Conveyance by Taxpayer Page1

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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.

 

[2001-1 USTC ¶50,367] United States of America , Plaintiff v. Harold Morrell and Michael F. Morrell, Defendants

U.S. District Court, East. Dist. N.Y., 97 CV 5344 (NG), 3/23/2001

[Code Sec. 6323 ]

Liens and levies: Enforcement: Validity: Foreclosure: Transfer of property subject to lien.--Federal tax liens on a residence conveyed by married taxpayers to their son and an annuity traceable to securities also transferred to their son, in exchange for a promise of future support were valid and could be foreclosed. The parents conceded that they divested themselves of their assets through the conveyance, rendering them unable to satisfy their tax obligations and the son admitted that the purported agreement arose after the transfer had taken place. Further, there was no supporting documentation for the claim that the son purchased the securities with his own money. Thus, there was no basis for concluding that the shares had not been transferred to the son in the same manner as other securities were transferred or that the transfer occurred before the tax assessments were made.

[Code Sec. 6323 ]

Liens and levies: Enforcement: Validity: Foreclosure: Transfer of property subject to lien: Purchaser: Oral agreement.--An individual who promised to provide future support for his parents in exchange for their transfer to him of their home was not a purchaser whose interests in the transferred property were superior to federal tax liens on the property. The purported oral agreement under which the property was transferred was unenforceable under the statute of frauds and the son admitted that the agreement arose after the property was transferred. Moreover, courts have repeatedly rejected the argument that promises of future support constitute fair consideration.

[Code Sec. 6323 ]

Liens and levies: Enforcement: Validity: Foreclosure: Transfer of property subject to lien: Purchaser: Equitable subrogation.--An individual who promised to provide future support for his parents in exchange for their transfer to him of their home was not entitled equitable subrogation. He did not have an equitable lien superior to the government's lien because he did not satisfy a senior encumbrance on any of the properties, nor did his payments to his parents confer any benefit upon the government. Moreover, equitable principles did not point to the type of relief requested by the taxpayer.

ORDER

GERSHON, District Judge:

The United States moves pursuant to Rule 56, Fed. R. Civ. P., for summary judgment to declare the validity of certain tax liens and to order foreclosure on the liens and sale of property, consisting of a residence conveyed by taxpayers to their son and an annuity traceable to securities that had been transferred by taxpayers to their son, that is subject to the liens. Defendants oppose the motion, arguing that there are factual issues for trial: (1) that the son"s interests in the real and personal property that had been transferred to him are superior to the tax liens; (2) that some of the funds used to purchase the annuity came from the son's independently accumulated assets, or alternatively, from property transferred by the taxpayers before the liens attached; and (3) that the government is not entitled to the appreciation in the value of assets after the transfers by the parents to the son.

The Facts

The facts, which in part are set forth in a Joint Agreed Statement of Material Facts ("Joint Statement") entered into by the parties, are undisputed except as indicated. Defendant Harold Morrell invested in tax shelters and claimed deductions on his joint income tax returns filed with his wife, Dolores Morrell, for the years 1977--1980. ¹ The IRS disallowed the deductions for these four years and assessed deficiencies. Harold and Dolores Morrell contested the deficiencies in Tax Court. On August 13, 1990 , the Tax Court entered an agreed decision finding deficiencies for those years, exclusive of interest, of $182, 645, which with interest had grown to over $750,000 as of the date of the decision and approximately $1.4 million when the parties entered into the Joint Statement.

The IRS separately assessed the deficiencies and demanded payment for each of the years 1977--1980 between November 15 and December 10, 1990, thereby creating liens against all property of Harold and Dolores Morrell pursuant to 26 U.S.C. §§6321 and 6322. These statutes provide that a lien attaches at the time of assessment to "all property and rights to property" of the taxpayer for the amount of the assessment, including interest that may accrue, and continues until the liability is satisfied or becomes unenforceable by lapse of time. Tax liens were filed against Harold and Dolores Morrell in Suffolk County on September 11, 1991 . Harold Morrell does not contest the deficiencies, and agrees that judgment should be entered against him for the full amount of the liability.

Harold and Dolores Morrell transferred real estate, stocks and other securities to their son, defendant Michael F. Morrell. The real estate, a home in Suffolk County having a fair market value of approximately $400,000 at the time, was transferred by deed dated May 24, 1991 , after the assessment and attachment of the government's lien. ² Harold and Dolores Morrell continued to reside there after the transfer as they had before. There was no mortgage on the property. Harold and Dolores Morrell also transferred to Michael Morrell in May 1991 their holdings in municipal trusts worth over $217,000. The transfer was effectuated by transferring the holdings from the parents' account at Dean Witter to Michael's account at Dean Witter. Michael subsequently transferred the municipal trusts to a joint Dean Witter account of Michael and his spouse. In April 1992, Harold and Dolores Morrell transferred stock holdings worth approximately $200,000 from their Dean Witter account to the Dean Witter account of Michael and his spouse.

Harold Morrell claimed in his deposition that all of these transfers, which admittedly followed the assessment, were not undertaken to avoid payment of tax deficiencies. Instead, he asserted, the assets were transferred in light of the declining health of Dolores Morrell, so that the parents would qualify for government medical assistance. Michael Morrell testified in his deposition that he shared the same understanding of the reason for the transfers of assets, and was not aware at that time of his parents' tax difficulties. For purposes of the summary judgment motion, the government does not contest motivation, but asserts that it is entitled to foreclose on its liens regardless of motivation.

Michael Morrell's assertion of an interest superior to the government liens is based upon the defendants' claim that in exchange for the transfer of assets, Michael orally agreed to support his parents and in fact did so. Defendants argue that Michael Morrell therefore is a "purchaser" protected under 26 U.S.C. §6323(a) or, alternatively, that he is entitled to an equitable lien for the hundreds of thousands of dollars he spent to support his parents over the years following the transfers of assets.

Harold Morrell testified at his deposition that he and his wife transferred their residence, stocks and securities pursuant to a unitary plan to divest themselves of all assets, and that no other assets were left after the transfers. ³ Harold Morrell testified as follows as to the timing of the alleged support agreement in relationship to the transfer of property:

Q. In connection with the transfer of the assets, did your son later make some promises to you as to what he would do for you?

A. Well, we had set up for a planned estate, and he agreed after we transferred everything over to his name he would support us. We were concerned about our health, my wife's health, which subsequently has died, but concerned about Medicare, so we didn't want to have anything around. So we made a deal. We decided that we'll have Michael take everything now and then support us so that we wouldn't be exposing the assets to Medicaid.

*****

Q. At the time of the transfers that you made to your son, had your son agreed to give you support?

A. Yes.

*****

Q. And your recollection is that his promise for the support was before the transfers were made, not after?

A. I don't remember whether it was before or after. I don't remember that part, before or after.

Q. It could have been one or the other?

A. Yeah, it could have been.

*****

Q. Everything was oral?

A. Oral.

Q. Did your son ever tell you what he would do for you in the way of providing you support?

A. He would support us the way we were--the way we lived, you know.

Michael Morrell admitted at his deposition that he first found out about the transfer of property to him during a telephone call from his father saying, "here is what I've done, and I'm really doing this because of these Medicare issues." As far as Michael knew, the documentation for effecting the transfer of securities consisted simply of a name change in ownership of the Dean Witter account. Michael Morrell testified that the circumstances surrounding the support arrangement "was simply, We're going to give you this money, and, you know, I agreed to support them. I mean it was no--there was no formal arrangement." Michael reiterated that he thought "the transfer took place and then we had the discussion," which could have taken place one or two months after the transfer. The discussion was: "I would just pay all their expenses." In the deposition, Michael Morrell recollected that the transfer of securities occurred after the real estate had been transferred; he believed the transfer of securities took place in late 1991.

Michael Morrell's affidavit submitted in opposition to the summary judgment motion simply states, in reference to the purported agreement: "In exchange for the transfer of the assets, I agreed to support my parents for their lifetime," and that he "kept that promise" by the substantial deposits to his parents' bank accounts and his purchase of a townhouse in 1996 where his father lives rent free. The affidavit identifies the transferred assets as his parents' entire portfolio of stock and municipal bonds, and their home. The affidavit states that the home was transferred in May 1991, and the securities in May 1991 and April 1992.

In October 1995, Michael Morrell liquidated his joint Dean Witter account and used all of the proceeds to purchase a variable annuity for approximately $833,000. The government claims that its lien attaches to the entire amount of the annuity, which had increased in value to over $1 million as of March 31, 1998 . In opposition to the summary judgment motion, Michael Morrell claims that at least $380,000 in the Dean Witter account that was used to purchase the annuity represented separate savings accumulated by Michael and his wife and did not come from his parents. Michael also argues that the government should not be entitled to payment of the portion of the proceeds from his Dean Witter account used to purchase the annuity that represents appreciation in the Dean Witter account; Michael attributes that appreciation in asset value to his prudent and skillful management of the account.

The government agrees in principle that, to the extent that Michael could show that a portion of the annuity was purchased with funds that were not traceable to transfers from his parents after the lien attached, Michael would be entitled to retain a pro rata share of the proceeds of the annuity. However, the government contends that there is no genuine factual dispute that all of the funds in the Dean Witter account that were used to purchase the annuity are traceable to transfers made by Harold and Dolores Morrell after the tax liens had attached. The government also contends that, since the lien follows the property, it is entitled to foreclose on the entire value of the annuity, including any appreciation in value of the annuity or the Dean Witter fund used to purchase the annuity, until the deficiency, including accrued interest, is fully satisfied.

The property that Michael Morrell asserts had been purchased with his own funds is a tax free fund of Dean Witter. Neither Harold Morrell nor Michael Morrell produced most of their securities account records in discovery for the critical period of 1990 through the first few months of 1992, which would have shown all holdings and activity in the accounts in the periods preceding and following the assessments. Michael Morrell's affidavit in opposition to summary judgment attached his Dean Witter account statement for June 1991, which reflected a holding of 33,769 shares of Dean Witter New York Tax Free Inc. Fund, then worth approximately $378,000, as well as approximately $2,000 in a U.S. government money market fund. Michael claimed that these investments were acquired with his own funds and were not derived from property his parents transferred to him. Michael explained his failure to produce that statement and others or to discuss those holdings at his deposition by stating that he had only recently located some of these records, and that his memory had been impaired because of a heart condition. Michael Morrell did not produce any records that showed that he in fact purchased shares of this tax free fund from his own savings. The government responded to this new information by obtaining other records from Dean Witter, including the account statement for Harold and Dolores Morrell as of April 30, 1990 , showing that the exact same quantity, 33,769 shares of Dean Witter New York Tax Free Inc. Fund, then worth approximately $364,000, was held in the parents' account.

Because the account statements produced by the defendants and those obtained by the government from Dean Witter are incomplete, there is a gap between the April 1990 statement of the taxpayers and the June 1991 statement of Michael Morrell. Therefore, no document shows when, after April 1990, the 33,769 shares of Dean Witter New York Tax Free Inc. Fund were withdrawn from the taxpayers' account or where it went, or when, before June 1991, 33,769 shares of Dean Witter New York Tax Free Inc. Fund first were carried in Michael's account or where it came from. Defendants argue that there are factual issues, precluding the granting of summary judgment to the government, as to whether this fund was transferred from the parents to Michael Morrell, and if it was, when the transfer took place, i.e., before or after the tax liens attached in November and December, 1990.

Examination of the Dean Witter monthly statements for the account of Michael Morrell and his spouse from the end of 1991 until its liquidation in October and November 1995, when Michael used the entire proceeds to purchase the annuity, confirms the government's assertion that no new money or other assets were put into the account except for securities transferred by Harold and Dolores Morrell in April 1992. Defendants were afforded an opportunity after oral argument to identify any such assets that Michael put into the account, but their counsel notified the court that they had no further information to offer. The account statements show that there were few purchases and sales of securities, except for liquidations to withdraw funds from the account, and that all purchases of securities in the account during this time period were made with the proceeds from redemption of other securities held in the account and accumulated dividends and interest from those securities. Although Michael Morrell placed no new money in the account, he frequently made withdrawals from it between December 1992 and September 1995, for a total of approximately $119,000. The record contains no explanation of these withdrawals. As a result of these withdrawals, there was in fact negligible increase in the value of the account: it had a value of approximately $778,000 on March 31, 1992 , $807,000 on November 30, 1992 , $781,000 on February 28, 1995 , and $814,000 on May 31, 1995 , before being liquidated for approximately $833,000 in October and November, 1995.

Discussion

Summary Judgment Standards

Motions for Summary judgment are granted if there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. See Lipton v. Nature Co., 71 F.3d 464, 469 (2d Cir. 1995). The moving party must demonstrate the absence of any material factual issue genuinely in dispute. See id. A material fact is one whose resolution would "affect the outcome of the suit under governing law," and a dispute is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The court must view the inferences to be drawn from the facts in the light most favorable to the party opposing the motion. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). However, the non-moving party may not "rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986). Nor may the non-moving party "simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec., 475 U.S. at 586. The party must produce specific facts sufficient to establish that there is a genuine factual issue for trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

"Purchaser" Under 26 U.S.C. §6323(a)

Section 6323(a) of Title 26, United States Code, provides that "[t]he lien imposed by section 6321 shall not be valid as against any purchaser" until notice of the lien has been filed. A "purchaser" is defined in Section 6323(h)(6) 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." The Treasury Regulations define "adequate and full consideration" to require "consideration in money or money's worth having a reasonable relationship to the true value of the interest in the property acquired." 26 C.F.R. §301.6323(h)-1 (f)(3). "Money or money's worth" is defined in the regulation as including "tangible or intangible property, services and other consideration reducible to a money value," but excluding such things as "love and affection . . . or any other consideration not reducible to a money value." Id. §301.6323(h)-1(a)(3).

No reasonable juror could find that Michael Morrell was a "purchaser" within the meaning of this provision. First, defendants conceded during oral argument of the summary judgment motion that the purported oral agreement by Michael Morrell to support the taxpayers for their lives is unenforceable under the statute of frauds. Obviously, an unenforceable promise of future support is not "adequate and full consideration in money or money's worth" under any rational construction of the statute.

Second, there is no genuine issue of fact as to the existence of an agreement, even an oral one, in which Michael Morrell furnished consideration in exchange for which Harold and Dolores Morrell transferred these properties to him. Michael Morrell testified at his deposition that his best recollection was that any discussion he had with his father concerning support occurred after the property had already been placed in his name by the unilateral action of his parents. Viewed most favorably to him, Harold Morrell admitted that he could not recall whether any such discussion preceded or followed the transfers. Accordingly, there is no basis for a reasonable jury to find that consideration was furnished in exchange for the transfers of property, even if any such promise would have been enforceable.

Third, even if there had been an agreement that was enforceable before the transfers took place, Michael Morrell's promise to support his parents is not "adequate and full consideration in money or money's worth" for the immediate conveyance of unencumbered assets worth over $800,000 (or almost $1.2 million when the Dean Witter New York Tax Free Inc. Fund is included, see pp. 13-14 infra). The issue of adequate consideration is a matter of federal and not state law, and as the Second Circuit has stated, "a finding that [taxpayer] conveyed the Property to her daughters for adequate consideration under New York law, while helpful, does not provide a rule of decision that [the daughters] are federally protected 'purchasers' under Section 6323(a)." United States v. McCombs [94-2 USTC ¶50,363], 30 F.3d 310, 330 (2d Cir. 1994). Nevertheless, in the absence of reported federal cases construing Section 6323's requirement of "adequate and full consideration" when the consideration furnished by the reputed purchaser is a promise of parental support, and notwithstanding the variations in statutory language, the New York decisions that have construed the requirement of "fair consideration" under Section 273 of New York Debtor and Creditor Law in similar circumstances are persuasive. ⁴ Courts have rejected repeatedly the argument that promises of future support constitute fair consideration within the meaning of Section 273. Schmitt, 98 A.D.2d at 936 (purchaser's promises to take over payments on mortgage, furnace and taxes, to permit debtors to remain in house rent-free, and to convey ten acres to debtors' sons did not constitute "fair consideration" under §273; "[s]uch promises . . . are akin to promises of future support, which are insufficient as a matter of law to be considered a fair equivalent of the property transferred"); Petition of National City Bank of New York, 269 App. Div. 1040 (2d Dep't 1945) (promise of future support is not fair consideration); see United States v. Bushlow [93-2 USTC ¶50,556 ], 832 F.Supp. 574, 582 (E.D.N.Y. 1993) (promises of future services are not "fair consideration" under §273).

Defendants concede that Harold and Dolores Morrell divested themselves of virtually all their assets when they conveyed their real and personal property to their son, which rendered them unable to satisfy their tax obligations, and received nothing in return except at most an oral promise of support. It is not reasonable to find this promise to be "adequate and full consideration in money or money's worth."

Equitable Lien

Defendants argue that, even if Michael Morrell is not a purchaser within the meaning of Section 6323(a), he is entitled to an "equitable lien," that is superior to the government's lien, for the hundreds of thousands of dollars he spent to support his parents. Pursuant to 26 U.S.C. §6323(i)(2), equitable subrogation applies in certain circumstances where a transferee of property or a junior lienor has satisfied a lien that is superior to the tax lien. The statute provides: "Where, under local law, one person is subrogated to the rights of another with respect to a lien or interest, such person shall be subrogated to such rights for purposes of any lien imposed by section 6321." Equitable subrogation is designed to avoid the unjust enrichment that would occur if the government could reap the benefit of having the senior lien satisfied but deprive the party who satisfied that senior lien of any benefit in a foreclosure proceeding. To avoid such unfairness, the party that satisfied the senior encumbrance is allowed to assume the position that had been occupied by the original holder of the senior lien, if equitable subrogation is authorized by state law. See United States v. Avila [96-2 USTC ¶50,357], 88 F.3d 229, 237-39 (3d Cir. 1996); Mort v. United States [96-1 USTC ¶50,315], 86 F.3d 890, 893-95 (9th Cir. 1996); Progressive Consumers Federal Credit Union v. United States [96-1 USTC ¶50,160], 79 F.3d 1228, 1234-37 (1st Cir. 1996).

Even assuming arguendo that the Second Circuit would recognize a non-statutory equitable doctrine applicable to tax liens, equitable principles do not point to the relief requested. ⁵ Michael Morrell did not satisfy a senior encumbrance on any of these properties; indeed, there was no mortgage on the real property. Nor did Michael's payments to his parents confer any benefit upon the government. Michael Morrell received property from his parents that they should have used to satisfy their indebtedness to the government and then gave money back to his parents so that they could continue to live in the same style as that to which they were accustomed, as if they had never incurred liability pursuant to an agreed judgment. Equity is not served by giving Michael Morrell credit for these payments to his parents.

Source of Funds for Annuity

It is undisputed that the residence and over $400,000 worth of securities were transferred from Harold and Dolores Morrell to Michael Morrell after the assessments were made. On review of the entire record, the undisputed facts also establish that additional securities worth approximately $380,000, consisting of 33,769 shares of Dean Witter New York Tax Free Inc. Fund also were transferred to Michael by his parents. With no supporting documentation of any kind, Michael Morrell claims that he purchased the 33,769 shares of the Dean Witter New York Tax Free Inc. Fund with his own money. There is no explanation for the astounding coincidence that a year before, the taxpayers had the exact same number of shares of the same fund in their account. Moreover, Harold Morrell testified that he transferred all of his assets to his son, ostensibly so that Harold and Dolores could qualify for government medical assistance, and defendants offer no other explanation for the fact that the 33,769 shares of the fund the parents held in 1990 were no longer owned by them later. Since all other securities were conveyed from parents to son by directing transfer of the securities from the parents' Dean Witter account to the son's Dean Witter account, there is no rational basis for concluding that the 33,769 shares in Michael Morrell's account had not also been transferred in the same manner.

Furthermore, no rational juror could find that the transfer of this fund was made by the parents to their son before the liens had attached. As set forth in the Facts section above, Harold Morrell testified that the transfer of all assets held by him and his wife to Michael took place pursuant to one plan to divest themselves of all assets. Michael Morrell testified that all securities he received from his parents were transferred after the residence had been conveyed to him; it is undisputed that the real property was transferred approximately six months after the assessments. The parties agree that the assessments were made in November and December 1990, the real property was conveyed in May 1991, and that other securities were transferred in May 1991 and April 1992. Accordingly, there is no basis in the undisputed evidence for finding that the Dean Witter New York Tax Free Inc. Fund was transferred before the assessments.

Appreciation

Michael Morrell's argument that the government is not entitled to foreclose on the annuity to the extent that it represents appreciation in the value of the security holdings after the transfers of assets from the taxpayers is erroneous. He does not question the well-settled principle that the lien follows the property. "The transfer of property subsequent to the attachment of the lien does not affect the lien, for 'it is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere. . . .' " United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57 (1958) (citations omitted). This principle has been held to mean that the lien attaches to any appreciation in the value of the property until the taxpayer's liability has been discharge. Avila [96-2 USTC ¶50,357], 88 F.3d at 231, 233-34 (government lien is not limited to taxpayer's equity when he conveyed the property subject to the lien; it also attaches to the appreciation in the value of the property after the conveyance); Han v. United States [91-2 USTC ¶50,486], 944 F.2d 526, 528-29 (9th Cir. 1991) (same); see United States v. Librizzi [97-1 USTC ¶50,263], 108 F.3d 136 (7th Cir. 1997) (government's lien extended to appreciated fair market value of deceased taxpayer's interest in the property at the time of foreclosure and is not limited to value at death).

Furthermore, the premises of defendant's argument, that the annuity was purchased with appreciated assets and that the appreciation is attributable to Michael Morrell's skillful and prudent management of his Dean Witter account, are unfounded under the undisputed facts recited earlier. Almost all of the appreciated value in the Dean Witter account was taken out of it by Michael between 1992 and the account's liquidation in late 1995; and, with the inclusion of approximately 380,000 from the New York Tax Free Inc. Fund that defendant omitted in advancing his contention, the remaining minimal appreciation is attributable to passive reinvestment of interest and dividends which there is no persuasive reason to exempt from the government lien.

Conclusion

The motion of plaintiff United States of America for summary judgment is granted. The government should submit a proposed judgment on fourteen days' notice to the defendants.

SO ORDERED.

¹ Dolores Morrell died after this action was commenced and is no longer a party.

² The parties agree that the fact that certain transfers were made after the attachment of the liens but preceded their filing, is not determinative in this case.

³ Harold and Dolores Morrell in fact continued to retain ownership of a condominium, but the government is not seeking to foreclose on that property in this proceeding.

⁴ N.Y. Debtor & Creditor Law §273 declares that any conveyance made by a person who is thereby rendered insolvent is constructively fraudulent as to creditors regardless of the transferor's "actual intent if the conveyance is made or the obligation is incurred without a fair consideration." Section 272 provides that "fair consideration" is given for property when, as a fair equivalent for it and in good faith, property is conveyed or an antecedent debt is satisfied, or when the property is received in good faith to secure a present advance or antecedent debt in an amount not disproportionately small as compared with the value of the property. Schmitt v. Morgan, 98 A.D.2d 934, 935 (3d Dep't 1983 ), appeal dismissed, 62 N.Y.2d 914 (1984).

⁵ In McCombs [94-2 USTC ¶50,363], 30 F.3d at 333, the court in dictum apparently applied the equitable subrogation doctrine of §6323(i)(2) without citing the statute.

 

 

[97-2 USTC ¶50,509] Carl G. Mueller, Jr., Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-5), U.S. Court of Appeals, 5th Circuit, 96-20419, 6/10/97, Reversing a District Court decision, 96-1 USTC ¶50,298

[Code Secs. 6323 and 7403 ]

Actions to enforce liens: Validity of liens: Priority of liens: Conveyance by taxpayer: State recording statutes, notice provisions: IRS immunity: Inquiry notice: Unjust enrichment.--The IRS's seizure of half the proceeds of a sale of real property in order to satisfy several tax liens against the seller's son was improper. The IRS was not exempt from the notice provisions of a state ( Texas ) recording statute and, therefore, was charged with inquiry notice with respect to a late-recorded deed in which the son conveyed his ownership interests to his father. Moreover, under state ( Texas ) law, the father held equitable title under a purchase money trust because he paid all the costs associated with the purchase of the property. The son's only obligation was to convey the legal title to his father which he did. Finally, since the IRS waited until the father paid the mortgage in its entirety before it executed the tax liens on the property, the retention of the proceeds from the sale would have resulted in the government's unjust enrichment.

Carl G. Mueller, Jr., Three River Hollow, Houston, Tex. 77027-9401, pro se. Carol A. Barthel, Gary R. Allen, Bruce Raleigh Ellisen, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before: POLITZ, Chief Judge, WIENER and STEWART, Circuit Judges.

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

POLITZ, Chief Judge: ^*

This appeal involves questions of property ownership under Texas law, of legal and equitable title, and of the proper application of the Texas recording statute in the factual scenario presented herein. Concluding that the trial court erred in holding that Carl Mueller owned only a one-half interest in the subject property, we reverse the grant of summary judgment in favor of the Internal Revenue Service. For the reasons assigned we render summary judgment in favor of Carl Mueller.

Background

On November 1, 1979 Carl G. Mueller, Jr. and his son Clint purchased a piece of property near Houston , Texas known as the Braewick property. Carl paid the earnest money, down payment, and closing costs totaling $9,548.85. The remaining consideration consisted of a purchase money first mortgage in the sum of $58,000 signed by both Carl and Clint Mueller. It appears that Clint was included as a signatory on the note in order to secure a more favorable interest rate. ¹ The warranty deed was properly recorded on November 19, 1979 .

On December 5, 1979 Clint executed a deed conveying his interest in the property to his father. The instrument was "executed effective as of November 1, 1979 ." Carl expressly agreed therein to assume Clint's obligations on the $58,000 note. Clint and his wife Karen then promptly moved onto the Braewick property under an unrecorded written lease. Carl thereafter made all mortgage payments on the property and paid for all subsequent repairs, taxes, and insurance. Carl did not record the December 1979 deed, however, until January 1994 when he sold the property.

Unbeknownst to Carl, in January of 1987 the IRS filed a Notice of Federal Tax Lien in Harris County, Texas for the unpaid taxes of Clint and Karen for the years 1984 and 1985. The IRS filed additional tax liens through May 1993.

In December 1993, preparatory to selling the property, Carl paid the sum of $48,214.27 in full satisfaction of the purchase money mortgage. As noted, the following month he recorded the December 1979 deed. Believing the property free of encumbrances, on May 26, 1994 Carl closed the sale for the sum of $35,587.64. The IRS immediately seized one-half of the proceeds, $17,793.82, in partial satisfaction of its tax liens against Clint and Karen Mueller.

Carl filed the instant wrongful levy action against the IRS. Competing motions for summary judgment were filed. The IRS contended that by virtue of the Texas recording statute its tax liens had priority over the late-recorded December 1979 conveyance from Clint to his father. Carl contended that Clint never had an interest in the property to which the tax liens could attach and, even if he did, the IRS could not take advantage of the Texas recording statute because it was not a creditor "without notice." Finally, Carl maintained that when he paid the purchase money note he had become subrogated to the mortgagee's position which primed the tax liens. The district court rejected Carl's motion and granted that of the IRS, holding that Clint owned an undivided one-half interest in the subject property. Carl timely appealed.

Analysis

A. Standard of Review

We review a summary judgment de novo, applying the same standards used by district courts in such matters. ² The court must review the facts and draw inferences in favor of the nonmoving party. ³ Summary judgment is only proper when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. ⁴

B. Notice Under the Texas Recording Statute

We previously have held ⁵ that the IRS could avail itself of the Texas recording statute ⁶ in the filing of a tax lien. We reject the contention of the IRS advanced herein, however, that it somehow is exempt from the notice provisions of that statute. ⁷ The recording statute requires that a creditor be without actual, constructive, or inquiry notice of the conveyance that it seeks to avoid, in this instance the 1979 deed from Clint to his father. ⁸

Mueller produced evidence that the IRS was on notice of his claim to full title to the property because his tax returns reflected his son's rental payments, his son's bankruptcy petition did not list the property, and the original deed did not specify the proportions of ownership thus creating the potential that he and his son did not have equal ownership. We need not consider each contention in excessive detail for we are persuaded beyond peradventure that no lending institution likely would have relied on an ambiguous deed if offered as collateral by the son, nor would any purchaser or Texas