of a receiver, a levy
of execution on the asset or its proceeds, or a money judgment for the
value of the asset. See Ohio Rev. Code Ann. §§1336.07, 1336.08.
The language cited by Defendants Stedman and
Garland
in §1336.08(B) refers only to the remedy of a money judgment. In the
case before this Court, although the
United States
makes use of
Ohio
's UFCA statute to reach property in the hands of the transferees of Mr.
Hans, the
United States
does not seek to obtain a money judgment against the transferees, but
merely seeks to foreclose on the liens it holds on property formerly
owned by Mr. Hans. Accordingly, §1336.08(B), which provides for money
judgment against transferees, is not applicable, and the Court finds the
argument of Stedman and
Garland
premised on this language to be without merit.
Defendants
Stedman and
Garland
cite to one case in support of their argument, United States v.
Fernon [81-1 USTC ¶9287], 640 F.2d 609 (5th Cir. 1981), a Fifth
Circuit case interpreting
Florida
's version of the UFCA. In Fernon, the
United States
brought a fraudulent transfer action against the transferees of property
transferred by a delinquent taxpayer. The Fifth Circuit stated in a
footnote:
In
view of the fact that the trial court properly concluded that the
appellants knew or should have known that tax deficiencies were pending
against their transferors, then they could not have possibly been said
to be innocent purchasers for value as their grantees were found to be.
Thus, appellants were correctly found liable as constructive trustees
for the value of the property at the time of transfer plus interest from
the time the Government filed suit.
Id.
at 614 n.11.
Although the
Fifth Circuit stated that the appellants were liable for the value of
the property "at the time of transfer," this language is
dicta. The issue of the appropriate time of valuation was not
specifically before the appellate court. See id. at 611
("The following three issues were raised before this court: (1)
whether the Government's cause of action was barred by state statute of
limitations or common-law doctrine of laches; (2) whether prejudicial
error affecting the substantial rights of the appellants was committed
at trial; and (3) whether the conveyance in question was made in fraud
of creditors.").
In addition,
the holding in Fernon is distinguishable on the facts. The
appellant-transferees involved in the fraudulent transfer had
subsequently transferred the property to bona fide purchasers for value,
and no longer had possession of the property at issue. Thus, the
United States
did not foreclose on property in the hands of the fraudulent
transferees, but apparently obtained a judgment against the fraudulent
transferees for the value of the property. See id. at 611.
Defendants Stedman and
Garland
have pointed to no
Ohio
case, and this Court has found none, holding that in a UFCA action to
void a fraudulent conveyance, the creditor is limited to the value of
the property at the time of transfer.
Moreover,
federal law contains no such limitation on the government's recovery
upon execution of a tax lien. In Han v. United States [91-2 USTC
¶50,486], 944 F.2d 526 (9th Cir. 1991), the Ninth Circuit reversed the
district court's ruling that the IRS's recovery was limited to the value
of the taxpayer's holding at the time of sale. The appellate court in Han
held:
[T]he
IRS . . . is not limited to the value of [the taxpayer's] interest at
the moment of sale. A tax lien "shall continue until the liability
for the amount so assessed . . . is satisfied or becomes unenforceable
by reason of lapse of time." 26 U.S.C. §6322 (1988). The IRS is
authorized to seize liened property even if it has been sold to a third
party. Nowhere in the statutory or regulatory scheme is there a
provision limiting the IRS's recovery. A lien continues unabated
regardless of sale, so long as it is property recorded. Because the lien
is unaffected by sale, we see no basis for fixing the amount of the lien
at the time of sale. We decline to legislate where Congress has failed
to do so.
Furthermore,
the fact that the IRS may recoup more than it would have if it had
foreclosed while [the taxpayer] still held the property does not affect
our analysis. . . . [W]here the IRS receives a "bonus" because
of a sale, if the extra proceeds are applied to reduce a legitimate tax
lien, the IRS has not necessarily been unjustly enriched.
Han
[91-2 USTC ¶50,486], 944 F.2d at 528-29 (citations omitted). The Third
Circuit in United States v. Avila [96-2 USTC ¶50,357], 88 F.3d
229 (3d Cir. 1996), adopted the reasoning of the Ninth Circuit in Han,
stating "we are aware of no case which says that the value of the
property securing a tax lien must be frozen when the taxpayer transfers
it. Overall, we are satisfied that the lien continues to attach to [the
taxpayer's] entire former interest in the property, limited only by the
amount of the debt it secures. . . ." This Court agrees with the
reasoning of the appellate courts in Han and
Avila
.
The Court
further notes that a federal tax lien applies to property acquired by
the taxpayer after the lien is perfected. See United States v.
McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 453-54 (1993); Redondo
Constr. Corp. v. United States [98-2 USTC ¶50,841], 157 F.3d 1060,
1067 n.11 (6th Cir. 1998). The appreciation in value of the
New Albany
property and the Indian Mound property could be considered to be
after-acquired property of Mr. Hans, subject to tax liens previously
filed against him.
For these
reasons, the Court holds that federal tax law contains no provision
limiting the amount of recovery upon execution of a lien to the value of
the property at the date of transfer.
Defendants
Stedman,
Garland
, and the Oglesbys assert equitable reasons why the
United States
should not benefit from the appreciation in value of the property,
particularly the government's delay in bringing this action. Although
the
United States
admittedly could have pursued these claims at an earlier date, they were
not required to do so. 14
In addition, if the
United States
prevails in this case, the balance of equities on this issue would
perhaps favor the IRS, which was merely slow to take action, rather than
Defendants Stedman and
Garland
, who, if the
United States
should prove all of its allegations, were participants in fraud.
Defendants
also point to improvements they have made which have allegedly enhanced
the value of the properties at issue. The Court's ruling in this order
on the issue of recovery value does not preclude a finding at trial that
Defendants are entitled to an adjustment for improvements they have made
to the properties, should the balance of the equities require such an
adjustment. See United States v. Scheve [99-1 USTC ¶50,129], No.
Civ. A. CCB-97-556, 1998 WL 919873, at *3 (D. Md. Nov. 20, 1998) (
Avila
and Han are distinguishable because in those cases it was not
clear whether the increase in property was due to improvements made by
the transferees). However, to the extent that the increased value of the
properties was not caused by contributions of Defendants, it is not
inequitable for the
United States
to benefit from the appreciation in value. As stated in Han,
"if the extra proceeds are applied to reduce a legitimate tax lien,
the IRS has not necessarily been unjustly enriched." Han
[91-2 USTC ¶50,486], 944 F.2d at 529.
The Court
cannot resolve the balance of the equities in this case on a motion for
summary judgment; the facts related to the balance of equities will be
determined at trial. The Court merely holds at this time that no
Ohio
or federal law requires that the Government's recovery be limited to the
value of the property at the time of the transfers.
III.
MOTION TO DISMISS OR FOR SUMMARY JUDGMENT BY DEFENDANTS DALE AND NANCY
OGLESBY
On October 19,
1998, Defendants Dale and Nancy Oglesby filed a motion to dismiss or for
summary judgment against the
United States
and Plaintiff Kaiser. (R. 126.) The
United States
objects that the motion is untimely. The Court notes that the Magistrate
Judge permitted the parties to file supplemental memoranda in opposition
to motions previously filed in this case, see supra note 5, but
did not grant leave to the Oglesbys to file a case-dispositive motion.
The Court finds, however, that the issues in the Oglesbys' motion have
been fully briefed, and the opposing parties are not prejudiced by the
late filing of the Oglesbys' motion. The Court will therefore consider
the Oglesbys' motion for summary judgment.
The Oglesbys
argue that Nancy Oglesby is a bona fide purchaser for value without
notice and that her claim to the Indian Mound property is therefore
superior to the federal government's interest in the property arising
from the federal tax lien.
Evaluation of
the priority of a federal tax lien is a question of federal law. See
Aquilino [60-2 USTC ¶9538], 363
U.S.
at 514. The federal tax code, 26 U.S.C. §6323, provides that a federal
tax lien is not valid as against "any purchaser . . . until notice
thereof which meets the requirements of subsection (f) has been filed by
the Secretary." 26 U.S.C. §6323(a). The Oglesbys argue that they
are entitled to judgment as a matter of law because the notice filed by
the
United States
did not meet the requirements of 26 U.S.C. §6323(f). The
United States
argues that the requirements of §6323(f) were met, and further argues
that Nancy Oglesby is not a "purchaser" entitled to protection
under 26 U.S.C. §6323(a).
A
"purchaser" is defined in the Internal Revenue Code as "a
person who, for adequate and full consideration in money or money's
worth, acquires an interest . . . in property which is valid under local
law against subsequent purchasers without actual notice." 26 U.S.C.
§6323(h)(6). The
United States
argues that Nancy Oglesby, who stopped paying on the land contract in
1989, has not paid adequate and full consideration for the Indian Mound
property.
In order to
determine whether Nancy Oglesby paid adequate and full consideration for
the Indian Mound property, the Court must determine the fair market
value of the property at the time of purchase. The only evidence in the
record concerning the fair market value of the property is the agreed
purchase price under the land contract, $109,585. The
United States
has offered no evidence that the agreed purchase price is not the fair
market value of the property at the time of purchase, or that Nancy
Oglesby, at the time of purchase, did not intend to make all payments
required under the contract. Although Ms. Oglesby stopped making
payments on the contract in 1989, there is no evidence to contradict the
Oglesbys' claim that she would have paid the balance of the loan if the
tax lien had not been discovered and Mr. Hans had not told the Oglesbys
to stop making payments until good title could be conveyed. Under the
circumstances, it is reasonable for the purchaser to cease making
payments until clear title could be conveyed.
Nancy Oglesby
in fact made substantial payments on the contract. According to the
undisputed evidence on the record, Ms. Oglesby made an initial down
payment of $9,585, monthly payments totaling $55,900, and a one-time
payment of $17,410.66, for a total of $82,895.66. (D. Oglesby Dep. at
52,
U.S.
Ex. 46; Oglesby Ex. 7.) The Oglesbys paid the real estate taxes and
utility bills for the property. (D. Oglesby Dep. at 84,
U.S.
Ex. 46.) In addition, the Oglesbys have offered evidence that they have
spent over $100,000 on improvements to the property. (Oglesby Ex. 9.)
Neither the
United States
nor Plaintiff Kaiser have offered any evidence to contradict the amount
of payments and improvements made by the Oglesbys. The Court therefore
finds that the Oglesbys have demonstrated as a matter of law that they
provided adequate and full consideration for the Indian Mound property.
To show that
Nancy Oglesby is a "purchaser" under 26 U.S.C. §6323, in
addition to showing that Nancy Oglesby paid adequate and full
consideration for the property, the Oglesbys must also show that her
interest in the property "is valid under local law against
subsequent purchasers without actual notice." 26 U.S.C. §6323(h)(6).
The land contract between Shirley Stedman and Nancy Oglesby was properly
recorded on September 27, 1983, giving any subsequent purchaser
constructive notice under
Ohio
law. Nancy Oglesby's interest is therefore valid under
Ohio
law against a subsequent purchaser without actual notice.
Under §1336.09
of the Ohio UFCA, the Oglesbys must show that Nancy Oglesby did not have
knowledge of the alleged fraud at the time of purchase. See Ohio
Rev. Code Ann. §1336.09(A) (Anderson 1979) (repealed 1990). Nancy
Oglesby has testified that she had no such knowledge. (N. Oglesby Dep.
at 35-36.) The
United States
insinuates that the Oglesbys did not purchase the property in good faith
without knowledge of the fraud because of several events indicating that
Dale Oglesby "had a complicated and a dependent relationship with
Joe Hans." (U.S. Oct. 27, 1998 Mem. in Opp. at 6.) Although the
circumstances cited by the United States may indicate that Dale Oglesby
and Mr. Hans had a complicated relationship, none of these circumstances
show that Nancy or Dale Oglesby had knowledge that the transfer of the
Indian Mound property from Mr. Hans to Shirley Stedman, or the transfer
from Ms. Stedman to Nancy Oglesby, was made with intent to defraud the
United States or any other creditor. The Court finds that the
United States
has not offered any evidence to contradict the evidence offered by the
Oglesbys evidence that Nancy Oglesby had no knowledge of the fraud at
time of purchase. Thus, the Oglesbys have demonstrated as a matter of
law that Nancy Oglesby is a purchaser for fair consideration without
knowledge of the fraud at the time of purchase under §1336.09(A) of the
Ohio UFCA and is a "purchaser" as defined in 26 U.S.C. §6323(h)(6).
In order for
Nancy Oglesby's interest to be superior to that of the United States,
the Oglesbys must also show that the notice filed by the United States
did not meet the requirements of 26 U.S.C. §6323(f). Subsection (f) of
§6323 provides that notices for liens on real property may be filed in
accordance with state law in the county in which the property is
situated. See 26 U.S.C. §6323(f)(1)(A)(i) (1989).
Section 6323
further provides that in order to meet the notice requirement of §6323(f)(1)(A)(i),
the fact of filing must be entered and recorded in a public index
"in such a manner that a reasonable inspection of the index will
reveal the existence of the lien." 26 U.S.C. §6323(f)(4). The
Oglesbys argue that the notice of lien was not filed in such a manner
that a reasonable inspection would reveal the existence of the lien.
(Oglesbys Ex. 11.)
The Oglesbys
contend that a reasonable inspection would not reveal the existence of
the tax lien because the notice was filed against "S. Ann Douglas
and Rino Borean" and the Indian Mound property was held in the name
of Shirley Stedman Hans prior to the transfer to the Oglesbys. The
United States
argues that a reasonable inspection would reveal the existence of the
lien. The
United States
contends that a searcher doing a reasonable inspection would have found
as the last entry under the name "Shirley Stedman" a mortgage
deed recorded on September 23, 1977. The mortgage deed lists as the
mortgagor "Shirley Stedman a/k/a/ Shirley Stedman Hans, unmarried
a/k/a S. Ann. Douglas." (
U.S.
Ex. 19.) The
United States
argues that a reasonable inspection would require that the searcher look
at the mortgage document and search the index for the alternative names
for Shirley Stedman.
The
notice filed by the
United States
must meet the requirements of 26 U.S.C. §6323(f), which provides:
In the case of
real property, if--
(A)
under the laws of the State in which the real property is located, a
deed is not valid as against a purchaser of the property who (at the
time of purchase) does not have actual notice or knowledge of the
existence of such deed unless the fact of filing of such deed has been
entered and recorded in a public index at the place of filing in such a
manner that a reasonable inspection of the index will reveal the
existence of the deed, and
(B)
there is maintained . . . an adequate system for the public indexing of
Federal tax liens,
then the
notice of lien referred to in subsection (a) shall not be treated as
meeting the filing requirements under paragraph (1) unless the fact of
filing is entered and recorded in the index referred to in
subparagraph (B) in such a manner that a reasonable inspection of
the index will reveal the existence of the lien.
26
U.S.C. §(f)(4) (emphasis added).
Under the law
of the State of
Ohio
, it is not disputed that the provision of (4)(A) is met, and the
"adequate system for the public indexing of Federal tax liens"
is set forth in Ohio Revised Code §317.09, which, at the time of the
filing of the notice of lien in 1983, provided:
(A)
Notices of liens for internal revenue taxes and of any other lien in
favor of the
United States
. . . may be filed, by mail or otherwise, in the office of the county
recorder of the county in which the property subject to the lien is
situated. . . . Except as provided in division (B) of this section, when
notice is filed with him, the recorder shall enter it in a book known as
the "federal tax lien index," in alphabetical order, showing
on one line the name and residence of the taxpayer named in the notice,
the district director's serial number of the notice, and the amount of
tax and penalty assessed. . . .
(B)
If a county recorder records all instruments in two sets of record books
pursuant to division (F) of section 317.08 of the Revised Code, notices
of liens for internal revenue taxes and of any other lien in favor of
the United States, as provided in the statues of the United States or in
any revision of the statutes, and certificates discharging or
certificates of release and the liens that are filed with a county
recorder shall be recorded in the "official records" set of
books.
Ohio
Rev. Code Ann. §317.09 (
Anderson
1987) (amended 1991). Therefore, in
Ohio
, the index referred to in 26 U.S.C. §6323(f)(4) is the "federal
tax lien index" set forth in Ohio Revised Code §317.09, not a deed
index or mortgage index or any other index maintained by the
County
Recorder
.
In the view of
the Court, the government has the burden to prove in the present case
that it filed its notice on the Indian Mound property in the federal tax
lien index in such a manner that a reasonable inspection of that
index would reveal the existence of its lien on the Indian Mound
property.
Although the
government presumably was aware that Mr. Hans had conveyed an interest
in the Indian Mound property to S. Ann Douglas and also to Rino Borean,
the deed records further showed that S. Ann Douglas and Rino Borean had
conveyed their interests to the Billy G. Corporation, which later
conveyed its interest to Shirley Stedman Hans. Of even greater
importance is the fact that the record shows that the government was
aware of the relationship between the taxpayer, Mr. Hans, and his
alleged common law wife, Shirley Stedman, prior to the filing of the
lien. Speculation aside as to why the United States failed to include
Shirley Stedman and Shirley Stedman Hans in its notice, the fact remains
that the notice filed by the government did not reveal or cause a
reasonable inspection of the federal tax lien index to reveal the
existence of a tax lien on property owned by Shirley Stedman.
The government
relies heavily on Kivel v. United States [89-2 USTC ¶9415], 878
F.2d 301 (9th Cir. 1989), to support its position that a reasonable
inspection would have revealed the existence of a mortgage deed recorded
on September 23, 1977 from Shirley Stedman, a/k/a Shirley Stedman Hans,
a/k/a S. Ann Douglas. In Kivel, the Court described the issue in
that case as follows: "The case turns on what, under federal tax
law, is a 'reasonable inspection' of the public index of deeds to
real property in
Orange County
,
California
." Kivel [89-2 USTC ¶9415], 878 F.2d at 301 (emphasis
added).
Whether the
county recorder of Orange County, California, maintained a separate
index for the filing of federal tax liens is not mentioned in the
opinion, and the "system for the public indexing of federal tax
liens" may have required a searching of the index of deeds in that
state. In any event, as stated earlier, this Court believes that in
Ohio
the index referred to in 26 U.S.C. §6323(f)(4) is not the index of
deeds but the federal tax lien index. In the view of this Court,
subsection (f)(4) does not contemplate nor require that a purchaser of
real estate in Ohio who wants to know if that real estate is encumbered
by a federal tax lien must conduct a full-blown title search, even when
there is a absolutely nothing in the federal tax lien index to put a
reasonable person on notice that such a lien exists.
The government
has offered no evidence that any entry in
Ohio
's federal tax index would reveal to a searcher that a tax lien had been
filed against Shirley Stedman. The Court therefore finds the government
has failed to present evidence that a "reasonable inspection"
of the federal tax lien index would reveal the existence of the lien.
Accordingly, the Court finds that the filing of the tax lien on the
Indian Mound property did not meet the filing requirements of subsection
(f)(4) and therefore is not a valid lien as against the purchaser of
that property, Nancy Oglesby. 15
IV.
CONCLUSION
The August 29,
1997 motion of the
United States
for partial summary judgment, (R. 91), and the August 31, 1998 motion of
the
United States
for oral hearing on the motion, (R. 120), are DENIED.
The October
22, 1997 motion of Defendants Stedman and
Garland
, (R. 98), is GRANTED IN PART AND DENIED IN PART. The motion is GRANTED
as to the claims brought by the United States against Defendant Stedman
pursuant to the nominee doctrine, but is DENIED as to the
remaining claims against Defendants Stedman and Garland.
The October
19, 1998 motion by Defendants Dale and Nancy Oglesby for summary
judgment or to dismiss, (R. 126), is hereby GRANTED. The tax lien
filed on August 24, 1983 is declared invalid insofar as it purports to
assert a property interest superior to the property interest of Nancy
Oglesby in the Indian Mound property.
IT IS SO
ORDERED.
1
Shirley Stedman is also known as S. Ann Douglas.
2
On January 29, 1997, the Court granted Defendant National Wood Products,
Inc.'s motion asking that judgment by default be entered against it and
dismissing it as a party to this litigation. (R. 63.)
3
On August 3, 1998, the Department of Taxation for the State of
Ohio
filed an amended answer to the complaint in which it disclaimed any
interest in the subject property in this case. (R. 113.)
4
According to Plaintiff and Defendant United States, Defendant Stedman
considers the
New Albany
property to be her property and that title is only nominally in the name
of
Garland
by the Sea, Ltd. During Stedman's deposition, she testified that the
fact that the property is titled in the name of
Garland
by the Sea, "doesn't mean a thing." (U. S Ex. 42 at 163.)
5
At the direction of the Magistrate Judge, the parties have filed
supplemental memoranda discussing the application of a state statute of
limitations to the United States, sufficiency of notice in relation to
the Indian Mound property, and calculation of the remedy should the
United States prevail on its fraudulent conveyance claim. At the
direction of the District Judge, the parties filed subsequent memoranda
discussing the application of federal statutes of limitation to the
government's claims.
6
S. Ann Douglas is a name used by Defendant Shirley Stedman during her
marriage to William Douglas.
7
National Wood Products, Inc. has disclaimed any interest in the
New Albany
property and has been dismissed as a party.
8
The Oglesbys state that they "agree" and join with the
arguments advanced by Defendants Stedman and Garland on the statute of
limitations issues, but also state in their memorandum that they
"must concede that the government's analysis of the federal statute
of limitations is essentially correct." (Dec. 9, 1998 Mem. of Nancy
and Dale Oglesby at 2, 4, R. 135.)
9
Defendants Stedman and
Garland
presented this argument in their supplemental memorandum of October 16,
1998, but now concede that the
United States
is not bound by the state statute of limitations on its fraudulent
conveyance claim. (Stedman and Garland Dec. 7, 1998 Supp. Mem. at 6, R.
134.)
10
On November 5, 1990, the limitations period for collection was extended
from six to ten years. See 26 U.S.C. §6502(a) (1989) (amended
Nov. 5, 1990).
11
Tax liens, unlike most liens under state law, do not merge into judgment
liens, but continue to exist independently of a suit or judgment which
has extended their existence. See United States V. Bank of Celina
[87-2 USTC ¶9440], 823 F.2d 911, 913 (6th Cir. 1986).
12
Defendants Stedman and
Garland
put forth this argument in their supplemental memorandum of
October 16, 1998
. Defendant Stedman and
Garland
now concede that because the government can still assert its tax
liability against Mr. Hans' estate, the government can also assert its
fraudulent conveyance claim against them as transferees. (Stedman and
Garland Dec. 7, 1998 Supp. Memo. at 6.)
13
The alter ego doctrine typically appears in cases in which a corporation
is unreal or a sham and is deemed to be the alter ego of the taxpayer.
In such cases, the corporate veil can be pierced and assets of the
corporation deemed to be assets of the taxpayer. The other federal cases
cited by the
United States
, G.M. Leasing and Shades, discuss the nominee or alter
ego theory as it relates to piercing of the corporate veil. See G. M.
Leasing [77-1 USTC ¶9140], 429
U.S.
at 351; Shades, 888 F.2d at 729.
14
See discussion of statute of limitations issues, supra at 23-31.
15
The Court notes that Defendants Stedman and
Garland
state in their supplemental memoranda that they join in the Oglesbys'
motion on "the issue of the sufficiency of the notice of [the]
federal tax lien relating to the Indian Mound property." (Stedman
and Garland Oct. 16, 1998 Mem. at 4, R. 125.) It is unclear whether
Defendants Stedman and Garland join the Oglesbys in their argument that
Nancy Oglesby is a purchaser entitled to protection under 26 U.S.C. §6323,
or whether Stedman and Garland are asserting that they themselves are
purchasers under 26 U.S.C. §6323. Assuming that Stedman and
Garland
contend that they are purchasers under 26 U.S.C. §6323, the Court finds
that genuine issues of material fact preclude summary judgment on this
issue. As discussed previously in relation to the fraudulent conveyance
claim brought by the
United States
, supra at 40-42, the Court has found that genuine issues of
material fact exist as to whether Ms. Stedman provided consideration for
the Indian Mound property. Because such issues exist, the Court cannot
find as a matter of law that Defendants Stedman and Garland are
purchasers who paid adequate and full consideration and are therefore
entitled to protection under 26 U.S.C. §6323.
[99-1 USTC
¶50,303]
United States of America
, Plaintiff v. Nicholas A. Alfano, Lisa Marie Alfano, and Long Island
Savings Bank, Defendants
U.S.
District Court, East. Dist. N.Y.,
96-CV-4372(JS), 1/25/99, 34 FSupp 2 d 827, 34 FSupp2d 827
[Code
Secs. 6323 and 6871 ]
Tax liens: Foreclosure of: Validity and priority: Fraudulent
conveyance: Bankruptcy: Discharge, effect of: Property not part of
bankruptcy estate.--The government was permitted to foreclose its
federal tax lien on a house that had been fraudulently conveyed by
delinquent taxpayers to their children, despite their having obtained a
prior discharge of the tax liabilities in bankruptcy. The bankruptcy
discharge affected only the taxpayers' personal liability, not any
existing liens against their property. Moreover, the discharge could not
have affected the property since the validity of the transfer was never
raised in the bankruptcy proceedings and, accordingly, the property
never became part of the estate. The fact that the IRS, with knowledge
of the conveyance, agreed to reclassify its debt from secured to
unsecured prior to entry of the discharge did not affect the result. In
addition, since the children did not qualify as bona fide purchasers,
they were not entitled to protection from the lien under Code
Sec. 6323(h)(6) .
[Code
Secs. 6502 and 7402 ]
Tax liens: Foreclosure of: Validity and priority: Statute of
limitations: Fraudulent conveyance: Bankruptcy: Discharge, effect of.--The
government's action to foreclose a tax lien on property that was
fraudulently conveyed by delinquent taxpayers to their children was
timely commenced under the amended 10-year limitations period set forth
in Code
Sec. 6502(a)(1) for IRS collection actions. Since the taxpayer's
prior bankruptcy discharge did not occur until after the effective date
of the amendment that extended the statute of limitations from six years
to 10 years, the foreclosure action was timely.
[Code Sec.
7402 ]
Tax liens: Foreclosure of: Fraudulent conveyance: Summary judgement:
Issues of fact: Actual fraudulent intent: Attorneys' fees.--The
government was permitted to foreclose its federal tax lien on a house
that had been fraudulently conveyed by delinquent taxpayers to their
children, despite their having obtained a prior discharge of the tax
liabilities in bankruptcy. The taxpayers admitted to having made the
conveyance, which rendered them insolvent. In addition, the conveyance
was not made for fair consideration since no money exchanged hands and
the children did not legally assume the mortgage. Thus, the government
was entitled to summary judgment on the fraudulent conveyance issue.
However, the government's summary judgment motion for an award of
attorneys' fees under the state debtor and creditor statute was denied;
that provision required a showing of actual fraudulent intent, and
genuine issues of material fact existed with respect to that issue.
[Code Sec.
7403 ]
Tax liens: Foreclosure of: Validity and priority: Res judicata:
Collateral estoppel: Fraudulent conveyance.--The government was
permitted to foreclose its federal tax lien on a house that had been
fraudulently conveyed by delinquent taxpayers to their children, despite
their having obtained a prior discharge of the tax liabilities in
bankruptcy. The taxpayers admitted to having made the conveyance, which
rendered them insolvent. In addition, the conveyance was not made for
fair consideration since no money exchanged hands and the children did
not legally assume the mortgage. The children's defenses of res
judicata and collateral estoppel were rejected since they were not
parties to the prior bankruptcy proceeding and they failed to offer any
evidence of privity. Moreover, since the property was not part of the
taxpayers' bankruptcy estate, its disposition as fraudulent or
otherwise, which was central to the instant action, was not at issue in
that case.
Philip J.
Berkowitz, Department of Justice,
Washington
,
D.C.
20530
, for plaintiff.
Rob
ert S. Arbeit, Pinks & Arbeit,
Hauppauge
,
N.Y.
, for defendants.
MEMORANDUM
AND ORDER
SEYBERT,
District Judge:
Pending before
the Court are cross-motions for summary judgment in this action brought
pursuant to Title 26, United States Code, Sections 7401 and 7403, by the
United States of America (hereinafter the "Government" or
"Plaintiff"), with the authorization and sanction of the
District Counsel of the Internal Revenue Service and the Attorney
General of the United States. Plaintiff seeks to foreclose federal tax
liens upon certain real property that was conveyed to Nicholas A. Alfano
and Lisa Alfano (the "Defendants") by their parents, Nicholas
J. Alfano and Rita Alfano (the "parents").
FACTUAL
BACKGROUND
Defendants are
the current record owners of the residence at 11 Alden Lane, Centereach,
New York, where Defendant, Lisa Alfano, presently resides, the subject
property at issue (hereinafter the "property"). Plaintiff is
seeking to satisfy tax liens against the Defendants' parents through
foreclosure sale of the property.
1.
The Tax Deficiencies
In tax years
1980 and 1981, Nicholas J. Alfano and Rita Alfano each filed federal
income tax returns reporting no taxable income. (Pl.'s Statement of
Material Facts (hereinafter "56.1") PP 1, 2.) Nicholas J.
Alfano claimed to be exempt from federal income taxes due to the vow of
poverty he took as a member of the "Life Science Church" (the
"Church"). (Pl's 56.1 PP 2, 4.) He filed a federal Form 1040A
with the Internal Revenue Service ("IRS") in 1980 reporting
earnings of $ 28,639.41 in wages, but owing no federal income taxes.
(Pl's 56. 1 P 5.) Nicholas demanded a refund of federal income taxes
withheld from his wages in the amount of $ 1,352.24. (Pl's 56. 1 P 5.)
Upon audit, it
was determined that each parent owed federal income taxes for tax years
1980 and 1981. (Pl's 56. 1 P 3.) After the IRS sent Nicholas Alfano a
Notice of Deficiency for income taxes due for tax year 1980, Alfano
filed a petition on or about
June 7, 1982
, for a redetermination of the deficiency with the United States Tax
Court (the "Tax Court"). (Pl's 56.1 PP 6, 8.) On
May 28, 1986
, the Tax Court decided that a tax deficiency existed for Nicholas J.
Alfano's 1980 federal income tax, and the following day, in a similar
manner, the Tax Court decided against Rita Alfano, and ordered the
payment of the Alfanos' taxes along with penalties and interest. (Pl's
56. 1 P 9&Ex. K.)
The IRS made
final assessments against Nicholas J. Alfano and Rita Alfano for unpaid
federal income taxes for calendar year 1981 on
September 2, 1986
and
September 10, 1986
, respectively, and for calendar year 1980 on
October 14, 1986
. (Pl's 56. 1 P 10.) The Defendants contend that on October 6 and
October 14, 1986
, assessments were made against Nicholas J. Alfano for tax deficiencies
and statutory additions for the tax years 1981 and 1980 respectively.
Further, Defendants contend that assessments were made against Rita
Alfano on
September 10, 1986
, for the 1981 tax year. (Arbeit Affidavit in Support of Summary
Judgment (hereinafter "Arbeit Aff. 1") P 7.) These
chronological discrepancies are not material to resolution of the
instant cross-motions. Notice of Federal Tax Liens were filed with the
Suffolk County Clerk's Office on or about
December 18, 1987
. ( Arbeit Aff. 1 P 8.)
2.
The Conveyance
During the
intervening years, and specifically on
October 17, 1983
, the parents transferred the property to the Defendants. (Pl.'s 56. 1 P
14.) The conveyance was made without the passage of fair consideration,
in fact, it is undisputed that the conveyance was made for zero
consideration. (Pl.'s 56. 1 P 15.) Moreover, the Defendants did not
legally assume the property's mortgage, however, they agreed to make the
payments. (Pl.'s 56. 1 P 15E.)
Plaintiff
avers that this conveyance effectively caused the parents to become
insolvent. (Pl.'s 56. 1 P 18.) Specifically, the parents admitted that
they had no assets to offset their liabilities. (Pl.'s 56. 1 P 18C.) It
is further asserted by the Government that the parents primarily
continued to live at the property and continued to deduct the home
mortgage interest and real estate taxes on their joint 1984 and 1985
federal income tax returns. (Pl.'s 56.1 PP 15-17.) The Alfanos did
testify that the payment by the parents of the mortgage and taxes was
effectively in lieu of a direct rent payment for occupying the property.
(Pl.'s 56.1 PP 15-17.)
3.
The Bankruptcy Proceeding
On or about
January 30, 1991
, the parents filed a Chapter 13 bankruptcy petition in the United
States Bankruptcy Court, Eastern District of New York, under Case Number
091-70163-511. ( Arbeit Aff. 1 P 9.) Plaintiff filed a secured claim
against the parents asserting an aggregate secured claim in the sum of $
53,015.33. ( Arbeit Aff. 1 P 10.) Thereafter, the parents moved to
reclassify Plaintiff's claim from secured to unsecured. ( Arbeit Aff. 1
P 11.) Plaintiff agreed to reduce its secured claim to the sum of $
2,000.00, and the balance was reclassified as unsecured, as approved in
an Order rendered by United States Bankruptcy Judge Cyganowski, on or
about
May 9, 1994
. (Arbeit Aff. 1 PP 11, 12.) On December 21, 1994, Judge Cyganowski
entered an Order confirming the Chapter 13 plan (hereinafter
"Confirmation Order") and discharging Debtors Nicholas and
Rita Alfano from "all debts provided for by the plan or disallowed
under 11 U.S.C. §502," except debts irrelevant herein. (Arbeit
Aff. 1 Ex. F.) Plaintiff did not appeal either Order of Judge
Cyganowski, although the Government was aware of the prior transfer of
the property. (Defs.' 56.1 PP 9, 10.) Because of this discharge, the
Defendants submit that the parents were dropped as party defendants to
the instant action. ( Arbeit Aff. 1 P 14.)
DISCUSSION
I.
STANDARDS FOR GRANTING SUMMARY JUDGMENT
Pursuant to
Federal Rule of Civil Procedure 56(c), courts may not grant a motion for
summary judgment unless "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."
Fed. R. Civ. P. 56(c). The burden of proof is on the moving party to
show that there is no genuine issue of material fact, Gallo v.
Prudential Residential Servs., L.P., 22 F.3d 1219, 1223 (2d Cir.
1994) (citing Heyman v. Commerce & Indus. Ins. Co., 524 F.2d
1317, 1320 (2d Cir. 1975)), and "all ambiguities must be resolved
and all inferences drawn in favor of the party against whom summary
judgment is sought."
Id.
(citing Eastway Constr. Corp. v. City of New York, 762 F.2d 243,
249 (2d Cir. 1985). "Factual disputes that are irrelevant or
unnecessary will not be counted." Anderson v. Liberty Lobby,
Inc., 477
U.S.
242, 248, 106
S. Ct.
2505, 2510, 91 L. Ed. 2d 202 (1986) (citing 10A C. Wright, A. Miller,
& M. Kane, Federal Practice and Procedure §2725, at 93-95 (1983)).
A party
opposing a motion for summary judgment " 'may not rest upon the
mere allegations or denials of his pleading, but . . . must set forth
specific facts showing that there is a genuine issue for trial.' "
Id.
at 248, 106 S. Ct. at 2510 (quoting First Nat'l Bank v. Cities Serv.
Co., 391
U.S.
253, 288-89, 88
S. Ct.
1575, 1592, 20 L. Ed. 2d 569 (1968). Under the law of the Second
Circuit, "when no rational jury could find in favor of the
nonmoving party because the evidence is so slight, there is no genuine
issue of material fact and a grant of summary judgment is proper." Gallo,
22 F.3d at 1224 (citing Dister v. Continental Group, Inc., 859
F.2d 1108, 1114 (2d Cir. 1988)). It is within this framework that the
Court addresses the present cross-motions for summary judgment motion.
Defendants
move for summary judgment and oppose Plaintiff's motion for summary
judgment on the sole ground that Plaintiff's action is barred by the
doctrines of res judicata and collateral estoppel. Plaintiff
moves for summary judgment under two separate and distinct theories, a
pure fraudulent conveyance theory and a lien theory. If Plaintiff
triumphs under either theory of recovery, and the property is sold, the
Government recognizes that Defendant Long Island Savings Bank, a
creditor with a valid security interest, is entitled to priority over
the
United States
in distribution. (Way Aff. P 2.) Plaintiff opposes Defendants' motion
for summary judgment by asserting, in effect, that the parents'
discharge in bankruptcy has no legal effect on its right to recover
under either theory.
II.
THE DEFENDANTS' SUMMARY JUDGMENT MOTION
Defendants
specifically contend that by agreeing to reclassify its claim in the
parents' Chapter 13 bankruptcy proceeding from secured to unsecured,
Plaintiff is barred, more than two years later, from foreclosing on the
property. Because the Government acknowledged its awareness of the
conveyance, and asserted that the liens attached to the property in
1986, Defendants maintain that Plaintiff must concede that the property
was property of the bankruptcy estate, and having agreed to a
reclassification of its claim, Plaintiff waived its right to aver that
the tax lien continued against the property after the parents'
bankruptcy was discharged.
Defendants'
blanket reliance upon the doctrine of prior adjudication is unpersuasive
and misapprehended. It is true that Second Circuit case law clearly
recognizes that proceedings conducted in bankruptcy courts are regularly
entitled to preclusive effect on subsequent proceedings with respect to
issues already litigated. In re Bono, 70 B.R. 339, 342 (Bankr.
E.D.N.Y. 1987) (holding that "the doctrines of collateral estoppel
and res judicata apply with full force to proceedings in
bankruptcy courts") see also In re Jamesway Corp., 205 B.R.
32, 36 (Bankr. S.D.N.Y. 1996) (finding "res judicata
dictates that a final judgment on the merits bars further claims by
parties or their privies based on the same cause of action that were
previously available to the parties, regardless of whether they were
asserted or determined in the prior proceeding"). Further, an order
of confirmation binds the debtor and its creditors and has preclusive
effect. See 11 U.S.C. §1141(a); Sure-Snap Corp. v. State
Street Bank&Trust Co., 948 F.2d 869, 873 (2d Cir. 1991) (res
judicata bars any attempt by parties to reorganization hearing to
relitigate matters raised or that could have been raised). However,
there are statutory and judicially created limitations on the breadth of
this preclusive effect.
1.
Res Judicata
According to
prevailing Second Circuit case law, once a final judgment has been
entered on the merits of a case, " 'it is a finality as to the
claim or demand in controversy, concluding parties and those in privity
with them, not only as to every matter which was offered and received to
sustain or defeat the claim or demand, but as to any other admissible
matter which might have been offered for that purpose.' " Interoceanica
Corp. v. Sound Pilots, Inc., 107 F.3d 86, 90 (2nd Cir. 1997)
(quoting Securities and Exch. Comm'n v. First Jersey Secs., Inc.,
101 F.3d 1450, 1463 (2d Cir. 1996) (citations omitted)). Yet, res
judicata may "be invoked only after careful inquiry"
because, it "shields the fraud and the cheat as well as the honest
person." Brown v. Felsen, 442
U.S.
127, 132, 99
S. Ct.
2205, 2210, 60 L. Ed. 2d 767 (1979) (allowing creditor to assert fraud
in bankruptcy proceeding as challenge to dischargeability of prior state
court judgment).
"To
determine whether the doctrine of res judicata bars a subsequent
action, we consider whether 1) the prior decision was a final judgment
on the merits, 2) the litigants were the same parties, 3) the prior
court was of competent jurisdiction, and 4) the causes of action were
the same." Corbett v. MacDonald Moving Servs., Inc., 124
F.3d 82, 87-88 (2d Cir. 1997) (citing In re Teltronics Servs., Inc.,
762 F.2d 185, 190 (2d Cir. 1985)). The court went on to add that
"in the bankruptcy context, we ask as well whether an independent
judgment in a separate proceeding would 'impair, destroy, challenge, or
invalidate the enforceability or effectiveness' of the reorganization
plan."
Id.
(quoting Sure-Snap Corp. v. State Street Bank and Trust Co., 948
F.2d 869, 875-76 (2d Cir. 1991). This last inquiry, the court noted,
"may also be viewed as an aspect of the test for identity of the
causes of action."
Id.
As discussed supra,
bankruptcy courts are courts of competent jurisdiction which render
final judgments on the merits, and the Confirmation Order was a final
judgment adjudicating the parents' bankruptcy petition. However, because
it cannot be gainsaid that Defendants were not parties to the bankruptcy
proceeding 1,
the first issue that arises is whether the Defendants were in privity
with their parents as it pertains to the Chapter 13 bankruptcy
proceeding. "The New York Court of Appeals has stated that privity
'includes those who are successors to a property interest, those who
control an action although not formal parties to it, those whose
interests are represented by a party to the action, and possibly
coparties to a prior action.' " Ferris v. Cuevas, 118 F.3d
122, 126 (2d Cir. 1997) (quoting Watts v. Swiss Bank Corp., 27
N.Y.2d 270, 277, 317 N.Y.S.2d 315, 320, 265 N.E.2d 7 39 (1970)). "
'Privity has also been found where a person so controlled the conduct of
the prior litigation in which they were interested such that the result
is res judicata against them.' " 118 F.3d at 126-27 (quoting
Tamily v. General Contracting Corp., 210 A.D.2d 564, 566, 620
N.Y.S.2d 506, 509 (3d
Dep't
1994
) (citations omitted)).
As an initial
consideration, the party asserting res judicata has the burden of
establishing privity with the parties to the prior adjudication.
Defendants have not addressed this issue and have therefore failed to
meet their burden on this initial threshold question. Nonetheless, it is
quite unlikely that the facts would support a finding a privity.
Although the Defendants and their parents have a familial relationship,
that alone will not automatically suffice to establish privity. See
Ferris, 118 F.3d at 127 n.6 (and cases cited therein). Further,
though it could be alleged that Defendants are successors in interest to
the property at issue, and thus have the requisite privity, such a
conclusion would ignore the specific factual setting. The conveyance
occurred prior to the IRS assessment of tax liability and because the
property was not considered an asset of the parents' bankruptcy
estate--the discharge of which was the determination central to the
prior adjudication--the Defendants cannot allege privity as successors
in interest. Nor were the Defendants' interests necessarily represented
by the parents in the Chapter 13 bankruptcy proceeding, as the IRS did
not assert any lien or claim against them at that time.
Considering
the fourth element, whether the causes of action are the same,
Defendants have once again failed to make specific factual or legal
assertions to support this required element. This inquiry requires
determining whether the second suit involves the same "claim"
or "nucleus of operative fact."
Interoceanica,
107 F.3d at 90 (citing Apparel Art Int'l, Inc. v. Amertex Enters.
Ltd., 48 F.3d 576, 583 (1st Cir. 1995). New York courts have adopted
the 'transactional approach' to res judicata, or claim
preclusion, holding that if claims arise out of "the same 'factual
grouping,' 'transaction,' or 'series of transactions,' " they are
deemed to be part of the same cause of action and the later claim will
be barred without regard to whether it is based upon different legal
theories or seeks different or additional relief. Board of Managers
of Windridge Condominiums One v. Horn, 234 A.D.2d 249, 250, 651
N.Y.S.2d 326, 327 (2d Dep't 1996) (citing Smith v. Russell Sage
College, 54 N.Y.2d 185, 192-93, 445 N.Y.S.2d 68, 71, 429 N.E.2d 746
(1981)); see also Davidson v. Capuano, 792 F.2d 275, 278 (2d Cir.
1986).
The claims
asserted and the underlying transactions are facially dissimilar, yet
both stem from the parents' tax liability. The initial action, the
Chapter 13 bankruptcy proceeding, resulted in a bankruptcy plan and a
subsequent discharge. A Chapter 13 confirmation plan binds the debtors
and creditors, and subject to exceptions, vests all property of the
estate in the debtor, and the subsequent confirmation order discharges
all debts, subject to exceptions. See 11 U.S.C. §§1327, 1328.
The case at bar is brought by the Government to set aside a fraudulent
conveyance of the property and to foreclose federal tax liens.
Corbett
counsels to inquire whether the judgment resulting from the instant
motions would impair, destroy, challenge, or invalidate the
enforceability or effectiveness of the reorganization plan. Corbett,
124 F.3d at 87. As will be discussed infra, and as Plaintiff agrees, the
parents' personal tax liability was discharged in bankruptcy, and as
such, a decision foreclosing on the property will not invalidate or
destroy the concluded Chapter 13 proceeding. Further, at the bankruptcy
proceeding, neither the debtors nor the creditors claimed or addressed
the property as an asset of the bankruptcy estate. Conversely,
disposition of the property is central to the instant claim. The
evidence and factual issues supporting the Government's fraudulent
conveyance claim bear little resemblance to the claims asserted at the
bankruptcy proceeding.
Accordingly,
because Defendants having failed to support their blanket assertion of res
judicata, specifically with respect to the elements of privity and
same causes of action, this defense will not lie.
2.
Collateral Estoppel
Collateral
estoppel bars the relitigation of issues actually litigated and decided
in the prior proceeding, as long as that determination was essential to
the judgment. Central Hudson Gas&Elec. v. Empresa Naviera Santa
S.A., 56 F.3d 359, 368 (2d Cir. 1995); see also, Johnson v.
Watkins, 101 F.3d 792, 795 (2d Cir. 1996) (stating that
"collateral estoppel has been narrowly tailored to ensure that it
applies only where circumstances indicate the issue estopped from
further consideration was thoroughly explored in the prior proceeding,
and that the resulting judgment thus has some indicia of
correctness"). Thus the "narrower principle" of
collateral estoppel, makes conclusive the determination of an issue in a
prior proceeding "in subsequent suits based on a different cause of
action involving a party to the prior litigation."
Montana
v.
United States
, 440
U.S.
147, 153, 99
S. Ct.
970, 973, 59 L. Ed. 2d 210 (1979). "The whole premise of collateral
estoppel is that once an issue has been resolved in a prior proceeding,
there is no further fact finding function to be performed." Parklane
Hosiery Co., Inc. v. Shore, 439
U.S.
322, 336 n.23, 99 S. Ct. 645, 654 n.23, 58 L. Ed. 2d 552 (1979).
The Second
Circuit has enunciated four elements which must be met in order for
collateral estoppel to apply: (1) the issues at both proceedings must be
identical; (2) the relevant issues were actually litigated and decided
in the prior proceeding; (3) there must have been full and fair
opportunity for litigation of the issues in the prior proceeding; and
(4) the issues were necessary to support a valid and final judgment on
the merits.
Central Hudson
, 56 F.3d at 368. In addition, a court must also engage in a fairness
analysis to determine "whether controlling facts or legal
principles have changed significantly since the [prior] judgment [and] .
. . whether other special circumstances warrant an exception to the
normal rules of preclusion."
Montana
, 440
U.S.
at 155, 99
S. Ct.
at 974-75. The party seeking the benefit of collateral estoppel bears
the burden of establishing the necessary elements. Dowling v.
United States
, 493
U.S.
342, 350, 110
S. Ct.
668, 673, 107 L. Ed. 2d 708 (1990); In re Sokol, 113 F.3d 303,
306 (2d Cir. 1997).
As will become
evident infra, the determinative issue in this action is whether the
parents fraudulently conveyed the property to the Defendants, an issue
never decided or raised in the bankruptcy proceeding. Thus, in Barristers
Abstract Corp. v. Caulfield, 241 A.D.2d 472, 660 N.Y.S.2d 62, 62 (2d
Dep't 1997), the court held that neither res judicata nor
collateral estoppel barred an action to set aside the transfer of real
property as fraudulent where a prior decision in the transferor's
bankruptcy case did not resolve the ultimate question of fact, whether
the transfer was made with intent to hinder creditors. The Appellate
Division so held even though the issue of fraudulent conveyance was
raised, but not decided, by the bankruptcy court.
Id.
Defendants'
contention appears to be that the issue decided at the bankruptcy
proceeding was the discharge of all debts of the parents' estate. This
included all property of the estate including all legal and equitable
interests of the debtor in property as of the commencement of the
bankruptcy proceeding, which, Defendants assert, must have included
their interest in the property at issue, especially in light of the
Government's allegation that it attached a lien on the property in 1986.
Yet, the specific issue of the legitimacy of the conveyance and whether
it was in fact an asset of the bankruptcy estate was never raised or
litigated in the bankruptcy proceeding, and therefore, collateral
estoppel is inapposite. Moreover, due to the in rem lien characteristics
and the Second Circuit's holding that pre-petition fraudulent
disposition of property is not property of the estate until judicial
determination, see In re Colonial Realty Co., 980 F.2d 125 (2d
Cir. 1992), as discussed within, Defendants' collateral estoppel defense
is futile.
However,
although articulated as a defense based solely upon collateral estoppel
and res judicata, Defendants' legal argument proffered appears to
encompass issues of waiver, satisfaction and discharge, and as such,
will be considered in the Court's examination of Plaintiff's summary
judgment motion.
III.
PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
In support of
its motion for summary judgment, Plaintiff asserts a tax lien and a
fraudulent conveyance theory. These theories will be addressed seriatim.
It is
important to note at this juncture that many, if not all, of the
arguments raised by Plaintiff are neither addressed nor challenged by
Defendants, and although it is not the Court's role to champion the
position of either party, the issues raised are of sufficient juridical
importance and personal gravity to warrant thorough analysis. To order
the foreclosure of an individual's residence, on what amounts to little
more than uncontested papers, and predicated upon someone else's
seventeen year old tax liability, gives this Court great pause for
concern.
1.
Was the Action Timely Commenced
Although it
was not raised in Defendant's papers, and although many courts have been
reluctant to consider statutes of limitations issues sua sponte, see
Davis v. Bryan, 810 F.2d 42, 44 (2d Cir. 1987), the Court will
briefly touch upon the subject. The
New York
State
statute of limitations applicable to fraudulent conveyances does not
apply to the
United States
. The
United States
acts in its sovereign capacity when it brings suit to set aside a
fraudulent conveyance or to enforce a tax lien. When acting in such
capacity, the Government is not bound by state statutes of limitations
or subject to the defense of laches. United States v. Summerlin
[40-2 USTC ¶9633], 310 U.S. 414, 416-17, 60 S. Ct. 1019, 1020, 84 L.
Ed. 1283 (1940) (holding United States is not bound by state statutes of
limitation or subject to the defense of laches in enforcing its rights);
see also United States v. RePass, 688 F.2d 154, 158 (2d Cir.
1982) (finding laches is not available against the United States); United
State v. Podell, 572 F.2d 31, 35 (2nd Cir. 1978) (holding United
States is not subject to any statutes of limitation, unless Congress
specifically provides otherwise); United States v. Carney, 796 F.
Supp. 700, 703 (E.D.N.Y. 1992) (holding state statute of limitations for
New York's Debtor and Creditor Law is not applicable against the
government).
Plaintiff is,
however, bound by the statute of limitations contained in 26 U.S.C. §6502(a)(1),
as amended in 1994. This section as amended provides that "where
the assessment of any tax imposed by this title has been made within the
period of limitation properly applicable thereto, such tax may be
collected by levy or by a proceeding in court, but only if the levy is
made or the proceeding begun . . . (1) within 10 years after the
assessment of the tax." 26 U.S.C. §6502(a)(1). This amended
version of 26 U.S.C. §6502(a)(1) extended the limitations period from 6
years to 10 years, effective November 1990, and it is retroactively
applicable to the current action because the assessment against the
parents was made in 1986, and the statute was amended before the tax
lien would have been discharged in 1992. See In re Dakota Industries,
Inc. [91-2 USTC ¶50,467], 131 B.R. 437, 441 (Bankr. D.S.D. 1991)
(holding that if a tax lien was not discharged by the November 1990
effective date of the amended statute, the amended version would be
retroactively applied). Furthermore, 26 U.S.C. §6901(c)(1) extends the
limitations period for the Internal Revenue Service to commence an
action to collect outstanding taxes of a transferor through property of
a transferee one year beyond the end of the limitations period in 26
U.S.C. §6502(a)(1).
The Government
assessed the federal income tax liability against the parents in
September and October of 1986, and initiated this action in September of
1996, within the combined 11-year period under 26 U.S.C. Sections
6502(a)(1) and 6901(c)(1). Therefore, Plaintiff's action was timely
commenced.
2.
Plaintiff's Standing to Pursue this Action
The Court also
examines the Government's right to commence an action pursuant to a
federal tax lien against a party who is not the delinquent taxpayer,
notwithstanding Defendant's failure to raise the issue. Plaintiff
maintains that its power to pursue this action springs from 26 U.S.C.
Sections 7401 and 7403. The government may pursue outstanding tax liens
in district courts pursuant to 26 U.S.C. §7403. Further, 26 U.S.C. §6331(a)
provides in relevant part, "if any person liable to pay any tax
neglects or refuses to pay the same within 10 days after notice and
demand, it shall be lawful for the Secretary to collect such tax . . .
by levy upon all property and rights to property . . . belonging to such
person or on which there is a lien provided in this chapter for the
payment of such tax." See Jones v. Internal Revenue Serv.,
206 B.R. 614, 617 (Bankr. D.C. 1997) (observing that pursuant to §6331,
a tax levy can be made on either property belonging to the taxpayer or
on property subject to a tax lien as in the case of property the debtor
has conveyed to another before levy has been attempted). Applicable
Supreme Court precedent upholds the
United States
' authority to take action against a transferee of property to collect
outstanding tax liens. United States v. Rodgers [83-1 USTC ¶9374],
461 U.S. 677, 694 n.18, 103 S. Ct. 2132, 2142 n.18, 76 L. Ed. 2d 236
(1983) (interpreting Section 7403 to reach the entire property in which
a delinquent taxpayer has or had any "right, title, or
interest"); see also Kathy B. Enters., Inc. v. United States,
779 F.2d 1413, 1415 (9th Cir. 1986) (affirming district court's ruling
that IRS could proceed against transferee of taxpayer's property prior
to taxpayer's discharge in bankruptcy); United States v. Nicholson
[98-2 USTC ¶50,639], 1998 U.S. Dist. LEXIS 11580, *9, No. CIV. A.
97-CV-3309, 1998 WL 437267, at *4 (E.D. Pa. July 15, 1998) (holding that
"26 U.S.C. §6901(a) provides a summary
admin
istrative procedure for the collection of an existing tax liability from
transferees of the taxpayer's property," and this is not the
government's exclusive remedy); United States v. Perrina, 877 F.
Supp. 215, 217 (D.N.J. 1994) (stating the "United States as a
creditor has the right, like any other creditor, to bring an action
either to enforce a lien under 26 U.S.C. §7403 or against the
transferee of a taxpayer for a fraudulent conveyance").
Specifically,
the Supreme Court held that Section 7403 does grant the district court
the power to order the sale of a property to satisfy an outstanding
lien, but "that its exercise is limited to some degree by equitable
discretion." Rodgers [83-1 USTC ¶9374], 461
U.S.
at 680, 103
S. Ct.
at 2136.
One other
statutory provision bears noting. From the bankruptcy laws, 11 U.S.C. §524(e)
provides that the "discharge of a debt of a debtor does not affect
the liability of any other entity on, or the property of any other
entity for, such debt," also supporting the authority of the
Government to proceed against the Defendants notwithstanding the
parents' bankruptcy discharge.
Accordingly,
Plaintiff has standing to bring this action against Defendants.
3.
The Tax Lien And The Bankruptcy Proceeding
It is
undisputed that the Government filed a valid tax lien against the
parents prior to their entering into bankruptcy protection. It is also
uncontested that at the time of the bankruptcy proceeding the Government
was aware of the prior conveyance of the property, although it was
apparently never mentioned by the parents or the IRS. Plaintiff
initially asserted a secured claim against the parents in the full
amount of the tax deficiency and later agreed to reduce the secured
claim to $ 2,000.00, the apparent amount of assets in the bankruptcy
estate. The bankruptcy plan was confirmed, effectively discharging the
debtors of all outstanding debts. Although it seems a natural
inclination to conclude that the bankruptcy proceeding therefore
discharged the parents' tax liability, the Government asserts two
separate legal theories to dispel this reasoning. The lien theory
concedes that the parents in personam liability to the IRS was
discharged in bankruptcy, yet asserts an in rem claim against the
property.
The Government
cites to In re Isom [90-1 USTC ¶50,216], 901 F.2d 744 (9th Cir.
1990) for the proposition that a bankruptcy discharge does not destroy a
United States
tax lien. This is generally a correct statement of law. The Ninth
Circuit specifically held that "26 U.S.C. §6325(a)(1) does not
require the I.R.S. to release valid tax liens when the underlying tax
debt is discharged in bankruptcy."
Id.
at 745. To properly analyze its relevance to the instant action requires
a more detailed understanding of the applicable tax provisions.
A tax lien
arises from Section 6321 of Title 26 of the United States Code, which
provides:
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any costs that may accrue in
addition thereto) shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal, belonging to
such person.
26
U.S.C. §6321. This language "is broad and reveals on its face that
Congress meant to reach every interest in property that a taxpayer might
have." United States v. National Bank of Commerce [85-2 USTC
¶9482], 472 U.S. 713, 719-20, 105 S.
Ct.
2919, 2924, 86 L. Ed. 2d 565 (1985) (citations omitted). The lien shall
arise at the time the assessment is made and shall continue until the
liability for the amount so assessed is satisfied or becomes
unenforceable by reason of lapse of time. See 26 U.S.C. §6322; see
also United States v. City of New Britain [54-1 USTC ¶9191], 347
U.S. 81, 84, 74 S. Ct. 367, 369, 98 L. Ed. 520 (1954) (describing lien
as choate "when the identity of the lienor, the property subject to
the lien, and the amount of the lien are established" and the
federal tax lien, as a general lien when attached at the time of
assessment to all of the taxpayer's property, was thus perfected).
"A federal tax lien becomes a lien on all property of the debtor,
so the property need not be described." In re LMS Holding Co.,
50 F.3d 1526, 1530 (10th Cir. 1995).
A lien is
released when "the liability for the amount assessed, together with
all interest in respect thereof, has been fully satisfied or becomes
legally unenforceable," and the Secretary shall thereafter within
30 days issue a certificate of release. See 26 U.S.C. §6325(a)(1).
Therefore, the
initial issue is whether the Government's acquiescence to the
reclassification of its secured claim to an unsecured claim, and
Defendants' subsequent discharge in bankruptcy, satisfies the
requirement of §6325. Or stated in another fashion, though Isom stands
for the proposition that the IRS is not required to release valid tax
liens when the underlying tax debt is discharged in bankruptcy, is the
same result required when the IRS agrees to a reclassification of its
debt from secured to unsecured, prior to discharge.
The first line
of cases, representing the vast weight of opinion, espouse the result
achieved in Isom. A good starting analysis of the issue begins with In
re Leavell, 124 B.R. 535, 540 (Bankr S.D. Ill. 1991), wherein the
court recited the general rule, "once the taxpayer files for
bankruptcy and receives a discharge, he is relieved of personal
liability for dischargeable tax debts. The debtor's discharge does not
automatically invalidate tax liens securing dischargeable debts, and
these liens continue beyond bankruptcy as a charge upon the debtor's
property if not disallowed or avoided."
Id.
(citing In re Leslie, 103 B.R. 775 (Bankr. S.D.
W.Va.
1989) & In re Dillard, 118 B.R. 89 (Bankr. N.D.
Ill.
1990)).
This reasoning
was followed by In re Stephenson, 96 B.R. 388 (Bankr. S.D. Fla.
1988), as the court upheld the federal tax lien recorded against the
debtors' homestead prior to their Chapter 7 filing, even though the
underlying tax obligation was discharged in bankruptcy. Id. at
389 (citing Verran v. United States Treasury Dep't [80-2 USTC ¶9606],
623 F.2d 477, 479 (6th Cir. 1980) (holding the IRS could collect unpaid
tax liability from property owned by debtors prior to their petition in
bankruptcy to the extent the government possessed a valid lien upon such
property), see also In re Sills [96-1 USTC ¶50,282], 82 F.3d
111, 113 (5th Cir. 1996) (affirming validity of IRS tax lien and finding
claim that lien is unenforceable to be meritless); In re Aylward
[97-2 USTC ¶50,796], 208 B.R. 565 (Bankr. M.D. Fla. 1997) (Chapter 11
debtor claimed tax lien was unenforceable, because, in part, it was not
perfected as required by the Bankruptcy Code, however, the court looked
to the applicable IRS Code in determining that the lien was enforceable
and the debtor's discharge only protected personal debt and not
property); In re Doviak, 161 B.R. 379, 381 (Bankr. E.D. Tex.
1993) (disallowing debtor's motion to "strip down" IRS tax
lien, in part, because debtor's in rem liability survived debtor's
bankruptcy discharge and Congress carved out tax liens as an exception
to the general lien avoidance provisions of §522); In re Cennamo,
147 B.R. 540, 542 (Bankr. C.D. Ca. 1992) (wherein both parties conceded
that the debtor's discharge operated only as a discharge of the in
personam liability to the IRS and did not eliminate the pre-petition tax
liens, as the IRS retained a legally enforceable in rem claim), In re
Hanson [91-2 USTC ¶50,485], 132 B.R. 406, 410 (Bankr. E.D. Mo.
1991) (holding when the IRS obtained its tax lien, it obtained rights
against the debtor's property to secure payment of the underlying tax
obligations in addition to the rights the IRS had against the debtors
personally, which alone were discharged in bankruptcy); In re Rench,
129 B.R. 649, 651 (Bankr. Kan. 1991) (concluding that IRS lien is a
statutory lien and although the debtors' liabilities for the tax years
are dischargeable, the federal tax liens for those years remain
enforceable against any assets acquired before the bankruptcy petition
was filed); In re Gerulis [85-2 USTC ¶9753], 56 B.R. 283 (Bankr.
D.
Minn.
1985) (holding debt of debtors to IRS is discharged, while IRS liens are
not).
The
distinction correctly advanced by the Government concerns the extent and
nature of the discharge that results from a bankruptcy proceeding. A
discharge in bankruptcy "operates as an injunction against the
commencement or continuation of an action, the employment of process, or
an act, to collect, recover or offset any such debt as a personal
liability of the debtor, whether or not discharge of such debt is
waived." 11 U.S.C. §524(a)(2) (emphasis added). Therefore,
"discharge does not affect liability in rem and prepetition liens
remain enforceable after discharge." In re Wren, 40 F.3d
1162, 1164 (11th Cir. 1994) (citing 3 Collier on Bankruptcy P 524.02 [1]
(Lawrence P. King ed., 15th ed. 1994); Dewsnup v. Timm, 502 U.S.
410, 418, 112 S. Ct. 773, 778, 116 L. Ed. 2d 903 (1992); Johnson v.
Home State Bank, 501 U.S. 78, 81-83, 111 S. Ct. 2150, 2153, 115 L.
Ed. 2d 66 (1991); Isom [90-1 USTC ¶50,216], 901 F.2d at 745; In
re Thomas, 883 F.2d 991, 997 (11th Cir. 1989); Estate of Lellock
v. Prudential Ins. Co., 811 F.2d 186, 189 (3d Cir. 1987)). See
also In re Harmon, 101 F.3d 574, 581 (8th Cir. 1996) ("No one
suggests that the discharge provisions remove a lien from the debtor's
property or make a lien unenforceable in rem.").
Illustrative
is In re Avola, in which the court affirmatively answered the
question of "whether federal tax liens continue to attach to the
debtors' pre-petition property even though the debtors' personal
liability for the taxes have been discharged." 1997 Bankr. LEXIS
1200, *10, No. 9525068, 1997 WL 792534, at *2 (Bankr. D.N.J. July 17,
1997). The court cited Johnson, 501
U.S.
at 84, 111
S. Ct.
at 2154, for the proposition that a "bankruptcy discharge
extinguishes only an action against the debtor in personam while leaving
intact an action in rem."
Id.
Ultimately the court denied debtors' motion to avoid the federal tax
liens against their pre-petition property.
Id.
at *3.
Also
instructive is In re Dillard, wherein the court framed the issue
as "whether the IRS must release its tax lien on Plaintiffs'
property when the tax obligations which gave rise to that lien are
dischargeable in bankruptcy." 118 B.R. at 91. The court analogized
a tax lien to a secured creditor's lien and looked to established
precedent for the axiom that valid liens that have not been disallowed
or avoided survive the discharge of the underlying debt. See, e.g.,
In re Lindsey, 823 F.2d 189 (7th Cir. 1987); Matter of Tarnow,
749 F.2d 464 (7th Cir. 1984); In re Ryan, 100 B.R. 411 (Bankr.
N.D.
Ill.
1989).
By obtaining a
tax lien, the IRS became a secured creditor under 11 U.S.C. §506(a). Dillard,
118 B.R. at 92. "The IRS's rights against the liened property
survive the bankruptcy notwithstanding the fact that the underlying
obligations are dischargeable." Id. (citing Lindsey,
823 F.2d at 191 ("The main purpose served by section 506 is to put
the secured creditor who chooses to pursue his rights in bankruptcy in
the same position that he would occupy if he had decided to bypass
bankruptcy.")).
The court went
on to consider whether the obligations discharged in bankruptcy were
therefore "legally unenforceable" within 26 U.S.C. §6325(a)(1).
118 B.R. at 92. Concurring with the reasoning of Isom and its
progeny, the court looked to the specific language of 26 U.S.C. §6325(a)(1)
and 11 U.S.C. §524(a)(2) and explained that the language of 11 U.S.C.
§524 specifically speaks of enjoining efforts to collect a debt as a
'personal liability' of the debtor. When the IRS obtained its tax lien
it obtained rights against the liened property to secure payment of the
tax obligations. Such rights were in addition to the rights it had
against [the debtors] personally. As the language of . . . §524(a)(2)
and the [precedent] indicate, rights against taxpayers personally are
affected by the bankruptcy discharge, but in rem lien rights are not.
Because a lien holder retains ability to enforce pre-petition
dischargeable obligations against the liened property even after
bankruptcy discharge, the debtor's obligation survives the discharge to
the extent it is secured by the liened property. . . . Although the lien
holder cannot enforce the obligations for unpaid debts personally
against the debtor, even following discharge the IRS can pursue its
rights against the liened property. . . . To be truly 'unenforceable'
under 26 U.S.C. §6325(a) means that all of the creditor's remedies to
satisfy a prepetition obligation must be extinguished. Since only [the
debtors'] personal liability for the tax obligations was extinguished by
the bankruptcy discharge, survival of the lien means that the obligation
is not wholly 'unenforceable'.
Id.
at 93.
There seems to
be a divergence of opinion as to whether the creditor's action post
discharge is necessarily an action in rem. For if it is, it would seem
logical to require the lien to have identified and/or attached to the
specific property at the inception of the lien. This is not a problem in
the majority of the cases which often involve creditors as mortgagees.
However, as in the case at bar, where the tax lien was not recorded as a
lien against the particular property but only against the parents, an
action to enforce the lien in rem may be inapposite. Of course, this
distinction may go more to the definitional use of the term, for
"it is true that, in a strict sense, a proceeding in rem is one
taken directly against property, and has for its object the disposition
of property, . . . but, in a larger and more general sense, the terms
are applied to actions between parties, where the direct object is to
reach and dispose of property owned by them, or of some interest
therein." Black's Law Dictionary 793 (6th ed. 1990).
The court in Isom
came to a similar conclusion for a different reason. Although the Ninth
Circuit affirmed the Ninth Circuit Bankruptcy Appellate Panel's
("BAP") decision, it rejected the distinction as one between
an action in personam and an action in rem, because although this result
makes sense in the bankruptcy discharge context, it might not make sense
if applied in other contexts. For example, if a taxpayer prevails in a
court action against the IRS and is discharged of personal liability,
the IRS would not necessarily be required to release the liens under the
BAP's reasoning. The better approach is to determine the legal
enforceability of the liability by referring to the relevant law
affecting the liens. In this case we refer to the bankruptcy code to
determine if the liability is legally enforceable.
Isom
[90-1 USTC ¶50,216], 901 F.2d at 746 n.3. Thus the lien prevailed not
because it was enforced via an action in rem, but because liability for
the amount assessed as against the debtor's property survived,
notwithstanding the discharge of the debtor's personal liability. See
also Thomas, 883 F.2d at 997 (section 506(d)(1) "codifies the
rule of Long v. Bullard--which previously had been purely a
judge-made rule of bankruptcy law--permitting liens to pass through
bankruptcy unaffected"). It appears that the reasoning in Isom is
sound, and the better approach is the lien survives as against the
property of the debtor.
In addition,
the applicable treasury regulation pertaining to release of a lien adds
the word "entire" to modify liability so that a lien is
released "when ever [the Secretary] finds that the entire liability
for the tax has been satisfied or has become unenforceable as a matter
of law. . . ." In re Burns [92-2 USTC ¶50,476], 974 F.2d
1064, 1065 (9th Cir. 1992) (citing Treas. Reg. §301.6325-1(a))
(emphasis added).
Defendants
herein never moved for a release of the IRS lien and never satisfied the
methods in which an IRS tax lien can be released: "(1) the tax lien
becomes unenforceable by operation of time, (2) the debt which is the
basis of the lien is paid in full or (3) an Offer in Compromise is
accepted by the IRS which would settle the debt and any tax lien
associated with the debt would be no longer enforceable and have to be
released." In re
Rob
ert Turner Optical, Inc., Bankr. No. 93-01004, 1994 WL 779352, at *4
(Bankr. N.D. Ala. Sept. 8, 1994) (upholding validity of federal tax
lien).
Defendants
contend that the Government's action in allowing the debt to be
reclassified as unsecured effectively waived its right to collect the
balance. However, no evidence has been put forth suggesting that the
Government's actions amounted to acceptance of an offer in compromise in
settlement of the total tax liability. See In re Pearson, 214
B.R. 156, 160-61 (Bankr. N.D. Ohio 1997) (finding IRS' adjustment of
proof of claim from secured to unsecured did not constitute settlement
requiring removal of underlying lien). There is a marked distinction
between a voluntary consensual release and a discharge in bankruptcy. A
creditor's acceptance of a reorganization plan is not an
"unambiguously manifested assent to the release of the nondebtor
from liability on its debt." In re Arrowmill Dev. Corp., 211
B.R. 497, 507 (Bankr. D.N.J. 1997); see also First Fidelity Bank v.
McAteer, 985 F.2d 114, 118 (3d Cir. 1993) ("a bankruptcy
discharge arises by operation of federal bankruptcy law, not by
contractual consent of the creditors"). Apparently, the Defendants
did not file an adversary proceeding to suggest any grounds under 11
U.S.C. §545 for the avoidance of the IRS' statutory lien.
The factual
setting and analysis of In re Deppisch is also germane to the instant
case. B.R. , 1998 Bankr. LEXIS 1646, 1998 WL 910048, at *3 (Bankr. S.D.
Ohio
Dec. 11, 1998). The IRS filed a tax lien and the taxpayer filed for
bankruptcy under Chapter 7. Pursuant thereto, the IRS entered into an
"Agreed Order of Dischargeability," yet eight months later it
levied the debtor's IRA account.
Id.
, 1998 WL 910048, at *1. The court granted the government's summary
judgment motion in an action by the debtor for damages for violation of
the bankruptcy discharge.
Id.
The court concluded that the debtor's tax liability was transformed into
a statutory lien once the tax assessment was made.
Id.
at *3 (citing United States v. Carlin [97-1 USTC ¶50,302], 948
F. Supp. 271 (S.D.N.Y. 1996)). Although the underlying debt was
discharged in bankruptcy, it does not render the liability for the
amount assessed subject to a valid lien legally unenforceable, and
therefore, the pre-petition federal tax lien continues in force. Id.
(citing Long v. Bullard, 117 U.S. 617, 6 S. Ct. 917, 29 L. Ed.
1004 (1886) (discharge in bankruptcy did not release a pre-petition lien
of a mortgage); Johnson, (bankruptcy discharge only extinguishes in
personam and not in rem action against the debtor); Dewsnup, (IRS cannot
proceed to collect from the debtor personally, it may satisfy the lien
by levying against the debtor's property)).
Finally, in United
States v. Uria, 180 B.R. 688 (S.D. Fla. 1995), the district court
reversed the ruling of the bankruptcy judge releasing the federal tax
liens as unenforceable. The debtors filed separate petitions for
bankruptcy and an adversary complaint to determine dischargeability of
tax liability. The debtors specifically objected to granting the liens
secured claim status and they alleged that pursuant to 11 U.S.C. §506(d),
to the extent the federal tax lien secures a claim that is not an
allowed secured claim, it may be avoided. Although the district court
judge acknowledged that it was hard to "conceptualize why the
federal tax liens should be allowed to survive bankruptcy after the
underlying liability is discharged," id. at 692, binding
precedent and strict statutory interpretation mandated that eventuality.
Thus, although the debtors tax liability was discharged, there was
evidence of equity to which the federal liens could attach, the equity
in the debtors' home, and therefore, the liens were enforceable and
survived the discharge.
Id.
at 693.
Part of the
conceptual difficulty may arise from the interplay between a discharge
of the debtor's debt and an extinguishment of the creditor's claim. The
key point is that although a debtor's debt may be personally discharged
in bankruptcy, the underlying debt is not extinguished. See In re
Conston, Inc., 181 B.R. 769, 772 (D. Del. 1995) (finding
"discharge . . . does not cause the underlying debt to vanish"
and IRS priority claim may be asserted in a second Chapter 11 case,
because, in part, nothing in the bankruptcy code suggest that
confirmation of a reorganization plan relieves the IRS from following
its collection procedures) (and cases cited therein).
Further,
Chapter 13 reorganization looks to the confirmation of the plan as the
critical point in time. "The basic framework of [reorganization]
chapters contemplates the revesting of estate property in reorganized
debtors 'free and clear of all claims and interests of creditors, equity
security holders, and of the general partners of the debtor,' provided
that the property was "dealt with by the plan.' " In re
Dever, 164 B.R. 132, 138 (Bankr. C.D. Ca. 1994) (citing 11 U.S.C.
§§1141(c), 1227(c)&1327(c)). Here, the property at issue was
conveyed prior to the filing of the bankruptcy petition and there is no
indication that the property was "dealt with by the plan," and
therefore is not entitled to protection under the plan.
Also relevant
is that in the case of a purported fraudulent transfer, the Second
Circuit has not included such property when determining the debtor's
estate. The court in Colonial Realty, 980 F.2d at 130-31, adopted
the reasoning of In re Saunders, 101 B.R. 303 (Bankr. N.D. Fla.
1989) that "until a judicial determination has been made that the
property was, in fact, fraudulently transferred, it is not property of
the [debtor's] estate."
Id.
at 305. Therefore, absent a judicial determination that the property at
issue was fraudulently conveyed, it is not properly considered property
of the debtor for bankruptcy purposes. See also Bank Brussels Lambert
v. Credit Lyonnais, 192 B.R. 73 (S.D.N.Y. 1996) (finding account
receivable not property of debtors' estate based on Colonial analysis); In
re Corp. Food Management, 223 B.R. 635 (Bankr. E.D.N.Y. 1998)
(property fraudulently transferred is not property of the estate until
judicially determined so); Klingman v. Levinson, 158 B.R. 109
(Bankr. N.D. Ill. 1993) (adopting reasoning of Colonial and Saunders).