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 (9^th 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 (6^th 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 (5^th 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).