Summary Judgment Page2

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[74-2 USTC ¶9677]United State of America v. Benjiman H. Deal, Jr.; Wanda Sue Deal and The Prudential Savings Bank

U. S. District Court, No. Dist. Ga. , Atlanta Div., Civil Action No. 14972, 3/4/74

[Code Sec. 6321]

Lien for taxes: Fraudulent transfer: Husband and wife.--Summary judgment in favor of the government could not be granted with respect to a tax lien on property which the taxpayer had transferred to his wife. Taxpayer claimed that the wife contributed more than 50% of the purchase price of the transferred property. Thus, a question of fact remained as to whether the transfer was fraudulent.

Julien Longley, Assistant United States Attorney, Atlanta , Ga. , for plaintiff. Douglas C. Lauderdale, Jr., 1523 Healey Bldg., Atlanta, Ga., Eugene A. Deal, Suite 808-Five Points Center Bldg., 15 Peachtree St., Atlanta, Ga., for defendant.

Order

EDENFIELD, District Judge:

In this tax case the government seeks to reduce to judgment an allegedly outstanding tax liability of Benjiman Deal, Jr., to set aside an allegedly fraudulent transfer of real estate from Mr. Deal to Wanda Sue Deal, his wife, and to enforce through foreclosure the federal tax lien attaching to that real estate. The government has moved for summary judgment.

The defendants have filed an affidavit in which they swear that more than 50% of the funds expended in the purchase and improvement of the real property in question originated in the separate estate of Wanda Sue Deal. It is clear that if the Deals can make a proper showing that the wife possessed an equitable interest in the real estate, they can defeat any presumption of fraud established by Ga. Code Ann. §28-201 (1969) and Mrs. Deal can prevail against her husband's creditors even if the court also finds that he purposefully elected to leave her in a position superior to that of his other creditors. Rowe v. Cole, 183 Ga. 477, 188 S. E. 668 (1936). Thus whether the real estate transfer was fraudulent and can be set aside under Georgia law is a remaining question of material fact and the motion for summary judgment must be denied.

However, the state of the record does allow the court to enter a partial summary adjudication as authorized by Rule 56(d), Federal Rules of Civil Procedure.

Accordingly, the court now finds that Benjiman H. Deal, Jr., is liable to the treasury of the United States in the amount of $23,097.39 plus accrued interest on the assessments at issue in this suit.

The court can reach no finding at this time on the issue of whether the real estate transfer was fraudulent and can be set aside. If at some later date the court makes a finding that the real estate transfer will be set aside, the court will further find that:

(1) The property in question is subject to the liens of the United States of America for the tax liability adjudged above.

(2) Foreclosure will be ordered as requested by plaintiff and any remaining deficiency will be reduced to a judgment against Benjiman H. Deal, Jr.

If at a later date the court finds that the real estate transfer may not be set aside the court will enter judgment against Benjiman H. Deal, Jr. for the full amount of the tax liability adjudged above, and the real estate owned by Wanda Sue Deal will be freed of the federal tax liens.

The only issue remaining for trial to the court in this case is whether or not under the applicable Georgia law the transfer of real property from Benjiman H. Deal, Jr. to Wanda Sue Deal was fraudulent and can be set aside as to Benjiman H. Deal's creditor, the United States.

In summary:

Plaintiff's motion for summary judgment is DENIED. However, as indicated above, the court has made a partial summary adjudication which disposes of the bulk of the issues presented by this case.

 

 

[99-2 USTC ¶50,886] United States , Plaintiff v. Gary M. Poling, et al., Defendants

U.S. District Court, So. Dist. Ohio , East. Div., C-2-97-773, 9/21/99, 73 FSupp 2 d 882

[Code Secs. 6321 and 6323 ]

Lien for taxes: Priority: Annuity payments: Assignment of: Absolute or security interest: Summary judgment: Issues of fact precluding: State law: New York: Ohio.--Summary judgment was inappropriate to determine whether federal tax liens had priority over annuity payments that a former insurance agent had assigned to a bank since issues of fact remained, under New York and Ohio law, regarding the intent of the parties to the assignment transaction. Specifically, it was unclear whether the assignment was absolute or was intended as security for the taxpayer's line of credit and whether the taxpayer could revoke the assignment at any time or if the bank intended to take an ownership, rather than a security interest, in the payments.

[Code Sec. 6323 ]

Lien for taxes: Priority: Annuity payments: Holder of security interest: Validity of lien against: Perfection of security interest: Judgment lien creditor: State law: Ohio.--A bank failed to establish that it was the "holder of a security interest" in annuity payments to an individual that were the subject of IRS liens. Consequently, it was not entitled to summary judgment that it had priority over the IRS. The bank never perfected its interest by filing a financing statement. Ohio law did not exempt the bank from the perfection requirement since the right to receive the payments was not an account or a policy of insurance. Moreover, Ohio law did not give a security interest priority against a judgment lien creditor.

OPINION AND ORDER

ABEL, Magistrate Judge:

The United States of America ("Government") brings this action against Gary M. Poling and Fifth Third Bank of Northwestern Ohio pursuant to 26 U.S.C. §§7401 and 7403. ¹ This matter is before the Court on the parties' cross-motions for summary judgment (docs. 18, 20).

As the result of Poling's failure to pay federal tax liabilities assessed against him, federal tax liens arose and attached to all his property and rights to property. In its motion for summary judgment, the Government contends that the tax liens attached and continue to attach to his right to receive monthly annuity payments from New York Life Insurance Company ("NYLIC"), even though the Bank maintains that Poling assigned this right to it before the tax liens arose. The Government contends that Poling assigned only a security interest to the Bank and that the Bank never perfected its security interest in the annuity payments. Therefore, the Bank has no right to retain the annuity payments because the tax liens have priority over the Bank's interest in these payments.

The Bank contends, however, that the tax liens have not attached to Poling's right to receive the annuity payments because Poling assigned to the Bank all of his rights to the annuity payments before the tax liens arose. Assuming arguendo that Poling retained some property interest in the annuity payments, the Bank argues that its interest in the payments is senior to the Government's interest because (1) it is entitled to the protections of 26 U.S.C. §6323(a) as the "holder of a security interest" because its assigned interest in the annuity payments is protected against the claims of a judgment lien creditor of Poling by Ohio Rev. Code §3911.10. and (2) Poling's assignment of his right to receive the annuity payments is excluded from the provisions of Article 9 of the Uniform Commercial Code ("UCC").

For the reasons that follow, both motions are denied.

I. Facts

After working as an insurance agent for NYLIC for over twenty years, Poling became a participant in a benefit plan for NYLIC agents known as Nylic No. 5 ("NYLIC plan"). Pursuant to the NYLIC plan, NYLIC agreed to make monthly annuity payments to Poling from December 1, 1980 until his death. ² (Government's Mot., Ex. 10.) The monthly income is assignable, but the NYLIC plan provides that "no assignee shall acquire any rights thereto, without written consent" of NYLIC. (Bach Aff., Ex. A, p. 3.) The NYLIC plan does not provide for a cash withdrawal or a cash surrender value.

On November 26, 1980, Poling "assign[ed], transfer[red] and set over" to the Bank "all [his] right, title and interest in and to any monthly income payments" due under the NYLIC plan. (Government's Mot., Ex. 12.) The document evidencing the 1980 Assignment was prepared by NYLIC. It provides in relevant part:

FOR VALUE RECEIVED, I hereby assign, transfer and set over

to: First National Bank

of: Findlay , Ohio

all of my right, title and interest in and to any monthly income payments now due me and which may hereafter during my lifetime become payable to me from the NEW YORK LIFE INSURANCE COMPANY in accordance with and subject to all the terms, provisions, conditions and rules of the Nylic No. 5 now applicable to me or any Nylic Plan hereafter applicable to me, and subject to any indebtedness which I may owe to said Company now or at any future date.

I hereby affirm that this assignment is made for a lawful consideration and is not made for the purpose of directly or indirectly evading the anti-rebate laws.

NEW YORK LIFE INSURANCE COMPANY assumes no responsibility for the validity of this assignment.

( Id. ) The document is signed by Poling, a witness, and a general manager who is apparently a representative of NYLIC. The Court will refer to this assignment document as the "1980 Assignment".

Poling testified that the purpose of the 1980 Assignment was to secure a commercial line of credit with the Bank and that he did not intend to assign his entire interest in the annuity payments to the Bank:

Q. At some point did you come to assign the payments under the NYLIC policy?

A. Yes.

Q. Who did you assign them to?

A. It was First National Bank at that time.

Q. What was the purpose of the assignment?

A. To help cash flow. I mean where I could have access to a line of credit.

Q. So the assignment was security for a loan or a line of credit?

A. For a line of credit.

. . .

Q. Could you read it over, Mr. Poling. Do you notice it says that for value received, I hereby assign and transfer and set over to First National Bank of Findlay , Ohio , all my right, title and interest to any monthly income payments now due me, etc.

When you signed this assignment, did you mean to assign the entire interest of your policy forever to the bank?

A. No.

Q. Let me finish my question. To First National Bank?

A. No. That was not the intent at all.

Q. What was the intent?

A. To cover the indebtedness of the line of credit only.

Q. So it was solely to secure the line of credit you were receiving from First National Bank?

A. Absolutely.

(Poling Dep., pp. 6-9.) The original note or written agreement between Poling and the Bank evidencing the establishment of the line of credit has apparently been lost. Except for the period from December of 1992 through May of 1993 when NYLIC suspended payments, the Bank has received the annuity payments from 1981 through the present. (Bach Aff., ¶8.)

On May 23, 1986 , Poling refinanced his outstanding debt with the Bank and received new credit in the amount of $136,660.04. (Bach Aff., ¶6.) In connection with the refinancing, Poling and his former wife executed a "Commercial Secured Note" in which they agreed to make "59 consecutive monthly payments of $1,574.40 each beginning June 8, 1986 with the balance if any due on May 8, 1991 ." (Government's Mot., Ex. 13.) They also agreed that the interest rate would be the Bank's base rate plus 1% per annum and that the interest charged would be payable out of the monthly payments. ( Id. ) The Court will refer to this refinancing agreement as the "1986 Agreement".

The 1986 Agreement states that the Polings deposited with the Bank, as "collateral security" for the payment of the principal amount of the note, the following property: the "[a]ssignment of annuity payment (1574.40) from New York Life" and the "[a]ssignment of $150,000 life insurance policy from Gleaner Life Insurance Policy." (Government's Mot., Ex. 13.) Poling testified that the principal amount of the note represented the total amount of money borrowed pursuant to the line of credit:

Q. What was the purpose of this commercial secured note?

A. For business purposes. I don't remember exactly at that time, but it was for business purposes.

Q. At that time, did you receive a principal amount of $136,660.04, as it states on the top left-hand corner?

A. No.

Q. Well, let me ask you this. When you first got your line of credit back in 1981, did you make immediate borrowings?

A. Yes.

Q. Did you keep track of how much you borrowed?

A. And this is a cumulative total in answer to your question, a cumulative total of all the monies that were borrowed over the time period.

Q. As of--

A. The $136,000.

Q. Right, as of May 23, 1986 ?

A. That's correct.

(Poling Dep., pp. 10-11.)

On June 1, 1990 , Poling filed a Chapter 7 bankruptcy petition. (Government's Mot., Ex. 15.) He was granted a discharge on October 15, 1990 . Pursuant to the discharge, Poling was relieved of any personal liability for the 1986 Agreement.

On July 9, 1991 , Poling and the Bank entered into an "Agreement to Extend Maturity Date of Note". (Bach Aff., ¶7.) The Court will refer to this extension agreement as the "1991 Agreement". The 1991 Agreement extends the maturity date of the 1986 Agreement to May 8, 2001 , and it provides for the continued assignment of the annuity payments to the Bank until the loan is satisfied or Poling's death, whichever occurs first. (Id., Ex. E.) The 1991 Agreement also states that all terms and conditions of the 1986 Agreement remain in full force and effect except for the assignment of the $150,000 life insurance policy. ( Id. ) Poling testified that it was not his understanding that he assigned his entire right, title and interest in the annuity payments to the Bank:

Q. Now, if you look down to the second whereas clause on the agreement, it says, "Whereas, said Exhibit A [the 1986 Agreement] is secured by an assignment of borrower's right, title and interest in and to monthly income payments in the amount of $1,574.40, and which are guaranteed to him for life, and which assignment shall terminate upon the satisfaction of the loan represented by A or borrower's death, whichever first occurs." Is that statement correct?

A. That's correct.

Q. So, in other words, you didn't assign your entire--

A. At no time--

Q. Right, title and interest?

A. At no time did I ever, under my understanding.

(Poling Dep., pp. 13-14.)

Prior to entering the 1991 Agreement, Poling received a letter from the Bank's attorney, Thomas Drake. In the letter, Drake states:

As you are aware, Fifth Third is receiving monthly payments in the amount of $1,574.40 from New York Life Insurance Company pursuant to an assignment of an annuity which you made to the bank to secure the payments of a note which you signed on May 23, 1986 .

. . .

The maturity date for this loan was May 8, 1991, and while the bank is satisfactorily secured so long as the annuity payments are being made, the bank is going to be forced by the banking regulators to show this loan as a non-performing asset on its books because technically it is now in default. Based on current interest rates, this loan will be paid in full in 7.9167 years. If interest rates go up, the loan will take longer to pay off, and if interest rates go down, the reverse will be true.

The purpose of my letter is to ascertain if you would be willing to enter into an agreement with Fifth Third for the extension of the due date on your loan. By doing so, I want to assure you that you will not in any way be reinstating your personal liability for this loan that was discharged in bankruptcy.

(Government's Mot., Ex. 16.)

On November 28, 1995 , the IRS issued a Notice of Levy to the Bank. (Government's Mot., Ex. 24.) The Notice of Levy specified that a levy had attached to the annuity payments received by the Bank on or after October 15, 1990 . ( Id. ) On January 9, 1996 , the IRS served a Final Demand on the Bank. ( Id. , Ex. 25.) On February 12, 1996 , the Bank responded to the Final Demand by letter, stating that it had a prior security interest in the annuity payments by virtue of the assignment dated November 26, 1980 and that it did not owe any sums to the taxpayer. ( Id. , Ex. 26.)

On July 8, 1997, the Government filed this action against Poling and the Bank, seeking to: (1) reduce to judgment outstanding federal tax assessments against Poling; (2) foreclose its federal tax liens on the annuity payments made to the Bank; (3) obtain a judgment against the Bank for tortious conversion of the Government's liens; and (4) obtain a judgment against the Bank for its failure to honor a levy served on it on November 28, 1995.

In an Opinion and Order dated June 3, 1999 , the Court rendered judgment in favor of the Government and against Poling in the amount of $158,269.10, plus interest from November 12, 1998 . The Court deferred ruling on the Government's claims against the Bank and ordered the parties to submit supplemental briefs addressing the following issues: (1) the applicable state law on assignments; (2) the application of the state law on assignments to the facts underlying the assignment at issue here; (3) whether Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163 (9th Cir. 1997) is applicable to the facts of this case; and (4) whether Poling has retained any control over the annuity payments, any authority to collect the annuity payments or any power to revoke the assignment to the Bank. Each party has filed two supplemental briefs addressing these issues.

II. Standard for Summary Judgment

Summary judgment is governed by Rule 56(c) of the Federal Rules of Civil Procedure which provides:

The judgment sought 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, 247-248 (1986) (emphasis in original); Kendall v. The 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 247-248. 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 Systems, Inc., 368 U.S. 464, 467 (1962); accord County of Oakland v. City of Berkeley , 742 F.2d 289, 297 (6th Cir. 1984).

In making this inquiry, the standard to be applied by the Court mirrors the standard for 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.

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), cert. denied, 469 U.S. 1062 (1985). Inferences to be drawn from the underlying facts contained in such materials must 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 Association, Inc., 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. See Adickes, 398 U.S. at 157-60; Smith v. Hudson, 600 F.2d 60, 65 (6th Cir. 1979), cert. dismissed, 444 U.S. 986 (1979).

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 mere existence of a scintilla of evidence in support of the opposing party's position will be insufficient; there must be evidence on which the jury could reasonably find for the opposing party. See Anderson, 477 U.S. at 251 (quoting Improvement Co. v. Munson, 14 Wall. 442, 448 (1872)). As is provided in Fed. R. Civ. P. 56(e):

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 his pleading, but his 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 he does not so respond, summary judgment, if appropriate, shall be entered against him.

Thus, "a party cannot rest on the allegations contained in his . . . [pleadings] in opposition to a properly supported motion for summary judgment against him." First National Bank of Arizona v. Cities Service Co., 391 U.S. 253, 259 (1968) (footnote omitted).

III. Discussion

Section 6321 of the Internal Revenue Code ("IRC") 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. Under §6322, the lien generally arises when an assessment is made, and it continues until the taxpayer's liability "is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322; see also United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719 (1985). "The statutory language 'all property and rights to property,' appearing in §6321 . . . is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 719-20.

State law controls in determining the nature of the legal interests which a taxpayer may have in property. See National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 722 (citing Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513 (1960)). Once it is determined that the taxpayer has rights in property, state law is inoperative, and the tax consequences are dictated by federal law. Id. (citing United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 56-57 (1958)).

A. Applicable state law on assignments

Because NYLIC is located in New York and the annuity payments are sent from New York , it is arguable that New York 's law on assignments is applicable to the contracts at issue in this case. A federal court applies the choice-of-law rules of the forum state. See Cole v. Mileti, 133 F.3d 433, 437 (6th Cir.), cert. denied, -- U.S. --, 119 S.Ct. 42 (1998); Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). The Ohio Supreme Court has adopted the Restatement (Second) of Conflict of Laws as the governing law for Ohio conflicts issues. See Cole, 133 F.3d at 437 (citing Lewis v. Steinreich, 652 N.E.2d 981, 984 ( Ohio 1995) and Morgan v. Biro Mfg. Co., Inc., 474 N.E.2d 286, 288-89 ( Ohio 1984)).

Section 188 of the Restatement (Second) of Conflict of Laws applies to contract disputes where, as here, the parties did not expressly designate the law of a particular jurisdiction to govern any disputes. See Macurdy v. Sikov & Love, P.A., 894 F.2d 818, 820 (6th Cir. 1990) (citing Gries Sports Enterprises v. Modell, 473 N.E.2d 807, 810 ( Ohio 1984), cert. denied, 473 U.S. 906 (1985)). Pursuant to section 188, the law of the state which has the "most significant relationship" to the contract and the parties is applied to the contract dispute. Id. Contacts to be taken into account in determining which state has the most significant relationship to the contract and the parties include the place of contracting, the place of negotiation, the place of performance, the situs of the subject matter, and the domicile of the parties. Id.

Both parties contend that the Court need not undertake a conflict of laws analysis because there is no conflict between Ohio 's law on assignments and New York 's. The Bank relies upon the Ninth Circuit's analysis of New York law in Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163 (9th Cir. 1997) to argue that New York law requires no particular form for an assignment and that "an assignment occurs only when the assignor retains no control over the funds, no authority to collect and no power to revoke." 104 F.3d at 1167. Relying upon State ex rel. Leach v. Price, 156 N.E.2d 316, 320 (Ohio 1959), the Bank contends that Ohio law, like New York law, requires no particular form for an assignment and that Ohio law also defines an assignment as a transfer of property from one person to another which, unless qualified in some way, transfers a person's entire interest in the assigned property with no retained control, authority or power over the assigned property. See 156 N.E.2d at 316.

The Government agrees with the Bank's contention that there is no conflict between Ohio 's law on assignments and New York 's. The Government also accepts the Bank's definition of an assignment under Ohio law. Because the parties agree that there is no conflict between Ohio's law on assignments and New York's and the Court has not found any cases indicating otherwise, the Court will refer to both Ohio's and New York's law on assignments in discussing whether the parties intended an absolute assignment or a security interest. See Carbonic Products Co. v. Welding & Cutting Supply Co., No. 86-1730, 1987 WL 38061, at *2 (6th Cir. July 17, 1987) (declining to decide whether Michigan or Ohio law should have been applied because Michigan and Ohio law were the same with respect to the issues presented) (citing Keene Corp. v. Insurance Company of North America, 667 F.2d 1034, 1041 n. 10 (D.C. Cir. 1981)); see also Lucker Manufacturing v. Home Ins. Co., 23 F.3d 808, 813 (3d Cir. 1994) (referring to laws of both Wisconsin and Pennsylvania because outcome of lawsuit was the same under either state's law); FDIC v. Massingill, 24 F.3d 768, 775 (5th Cir. 1994) (where there is no difference between the laws of the forum state and another state, a court need not decide the choice of law issue).

B. Whether Poling assigned to the Bank all of his rights to the annuity payments

A federal tax lien arose and attached to all Poling's "property and rights to property" on November 20, 1989 . The Government contends that Poling's property and rights to property included his right to receive the monthly annuity payments under the NYLIC plan. The Bank contends, however, that the federal tax liens did not attach to Poling's right to receive the annuity payments because he had no property interest in the annuity payments on November 20, 1989 or at any time thereafter. According to the Bank, after assigning his right to receive the annuity payments to the Bank on November 26, 1980 , Poling had no further interest in the annuity payments to which a federal tax lien could attach.

In order to determine to what extent Poling has property or rights to property to which a tax lien can attach, the Court must decide whether Poling has assigned to the bank all of his interest in the annuity payments or whether he has transferred a security interest. The Government argues that the Court must examine the 1986 Agreement between Poling and the Bank, and not the 1980 Assignment, in order to determine Poling's interest in the annuity payments. According to the Government, the 1980 Assignment does not govern Poling's interest in the annuity payments because (1) it was prepared by NYLIC and uses boiler-plate language likely used in all assignments of annuity policies issued by NYLIC and (2) it does not constitute the contract between the parties in interest, Poling and the Bank.

The Government next argues that the 1986 Agreement did not constitute an absolute assignment of Poling's interest in the annuity payments. Rather, it merely created a security interest in favor of the Bank. According to the Government, the 1986 Agreement indicates that the parties intended that there be an assignment of a security interest and not an ownership interest because (1) it provides that the annuity policy was deposited with the Bank as "collateral security" for the Commercial Secured Note and (2) it does not provide that the annuity policy would become the absolute property of the Bank.

In response to the Government's arguments, the Bank argues that the parties' intent when the 1980 Assignment was executed and delivered to NYLIC is controlling here and that the parties' intent was to give the Bank the right to receive all future annuity payments. The Bank maintains that the clear language of the 1980 Assignment reveals that Poling transferred his entire right, title and interest in the annuity payments in order to satisfy his financial obligations to the Bank. The Bank also argues that there is nothing in the 1986 Agreement which created or referred to a security interest, and there is nothing which changed Poling's previous assignment of his entire interest into a security interest.

In support of its argument that the 1980 Assignment resulted in the absolute assignment of Poling's interest in the annuity payments, the Bank relies upon the Ninth Circuit's reasoning in Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163 (9th Cir. 1997), in which the court addressed the issue of whether a federal tax lien took priority over prior unrecorded assignments of a taxpayer's rights to receive royalty income from the performance of a copyrighted work.

In Hirsch, Ronald Miller was a songwriter to whom Broadcast Music, Inc. ("BMI") paid royalties derived from his compositions. To satisfy debts Miller owed two creditors, he executed assignments to them of future royalties and directed BMI to pay the creditors directly. Before the debts were satisfied, the IRS assessed deficiencies against Miller and recorded notices of tax liens against his royalty income. The IRS served BMI with notices of levy, and BMI filed an interpleader action to resolve the conflicting claims to Miller's royalty income.

After deciding that Miller's assignment of future royalties to the creditors was not subject to the recording rules of the Copyright Act, 17 U.S.C. §101, et seq., the court examined whether, under New York law, the instruments executed by Miller in favor of the creditors "transferred all of his rights to the future royalties he purported to assign (i.e., whether Miller had anything left to which the liens could attach)." Hirsch, 104 F.3d at 1165. In support of its argument that Miller did not transfer all of his rights, the government maintained that an agreement to pay a debt out of a designated fund does not operate as a legal or equitable assignment because the assignor retains control over the subject matter.

The court rejected the government's argument because Miller did not control the royalty payments after executing the assignments and, in those assignments, he expressly waived his right to terminate his agreement with BMI until his loans were repaid. Thus, although Miller retained a residual interest in the excess royalty income over the amounts assigned, the court found that the assignments constituted irrevocable instructions to pay the specified sums directly to the creditors as royalties came into BMI's hands and that Miller had no control whatsoever over the amounts he had assigned. Id.

The government also argued that the assignments merely transferred security interests that were never perfected. After noting that it must look to the substance of the transaction rather than its form, the court concluded that Miller made complete assignments of the monies specified in the assignment documents, leaving him without a current vested interest. Id. at 1167-68. Because the assignments were complete under New York law, they transferred Miller's interests to the creditors before the federal tax liens could attach. Id. at 1168. Therefore, Miller's creditors, and not the government, had a right to the copyright royalties.

The Bank argues that the facts of Hirsch parallel the facts of this case in four critical aspects. First, in Hirsch, Miller did not control the royalty payments after executing the assignments. Here, except for a brief period when NYLIC suspended the payments, the Bank has been the sole recipient of the annuity payments for 19 years. Second, in Hirsch, Miller expressly waived his right to terminate the assignment until his loans were repaid. Referring to the 1986 Agreement, the Bank maintains that Poling has also agreed to assign his interest in the annuity payments until his loan is fully satisfied. Third, although Miller possessed a residual interest in the funds remaining after his loans were repaid, he retained no control whatsoever over the amounts necessary to repay his loans. Again referring to the 1986 Agreement, the Bank maintains that although Poling may have a residual interest in the annuity payments after his loan is fully satisfied, he does not have a current vested interest in the annuity payments. Finally, the Bank maintains that Poling, like Miller, possesses no authority to collect the annuity payments or to revoke the assignment.

The Government maintains that the facts of Hirsch do not apply to the facts of this case. The Government argues that, unlike the assignments executed by Miller, Poling did not expressly waive his right to terminate his agreement with NYLIC until his debt to the Bank was repaid. The 1980 Assignment was signed by Poling only as a unilateral statement of intention, and there is no indication that Poling could not revoke the assignment at any time.

The Government further argues that the parties' intent when the 1980 Assignment was executed and delivered to NYLIC must be examined. Poling has testified that the purpose of the 1980 Assignment was to secure a commercial line of credit and that he did not intend to assign his entire interest in the annuity payments to the Bank. The Bank, however, has not offered any evidence showing that its intention was to take an ownership, rather than a security, interest in the annuity payments.

The Government also directs the Court's attention to In re Willowood East Apartments of Indianapolis II, Ltd., 114 B.R. 138 (Bankr. S.D. Ohio 1990), In re Nat'l Equipment & Mold Corp., 64 B.R. 239 (Bankr. N.D. Ohio 1986), and United States v. Talco Contractors, Inc. [99-1 USTC ¶50,577], 93-CV-6389T (W.D.N.Y. May 7, 1999). In Willowood, the debtor's obligations under a promissory note were secured by a mortgage and an assignment of rents. The assignment of rents provided, in pertinent part:

As part of the consideration for the indebtedness evidenced by the Note, Borrower hereby absolutely and unconditionally assigns and transfers to Lender all the rents and revenues, including all security deposits, of the Project[.]

. . .

Borrower hereby authorizes Lender or Lender's agents to collect the aforesaid rents and revenues and hereby directs each tenant of the Project to pay such rents to Lender or Lender's agents . . . it being intended by Borrower and Lender that this assignment of rents constitutes an absolute assignment and not an assignment for additional security only.

. . .

This assignment of rents shall terminate at such time as this Instrument ceases to secure indebtedness held by Lender.

Willowood, 114 B.R. at 140-41. Applying Indiana's law on assignments, the court held that the lender's interest in the rentals was not an absolute transfer of ownership because (1) the right to collect the rents reverted back to the debtor once the debtor's financial obligations under the note were repaid and (2) the parties treated the transaction as a loan with a grant of a security interest. Id. at 141-42. The Government contends that the holding in Willowood applies here because it contends that the Bank would not be entitled to continue receiving the annuity payments if Poling decided to pay off his loan early.

In National Equipment & Mold Corporation, the debtor assigned to the bank an interest in its accounts receivable in exchange for a loan in the amount of $250,000. The agreement between the parties provided in relevant part:

The undersigned agrees, until payment of all indebtedness and of liability of every kind of the undersigned to the Bank . . . to make collection of the said Receivable as agent for the Bank, and remit the proceeds thereof forthwith to the Bank.

The proceeds of all collections of the Receivables shall be the absolute property of the Bank, and they shall not be deposited or mingled with any other moneys or funds of the undersigned.

64 B.R. at 241. After the debtor filed a Chapter 11 bankruptcy petition, the issue arose as to whether the agreement transferred ownership of the accounts receivable or merely created a security interest. Although the agreement did not use language which is customarily employed in a conveyance of title, the court found that the parties intended for the debtor to convey ownership of its accounts receivable to the bank. Id. at 245. The Government contends that National Equipment & Mold Corporation applies to the instant dispute because unlike the agreement between the debtor and the bank, the 1986 Agreement does not provide that the annuity policy would become the "absolute property" of the Bank. Rather, it provides that the Bank would have to purchase the annuity policy at a sale in order to become the owner.

In Talco, a tax dispute between the government and Talco was settled, and the court retained jurisdiction to enforce the terms of the settlement agreement. The agreement provided that Talco would pay the government the first $400,000 of the proceeds of a condemnation suit Talco had brought against the State of New York, and it would pay the government an additional 50% of any damages award after payment of reasonable attorney fees and litigation expenses.

Prior to entering into the agreement with the government, Talco had made an assignment of the proceeds of the suit to Chase Manhattan Bank in the amount of $124,000. Kendamar Corporation ultimately became the holder of this assignment, which provided in pertinent part: "[f] or value received, . . . Talco . . . hereby grants a security interest in and assigns, transfers and sets over unto Chase . . . all of Assignor's right, title and interest in a certain claim of the Assignor . . . and all proceeds of the foregoing." Talco, slip op. at 4-5. The assignment also provided that it was "made by Assignor as collateral and security for any and all liabilities of Assignor to Bank" and that "[i]f the Condemnation Claim exceed[ed] the Liabilities, Bank [would] refund the difference to the Assignor." Id. at 5. A letter from a Chase vice president indicated that Talco assigned its right, title and interest in the proceeds as "collateral security" for its obligations to Chase. Id.

Applying New York law, the court held that it was clear that the parties' intent was that the assignment was for collateral/security purposes and not an outright assignment. Id. at 6. Because Chase did not properly perfect its security interest, the court ruled that Kendamar, as successor in interest to Chase, held an unperfected security interest and that the government's lien had priority over Kendamar's interest. Id.

The government contends that Talco applies to the facts of this case because the only document reflecting the agreement between the Bank and Poling (the 1986 Agreement) unambiguously shows the parties' intent to be that the Bank was to have a security interest in the annuity payments. The Bank contends that the facts of Talco are not at all similar to those present in this case because no portion of the proceeds were ever paid out to Chase and it is unclear whether Talco ever directed the proceeds to be paid directly to Chase. Moreover, the Bank maintains that the Talco decision is devoid of reference to any case law and contains no substantive discussion of New York 's law on assignments.

The parties have agreed that an "assignment" is a transfer of property from one person to another which, unless qualified in some way, transfers a person's entire interest in the assigned property with no retained control, authority or power over the assigned property. Article 9 of the UCC, which has been adopted both in Ohio and in New York, applies "[t]o any transaction, regardless of its form, which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper, or accounts." Ohio Rev. Code §1309.02(A)(1). Pursuant to Article 9, a "security interest" is defined as "an interest in personal property or fixtures that secures payment or performance of an obligation." Ohio Rev. Code §1301.01(KK)(1).

"It is a long-standing rule that 'courts will determine the true nature of a security transaction, and will not be prevented from exercising their function of judicial review by the form of words the parties may have chosen.' " In re Hurricane Elkhorn Coal Corp., 19 B.R. 609, 616 (Bankr. W.D. Ky. 1982) (quoting 1 Gilmore, Security Interests in Personal Property §2.6, at 47 (1965)); see also Hirsch, 104 F.3d at 1167 (court must look to substance of transaction rather than form of contract); Columbus Motor Car Co. v. Textile-Tech, Inc., 428 N.E.2d 882, 885 (Franklin Cty. Mun. Ct. 1981) (same). The "absolute" nature of an assignment does not preclude its service as a security agreement. See In re Navigation Technology Corp., 880 F.2d 1491, 1493 (1st Cir. 1989).

In deciding whether the 1980 Assignment and/or 1986 Agreement resulted in an absolute assignment of Poling's interest in the annuity payments or merely created a security interest in favor of the Bank, the Court must examine the intent of the parties. See Goldstein v. Madison Nat'l Bank of Washington , D.C. , 89 B.R. 274, 276 (D.D.C. 1988); Nat'l Equipment & Mold Corp., 64 B.R. at 245. This intent is to be discerned from the contents of the documents at issue, the testimony of the contracting parties, the circumstances surrounding the transaction and the parties' conduct, practices, objectives, business activities and relationships. See Goldstein, 89 B.R. at 276; In re Tyson Metal Products, Inc., 117 B.R. 181, 184 (Bankr. W.D. Pa. 1990); In re Evergreen Valley Resort, Inc., 23 B.R. 659, 661 (Bankr. D. Me. 1982).

There are several factors which indicate when an assignment operates to create a security interest instead of an absolute assignment: (1) the assignment is delivered simultaneously with the loan, see In re Joseph Kanner Hat Co., 482 F.2d 937, 940 (2d Cir. 1973); Hurricane Elkhorn, 19 B.R. at 616-17; (2) the payments received are used to reduce the outstanding balance, id.; (3) any payments received pursuant to the assignment and exceeding the loan are returned to the assignor, id.; (4) the assignee retains a right to a deficiency on the debt if the assignment does not provide sufficient funds to satisfy the amount of debt, see Major's Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 545 (3d Cir. 1979); (5) the assignee acknowledges that his rights in the assigned property would be extinguished if the debt owed were to be paid through some other source, see Joseph Kanner, 482 F.2d at 940; and (6) the bank treats the assignment as a method of payment of the loan. Id. Assignments have been found to be absolute transfers where the assignment operates to discharge the underlying debt. See Evergreen Valley Resort, 23 B.R. at 661-62.

Applying these factors here, the Court concludes that whether Poling's assignment was absolute or intended as security presents a triable issue of fact which cannot be disposed of by summary judgment. See In the Matter of Candy Lane Corp. v. Leff, 38 B.R. 571, 577 (Bankr. S.D.N.Y. 1984); Major's Furniture Mart, 602 F.2d at 543. The language used in the 1980 Assignment supports a finding that Poling's assignment was absolute and not one for security because it states that he "assign[ed], transfer[red] and set over" to the Bank "all [his] right, title and interest in and to any monthly income payments" due under the NYLIC plan. The following facts, however, weigh in favor of a finding that Poling assigned merely a security interest to the Bank: (1) the 1980 Assignment was delivered in exchange for a commercial line of credit for which Poling undertook an obligation to repay; (2) Poling testified that the purpose of the 1980 Assignment was to secure the line of credit and that he did not intend to assign his entire interest in the annuity payments to the Bank; and (3) the payments received were applied to reduce the outstanding balance of the line of credit. It is unclear whether Poling could have or did make payments on the line of credit through other sources, whether the Bank's rights in the annuity payments would have been extinguished prior to the 1986 Agreement if Poling had paid his debt through some other source, or whether Poling could have revoked the assignment and collected the annuity payments himself. The Court also notes that there is some uncertainty as to how the transaction between Poling and the Bank was structured because NYLIC prepared the 1980 Assignment and the original note or written agreement between Poling and the Bank evidencing the establishment of the line of credit has apparently been lost.

The fact that the 1986 Agreement refers to the annuity payments as "collateral security" for a loan supports a finding that Poling assigned merely a security interest to the Bank. Moreover, the fact that the 1986 Agreement did not operate to discharge the amount owed by Poling, i.e., the Bank retained a right to a deficiency on the loan if the annuity payments did not provide sufficient funds to satisfy the amount of the loan by May 8, 1991 , further supports such a finding. On the other hand, the following facts weigh in favor of a finding that Poling's assignment was absolute and not one for security: (1) the annuity payments have been sent directly to the Bank since 1981; (2) despite the 1986 Agreement's reference to the annuity payments as "collateral security", no event of default triggered the Bank's receipt of the annuity payments; (3) the loan payment schedule matches the amount of the annuity payments; and (4) there is no evidence that Poling has made any payments on the loan through any other source besides the annuity. The Court also notes that the 1991 Agreement makes clear that the assignment terminates once the loan is paid in full, a fact which could support either a finding of an absolute assignment or a security interest. ³ Based upon the foregoing, the Court concludes that a finder of fact could conclude either that the assignment was absolute or that it created a security interest in favor of the Bank.

C. Whether the Bank is the "holder of a security interest"

In addition to arguing that Poling assigned all of his rights to the annuity payments, the Bank argues that even if Poling transferred only a security interest in the annuity payments, it is entitled to the protections of 26 U.S.C. §6323(a) because it is the "holder of a security interest". Section 6323 of the Internal Revenue Code provides that liens arising under §6321 are not valid as against "any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed[.]" 26 U.S.C. §6323(a).

The Government argues that the Bank is not entitled to this priority because the Bank's interest in the annuity payments has never been perfected as required by §6323(h)(1), which provides that a security interest must have, among other requirements, "become protected under local law against a subsequent judgment lien arising out of an unsecured obligation." 26 U.S.C. §6323(h)(1)(A). According to the Government, to perfect its interest under Ohio law, the Bank needed to file a financing statement pursuant to Ohio Rev. Code §1309.21 because an annuity contract is a "general intangible" under Article 9. ⁴ Because the Bank never filed a financing statement, it never perfected its security interest in the annuity payments under Ohio law; therefore, it is not entitled to the protections of §6323.

The Bank does not contend that it filed a financing statement. Rather, the Bank argues that it was not required to file a financing statement to meet the requirements of 26 U.S.C. §6323(h)(1)(A). According to the Bank, its security interest is protected against the claims of a judgment lien creditor of Poling by the provisions of Ohio Rev. Code §3911.10. The Bank maintains that Ohio Rev. Code §3911.10, which requires no filing of a financing statement, excepts the annuity payments from the claims of Poling's creditors by providing that:

All . . . annuities upon the life of any person, or any interest therein, which may hereafter mature and which have been taken out for the benefit of, or made payable by change of beneficiary, transfer, or assignment to, . . . any creditor . . . shall be held, together with the proceeds or avails of such contracts, subject to a change of beneficiary if desired, free from all claims of the creditors of such insured person or annuitant.

Ohio Rev. Code §3911.10. Because its interest in the annuity payments is protected against the claims of a judgment lien creditor by §3911.10, the Bank argues that its interest qualifies as a security interest under 26 U.S.C. §6323(h)(1). Therefore, the Bank contends that it is entitled to the protections of §6323(a) because it is the "holder of a security interest".

In the alternative, the Bank argues that it is the "holder of a security interest" because the filing requirements of Article 9 do not apply to a person's transfer of his rights to receive annuity payments. Without citing any case law, the Bank argues that Ohio Rev. Code §§1309.04(E) and (F) exclude the assignment from the provisions of Article 9. Ohio Rev. Code §1309.04(E) excludes "a transfer of a single account to an assignee in whole or partial satisfaction of a pre-existing indebtedness." Ohio Rev. Code §1309.04(F) excludes "a transfer of an interest or claim in or under any policy of insurance[.]"

The Government contends that the Bank's arguments are without merit. With regard to the Bank's reliance on §3911.10, the Government maintains that "[i]t is black letter law that state-law limitations on the ability of general creditors to reach certain types of property of a taxpayer have no effect on the attachment of federal tax liens." (Government's Br. in Opp'n, doc. 21, p. 4) (citing Bank One Trust Co., N.A. v. United States, 80 F.3d 173, 175 (6th Cir. 1996)). Therefore, any protection that Ohio may give an assignment for security against state law creditors is irrelevant where a federal tax lien is involved. With regard to the Bank's reliance on §§1309.04(E) and (F), the Government contends that the annuity payments at issue are not properly defined as either an "account" or a "policy of insurance."

Assuming arguendo that the Bank holds a security interest in the annuity payments, the Court concludes that Ohio Rev. Code §§1309.04(E) and (F) do not exclude the Bank from the provisions of Article 9. First, §1309.04(E) does not apply because the right to receive the annuity payments is not an account, which is defined as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance." See Ohio Rev. Code §1309.01(A)(15) and Commentary (stating that an account is the "ordinary commercial account receivable" and that in some cases a right to receive money "crystallizes not into an account but into a general intangible, for it is a right to payment of money that is not for goods sold or leased or for services rendered"); see also In re Hayes, 168 B.R. at 727 n. 36 (finding that the right to receive annuity payments was not an account because an account is defined in terms of "good sold or leased or for services rendered").

Second, §1309.04(F) does not apply because the NYLIC plan is not a policy of insurance. "An annuity contract is not necessarily a life insurance policy simply because a life insurance company issued it." In re Vinzant, 108 B.R. 752, 757 (Bankr. D. Kan. 1989). The Supreme Court of Ohio has stated:

[T]he ordinary annuity contract and the ordinary contract of life insurance are different in essential respects. The former is distinguishable from the latter in that a life insurance contract constitutes an agreement to pay a specified sum of money on the death of the insured or on his reaching a certain age, whereas an annuity contract is one in which there is an agreement to pay a certain sum to the annuitant annually during life or for a given number of years.

Bronson v. Glander, 149 Ohio St. 57, 59 (1948). Because the NYLIC plan is an agreement to pay a certain sum to Poling during his life rather than an agreement to pay a specified sum of money upon his death, the Court finds that the NYLIC plan is not a policy of insurance.

The Court further concludes that, assuming arguendo that the Bank holds a security interest in the annuity payments, the Bank's interest in the annuity payments is not protected against the claims of a judgment lien creditor by Ohio Rev. Code §3911.10; therefore, it is not entitled to the protections of 26 U.S.C. §6323(a) because it is not the "holder of a security interest." Because the annuity was not taken out for the Bank's benefit, the Bank must show that the annuity has been "made payable by change of beneficiary, transfer, or assignment to" it. Although there is no Ohio case law interpreting this phrase, a plain reading of the statute and the fact that Ohio's version of Article 9 does not incorporate or refer to §3911.10 leads the Court to the conclusion that the phrase refers to an absolute assignment, and not an assignment of a security interest. Because the issue of whether Poling's assignment was absolute or intended as security is a triable issue of fact, the Court cannot find that the Bank's interest in the annuity payments is protected against the claims of a judgment lien creditor of Poling by the provisions of Ohio Rev. Code §3911.10.

Assuming arguendo that the Bank holds a security interest in the annuity payments, the Court concludes that the Bank is not a "holder of a security interest" as set forth in 26 U.S.C. §§6323(a) and (h) because: (1) it did not perfect its security interest by filing a financing statement as required by Ohio Rev. Code §1309.21; (2) Ohio Rev. Code §§1309.04(E) and (F) do not exclude the Bank from the provisions of Article 9; and (3) the Bank's interest in the annuity payments is not protected against the claims of a judgment lien creditor by Ohio Rev. Code §3911.10.

IV. Conclusion

For the above stated reasons, the Court DENIES the Government's motion for summary judgment with respect to its claims against the Bank (doc. 18) and DENIES the Bank's motion for summary judgment (doc. 20).

¹ The predecessor in interest of defendant Fifth Third Bank is First National Bank of Findlay , Ohio . Fifth Third Bank and First National Bank will be collectively referred to as "the Bank."

² The monthly annuity payment was initially $1,574.40 per month, but since July of 1996, it has been reduced to $1,479.90 by NYLIC to permit income tax withholdings.

³ The courts in Joseph Kanner and Hurricane Elkhorn viewed this fact as supporting the conclusion that the parties intended a security interest. The court in Hirsch, however, found that an absolute assignment was intended even though the debtor retained a residual interest in the excess royalty income over the amounts assigned. The court reasoned that an absolute assignment was intended because the debtor had no control whatsoever over the amounts he had assigned.

⁴ The Government relies upon In the Matter of Newman, 993 F.2d 90, 95 (5th Cir. 1993) (finding that an annuity contract is a general intangible) and In re Hayes, 168 B.R. 717, 727 n. 36 (Bankr. D. Kan. 1994) (noting that debtor's right to receive annuity payments logically falls within the class of general intangibles) for this proposition of law.

 

 

[85-2 USTC ¶9682] United States of America , Plaintiff v. American Druggists' Insurance Co., Defendant

U. S. District Court, Dist. Minn., Fourth Div., Civil No. 4-85-229, 8/14/85

[Code Sec. 6323]

Collection: Validity of lien: Surety.--The district court held that under state (California) law, it could not rule, as a matter of law, that federal tax obligations were not obligations covered by a payment bond issued by the defendants to contractors who were doing work for a municipality. Therefore, the defendant's motion for judgment on the pleadings was denied. The court found that the language of the bond did not support the defendant's position that it did not assume employee tax obligations because the contractors paid wages directly. In the instant case, contractors, who were hired by the city and county of San Francisco to rehabilitate 146 buses, failed to pay federal withholding and F. I. C. A. taxes. Because the contractors had obtained a payment bond from the defendants (in accordance with California law), the IRS sought to recover the taxes allegedly covered by the payment bond from the defendants.

James E. Lackner, Assistant United States Attorney, Minneapolis , Minn. 55401 , for plaintiff. Diana P. Massie, Lang, Pauly & Gregerson, 4108 IDS Center, Minneapolis, Minn. 55402, for defendant.

Memorandum Opinion and Order

MURPHY, District Judge:

Plaintiff United States of America ( United States ), brought this action against defendant, American Druggists' Insurance Company (American Druggists), for recovery on a surety bond defendant issued to Dickenson Lines, Inc. (Dickenson). Jurisdiction is alleged under 29 U. S. C. §1345. This matter is now before the court upon defendant's motion for judgment on the pleadings to dismiss the complaint and for costs and disbursements. ¹

Background. American Druggists is an Ohio corporation doing business in Cincinnati , Ohio . Dickenson is a Minnesota corporation formerly doing business in Anoka and Princeton , Minnesota . In September 1982 the city and county of San Francisco ( San Francisco ) contracted with Dickenson to rehabilitate 146 buses. Dickenson obtained a payment bond from American Druggists. California law requires such a bond when contractors do work for a public entity. The bond states that the surety will pay amounts due under any federal law with respect to work or labor. The bond also provides that beneficiaries are those entitled to file claims under the provisions of §§ 4200-08 of the California Government Code. Section 4200 in turn provides that a public entity may be a bond beneficiary.

In July 1984 San Francisco notified Dickenson it had defaulted and terminated the contract. Prior to the contract default, Dickenson allegedly failed to pay $342,264.05 in federal withholding and F. I. C. A. taxes. On August 10, 1984 the United States Tax Division sent San Francisco a notice of levy for the taxes owing. On February 8, 1985 the United States filed its complaint herein to recover $313,654.47 from American Druggists for the taxes allegedly covered by the payment bond.

American Druggists maintains that, under California law, federal tax obligations are not obligations covered by the bond. It argues the surety company did not assume employee tax obligations because Dickenson paid wages directly. Defendant interprets California Civil Code §§ 3248, 3181, 3110, 3111, and 3112 ² to mean that only those who have furnished labor, supplies or services in connection with the public contract may benefit from the payment bond. It asserts that under California law any bond beneficiary not required by statute is surplusage and not a proper claimant. It relies on Miles v. Baley, 149 P. 45 (Cal. 1915); Brown v. Surety Co. of Pacific, 122 Cal. App. 3d 614 (Ct. App. 1981); Powers Regulator Co. v. Seaboard Surety Co., 204 Cal. 2d 338 (Ct. App. 1962); FAJ, Inc. v. Surety Co. of Pacific, 68 Cal. 3d Supp. 20 (App. Dep't Super. Ct. 1977).

The United States maintains the motion should be denied. It points out the bond had express language that the surety will pay amounts due under any federal law with respect to work or labor so defendant was aware of this type of liability and could set its price accordingly. Plaintiff asserts moreover that California law does not limit bond beneficiaries to those listed in the statute. Rather, those listed merely designate a special class within the larger class of beneficiaries covered by the bond. It cites a California case which suggests that if additional bond language does not impair or narrow the statutory scheme, recovery is allowed. Sukut-Coulson, Inc. v. Allied Cannon Co., 85 Cal. App. 3d 648 (Ct. App. 1978). It also says evidence of the parties' intent needs to be considered.

Discussion. A motion for judgment on the pleadings shall not be granted unless the moving party clearly establishes that no material issue of fact remains to be resolved and is entitled to judgment as a matter of law. Iowa Beef Processors, Inc. v. Amalgamated Meat Cutters & Butchers Workmen of No. America , AFL-CIO, 627 F. 2d 853, 855 (8th Cir. 1980). The court is required to construe the non-moving party's factual allegations as true, and to draw in favor of that party all reasonable inferences from these facts. Quality Mercury, Inc. v. Ford Motor Co., 542 F. 2d 466, 468 (8th Cir. 1976), cert. denied, 433 U. S. 917 (1977).

The California statutory scheme regarding payment bonds does not appear to entitle defendant to dismissal as a matter of law. California Civil Code §3248 provides tha a payment bond shall satisfy certain requirements. The statutory requirements reflect a concern to protect laborers and suppliers of materials, but the statutes do not state that bond claimants are limited to those listed. The cases cited by defendant involved inapposite facts and do not stand for its assertion that bond language listing more beneficiaries than those required by §3248 is surplusage. In Powers the court found the surety liable and held that if the terms of the bond conflicted with the statutory requirements, the terms could be surplusage. The court in Miles determined that the language in the bond which narrowed the bond and made recovery more difficult could be surplusage. In Brown and FAJ Inc. the courts did not consider the specific bond language. Contrary to defendant's assertion, the court in Sukut-Coulson, Inc. v. Allied Cannon Co., 85 Cal. App. 3d 648, 655 (1978), refused to accept the surplusage argument because there was nothing in the statutory language to prevent additional bond claimants.

The language of the bond appears clear and does not support defendant's position. The bond states:

And WHEREAS, said Principal is required to furnish a bond in connection with said Contract, providing that if said Principal, or any subcontractor of said Principal, shall fail to pay for any equipment, materials or supplies used in the performance of the work contracted to be done, or for any work or labor thereon of any kind, or for amounts due under any Federal, State and Local laws with respect to such work or labor, the Surety on this Bond will pay for the same, in an amount not exceeding the sum specified in this Bond, and also, in case suit is brought upon the Bond, a reasonable attorney's fee to be fixed by the Court. [emphasis added]

Pursuant to the bond, public authorities or public agencies are entitled to file claims on the bond. The parties' intent in drafting the bond, moreover, could be a material issue of fact yet to be resolved.

Order

Accordingly, based on the above and all the files, records, and proceedings herein,

IT IS HEREBY ORDERED that defendant's motion for judgment on the pleadings and costs and disbursements is denied.

¹ At the July 10, 1985 hearing, the court granted the parties leave to submit supplemental briefs.

² Section 3248 requires that the payment bond shall:

(b) Provide that if the original contractor or a subcontractor fails to pay any of the persons named in Section 3181, or amounts due under the Unemployment Insurance Code with respect to work or labor performed under the contract, or for any amounts required to be deducted, withheld, and paid over to the Employment Development Department from the wages of employees of the contractor and subcontractors pursuant to Section 1320 of the Unemployment Insurance Code, with respect to such work and labor that the sureties will pay for the same, and also, in the case suit brought upon the bond, a reasonable attorney's fee, to be fixed by the court . . .

(c) By its terms insure to the benefit of any of the persons named in Section 3181 so as to give a right of action to such persons or their assigns in any suit brought upon the bond . . .

Section 3181 provides that:

Except for an original contractor, any person mentioned in Section 3110, 3111, or 3112, or furnishing provisions, provender, or other supplies, may serve a stop notice upon the public entity responsible for such public work in accordance with the provisions of this chapter.

Section 3110 provides:

Mechanics, materialmen, contractors, subcontractors, lessors of equipment, artisans, achitects, registered engineers, licensed land surveyors, machinists, builders, teamsters, and draymen, and all persons and laborers of every class performing labor upon or bestowing skill or leasing equipment to be used or consumed in or furnishing appliances, equipment, teams, or power or of any person acting by his authority or under him as a contractor or otherwise. For the purposes of this chapter, every contractor, subcontractor, sub-subcontractor, architect, builder, or other person having charge of a work of improvement or portion thereof shall be held to be the agent of the owner.

Section 3111 provides:

. . . and express fund established pursuant to a collective bargaining agreement to which payments are required to be made on account of fringe benefits supplemental to a wage agreement for the benefit of a claimant on particular real property shall have a lien on such property in the amount of the supplemental fringe benefit payments owing to it pursuant to the collective bargaining agreement.

Section 3112 provides:

Any claimant who, at the instance or request of the owner (or any other person acting by his authority or under him, as contractor or otherwise) of any lot or tract of land, has made any site improvement as a lien upon such lot or tract of land for work done or materials furnished.

 

 

[86-1 USTC ¶9450] United States of America, Plaintiff v. Phyllis Helmick, Individually, Estate of Ernest D. Helmick by Phyllis Helmick, Executrix, and David R. Dodd, Co-Executor; Ernest D. Helmick, Jr.; George G. McClintock; Amy I. McClintock, Defendants

U.S. District Court, Mid. Dist. Pa., CIV. 84-0165, 3/28/86

[Code Secs. 6013(e) and 6323 and Tax Court Rule 121]

Joint returns: Liability for deficiency: Lien for taxes: Priority: Purchaser: Tax Court: Rules of practice: Summary judgment.--Although, upon reviewing the affidavit of the taxpayer, the court was convinced that she had presented genuine issues of material fact surrounding her assertion of the innocent spouse defense, the court nonetheless agreed that, because the taxpayer did not raise the innocent spouse defense during the Tax Court proceeding, she was barred from asserting it during the instant proceeding. Thus, the U.S. was entitled to summary judgment in its favor and against the taxpayer individually for the taxable year 1975, but there was an issue of material fact as to the amount of judgment to which she was entitled. Furthermore, because no defense or contention that a genuine issue of material fact existed was presented in the taxpayers' brief opposing the summary judgment motion, the court concluded that the U.S. was entitled to summary judgment as to the issue of liability. The court, however, limited the grant of summary judgment to the issue of liability alone, because it was unable to determine with specificity the amount to which the U.S. was entitled. In addition, one of the taxpayers raised a genuine issue of material fact with respect to the fairness of the consideration that he paid for his father's conveyance of property to him. Thus, the court did not enter summary judgment in favor of the U.S. against the taxpayer where the U.S. submitted that, as a matter of law, it was entitled to one-half the value of the property that it alleged was fraudulently conveyed. Finally, the court was convinced that a taxpayer raised a genuine issue of material fact concerning her qualification under Code Sec. 6323(h)(6) as a purchaser of property conveyed by her father, which property the U.S. contends was subject to federal tax liens and foreclosure by the U.S. She adduced evidence to indicate that she was, in effect, the owner of the property from the time of its purchase in 1975, and she claimed that, although the deed was originally in the names of her father and brother, it was she who made all the mortgage payments and paid taxes and other expenses attributable to the property and made or caused to be made all repairs and improvements to the property.

David C. Shipman, Assistant U.S. Attorney, Harrisburg, Pa. 17108, Michael J. Salem, Mark Gellar, Department of Justice, Washington, D.C. 20530, for plaintiff. Samuel Andes, George A. Vaughn III, Andes & Vaughn, PO Box A-168, Lemoyne, Pa. 17043, for defendants.

MEMORANDUM

HERMAN, District Judge:

This is an action by the plaintiff, the United States of America, seeking to reduce to judgment certain tax assessments against defendant Phyllis Helmick both in her individual capacity and in her capacity as the representative of the estate of her late husband, Ernest D. Helmick, Sr. The United States also seeks to have a conveyance of property from Ernest D. Helmick, Sr. to his son, defendant Ernest D. Helmick, Jr. deemed a fraudulent conveyance. Finally, the plaintiff seeks to have tax liens foreclosed against certain property presently owned by the deceased's daughter, Amy I. McClintock, and her ex-husband, defendant George G. McClintock. Currently before us is plaintiff's motion for summary judgment, a motion which has been fully briefed by the parties and is ripe for our disposition. For the reasons set forth herein, we shall deny the motion in part and grant the motion in part.

I. FACTUAL BACKGROUND

Pursuant to I.R.C. (26 U.S.C.) §6672 , the Internal Revenue Service (hereafter "I.R.S.") made assessments against defendant Phyllis Helmick and her late husband Ernest D. Helmick, Sr., for unpaid income taxes for the periods 1967, 1969, 1970, and 1975 through 1979. Exhibits A1, A2 to Affidavit of Harkins. The I.R.S. presented the Helmicks with statutory Notices and Demands for Payment with respect to these assessments, and when the Helmicks failed to pay the taxes, penalties, and interest thereon, the I.R.S. caused notices of federal tax liens to be filed. Exhibit A to Affidavit of Harkins. As of August 15, 1985 , defendants Phyllis Helmick and the estate of Ernest D. Helmick, Sr., are indebted to the plaintiff in the alleged amount of $940,951.77, with interest and statutory additions continuing to accrue.

On September 18, 1975 , Ernest D. Helmick, Sr. and Ernest D. Helmick, Jr., purchased property located in Cumberland County for the sum of $38,000. Shortly before his death, ¹ Ernest D. Helmick, Sr., along with his son, granted and conveyed the property to the son alone for the consideration of one dollar. On June 30, 1981 , the son granted and conveyed the property to Rob ert S. and Catherine M. Jones for $52,000. The plaintiff attacks the conveyance from the father and son to the son alone as a fraudulent conveyance pursuant to Pa. Stat. Ann. title 39, §§351 -363 (Purdon 1954 and 1985 Supp.), and thus seeks to recover one-half of the property's value.

On March 8, 1979, Ernest D. Helmick, Sr. transferred property also located in Cumberland County to his daughter, defendant Amy I. McClintock ² for the total consideration of one dollar. This property was purchased previously on June 27, 1975 by Ernest D. Helmick, Sr. and Ernest D. Helmick, Jr. Plaintiff claims that this property conveyed by Ernest D. Helmick, Sr. was subject to federal tax liens such that plaintiff may properly foreclose upon this property. ³

II. DISCUSSION

In response to the United States ' motion, the defendants raise several defenses and contend that issues of material fact are in dispute. In reviewing and analyzing defendants' defenses and contentions, we are mindful of the standards utilized in addressing a summary judgment motion. Granting summary judgment under Rule 56 of the Federal Rules of Civil Procedure is appropriate only where the moving party establishes that no genuine issue exists as to any material fact in the case, and that he is entitled to judgment as a matter of law. Fragale & Sons Beverage Co. v. Dill, 760 F.2d 469, 472 (3d Cir. 1985). The court should resolve any doubts as to the existence of a material fact in favor of the nonmoving party, and view all inferences in the light most favorable to the nonmoving party. Riehl v. Travelers Insurance Co., 772 F.2d 19, 23 (3d Cir. 1985). We now examine the motion as it relates to each defendant in turn.

A. Phyllis Helmick in her individual capacity. Defendant Phyllis Helmick asserts that under I.R.C. §6013(e) she is an "innocent spouse" and thus entitled to the protection afforded by that section of the Internal Revenue Code (Code). Married taxpayers who file a joint tax return, which the Helmicks did during the years in question, are jointly and severally liable for the tax due on their combined incomes. Congress, however, enacted §6013(e) to protect the spouse whose marital partner underreported income without the knowledge of the spouse, and then disappeared, leaving the spouse liable for a large deficiency. See Sanders v. United States [75-1 USTC ¶9297 ], 509 F.2d 162, 165 (5th Cir. 1975). In pertinent part, §6013(e) provides:

(e) Spouse relieved of liability in certain cases.--

(1) In general--Under regulations prescribed by the Secretary, if--

(A) a joint return has been made under this section for a taxable year,

(B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse,

(C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and

(D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement,

then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement.

26 U.S.C.A. §6013(e) (West Supp. 1985).

Defendant Phyllis Helmick seeks to establish that she did not know, nor had reason to know, of omissions from gross income. By affidavit, she asserts that during her marriage she had no income of her own, that her husband kept all the records relating to his personal income, and that he maintained the records at either his office or in a study to which Mrs. Helmick had no access. Affidavit of Helmick, ¶¶4-6. Nor did she ever review, read or question the tax returns presented to her by her husband for her signature, having trusted her husband and his financial advisors to calculate accurately, report and pay tax upon all his taxable income. Affidavit of Helmick, ¶7. During the years 1965 through 1979, Mrs. Helmick avers that she was not aware of any increase in the family's expenditures or in funds made available to her, nor did she notice any significant increase or substantial change in the family's lifestyle or standard of living. Affidavit of Helmick, ¶8. Finally, Mrs. Helmick claims under oath that she has received no substantial assets from the estate of her husband and is now destitute and dependent upon her family, church, and friends to meet her living expenses. Affidavit of Helmick, ¶10.

Reviewing the affidavit of Mrs. Helmick, we are convinced that she has presented genuine issues of material fact surrounding her assertion of the innocent spouse defense under §6013(e). Mrs. Helmick has adduced evidence to support a conclusion that she did not know, nor have reason to know, that her husband was underreporting substantial amounts of gross income. See Sanders v. United States [75-1 USTC ¶9297 ], 509 F.2d at 167. She has also come forward with evidence that not only did she not derive any significant benefit over the years from the omitted income, but also that it would be inequitable to hold her liable for the tax, interest, and penalties to the extent that such liability is attributable to such substantial understatement. As such, we hold that, with the exception discussed below, we can not at this stage of the proceedings enter summary judgment in plaintiff's favor and against defendant Phyllis Helmick in her individual capacity.

In its reply brief, the United States contends that with respect to the assessment for the taxable year 1975, ⁴ Mrs. Helmick is barred from contesting the assessment by the doctrine of res judicata. To support its contention, plaintiff argues that the United States Tax Court, in a 1981 case involving Mrs. Helmick, her husband's estate, and the Commissioner of Internal Revenue, ⁵ ordered and decided that there was a deficiency in the income tax due from Mrs. Helmick and the estate of her husband in the amount of $103,346.66. The plaintiff argues that because Mrs. Helmick did not raise the innocent spouse defense during the Tax Court proceeding, she is barred from asserting it during the instant proceeding. We must agree. See Commissioner v. Sunnen [48-1 USTC ¶9230 ], 333 U.S. 591, 597 (1948).

We hold therefore, that the plaintiff is entitled to summary judgment in its favor and against Phyllis Helmick individually for the taxable year 1975.

The amount of the judgment to which the plaintiff is entitled, however, does not lend itself to precision and clarity. Plaintiff's Exhibit A1, a certificate of assessments and payments, indicates that payments of $85,021.63 and $49.00 were made toward the assessment balance on April 10, 1984 and May 3, 1984 , respectively. Plaintiff relies upon Exhibit C, a schedule of unpaid tax liability, in concluding that Mrs. Helmick is liable for $178,209.78 for taxable year 1975. Exhibit C apparently does not reflect these payments. We conclude that although the plaintiff is entitled to summary judgment as to the issue of liability for the 1975 tax year, there is an issue of material fact as to the amount of the judgment to which it is entitled. See Fed.R.Civ.P. 56(c).

B. The Estate of Ernest D. Helmick, Sr. In defendants' brief opposing the summary judgment motion, no defense or contention that a genuine issue of material fact exists is presented to us by defendants David R. Dodd and Phyllis Helmick, co-executor and executrix, respectively, of the estate of Ernest D. Helmick, Sr. It is well settled in this circuit that a presumption of correctness applies to assessments made by the I.R.S. Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1159-60 (3d Cir. 1971); Hildebrand v. United States [83-2 USTC ¶9570 ], 563 F.Supp. 1259, 1264 (D.N.J. 1983); Tucker v. United States [85-1 USTC ¶9394 ], 3 Cl.Ct. 180 (1985). Therefore, in the absence of any evidence presented by the estate's representatives, we conclude that the United States is entitled to summary judgment as to the issue of liability. Again, for the reasons outlined above, we are unable to determine with specificity the amount to which the United States is entitled, and pursuant to Rule 56(c), we shall limit the grant of summary judgment to the issue of liability alone. The United States is free, of course, to submit affidavits which establish with precision the liability of the estate for the unpaid income taxes, plus interest and penalties, for the aforementioned years.

C. Ernest D. Helmick, Jr. The United States submits that as a matter of law it is entitled to one-half of the value of the property which it alleges was fraudulently conveyed by Ernest D. Helmick, Sr. to his son in 1979. Under sections 354 and 355 ⁶ of the Pennsylvania Uniform Fraudulent Conveyances Act (hereafter referred to as "the Act"), Pa. Stat. Ann. title 39, §§351 -363 (Purdon 1954 and 1985 Supp.), a conveyance will not be set aside as fraudulent, if the conveyance was made for fair consideration.

The Pennsylvania Supreme Court has construed these sections of the Act to mean that if the person conveying the property was in debt at the time of the conveyance, the burden rests upon the grantee to establish by clear and convincing evidence either that (1) the person conveying was then solvent and was not rendered insolvent by the conveyance or (2) fair consideration had been paid for the conveyance. First National Bank of Marietta v. Hoffines, 429 Pa. 109, 114, 239 A.2d 458, 462 (1968); see also United States v. Gleneagles Investment Co., 565 F. Supp. at 573. The plaintiff has shown that the grantor, Ernest D. Helmick, Sr., was in debt at the time of the March 8, 1979 conveyance to his son by virtue of the fact that assessments and notices and demands for payment had been made by the I.R.S. upon the father. To meet the shifted burden, the son argues that he gave his father fair consideration for the conveyance. ⁷ Ernest D. Helmick, Jr. avers that to the extent that the father owned any interest in the property in question, he transferred it to his son for valuable consideration in that the son paid all the mortgage payments, taxes, and utilities attributable to the property during the time the property was in the names of both the father and the son, i.e., 1975 through 1979. The plaintiff has not disputed this averment. We conclude that Ernest D. Helmick, Jr. has raised a genuine issue of material fact with respect to the fairness of the consideration paid for the father's conveyance. We thus shall not enter summary judgment in favor of the United States and against Ernest D. Helmick, Jr.

Plaintiff also asks us to deem the conveyance fraudulent under §357 of the Act. Sections 356 and 357 are commonly referred to as the Act's intentional, as opposed to constructive, fraud provisions. Under §357 , any conveyance made with the intent to hinder, delay, or defraud creditors is fraudulent. The sole inquiry is whether the requisite fraudulent intent existed at the time of the conveyance and whether the creditors were in fact prejudiced by the conveyance. United States v. Gleneagles Investment Co., 565 F. Supp. at 573; Queen-Favorite Building & Loan Association v. Burstein, 310 Pa. 219, 165 A. 13 (1933).

The United States contends that under Pennsylvania law, when a debtor conveys property to his child or children without adequate consideration, the conveyance is fraudulent on its face and the burden shifts to the child or children to demonstrate by "clear and satisfactory proof" that the conveyance was fair. Queen-Favorite Building & Loan Association, 310 Pa. at 223; 165 A. at 15. Because we conclude above that there was a genuine issue of material fact with respect to the adequacy or fairness of the consideration, summary judgment is inappropriate under section 357 as well.

D. George McClintock and Amy McClintock. The United States also contends that property conveyed by Ernest D. Helmick, Sr., to his daughter and her husband was subject to federal tax liens and thus subject to foreclosure by the United States. The plaintiff argues that although the liens had not been filed in accordance with §6323(f) of the Code at the time of the conveyance, defendant Amy Ensminger took title subject to the lien because she was not a "purchaser." Section 6323(h)(6) defines purchaser as "a person who, for adequate and full consideration in money or money's worth, acquires an interest" in the property. Because Amy Ensminger paid but one dollar for the property according to the terms of the deed, the United States claims that Ensminger does not qualify as a purchaser under the statute.

Ensminger presents an argument similar to that of her brother. She claims that although the deed was originally in the names of her father and brother, it was she who made all the mortgage payments and paid taxes and other expenses attributable to the property from the date of purchase in 1975 . ⁸ Affidavit of Ensminger, ¶7. She avers that she alone made or caused to be made all repairs and improvements to the property. Id. , at ¶9. Finally, Ensminger avers that title to the property was placed in her father's and brother's names solely as an accommodation to obtain financing for the parcel, and that it was the understanding of the family members involved that the property always belonged to the daughter. Id. , at ¶¶3, 4, 5, and 10.

Reviewing the documents before us, we are convinced that Ensminger has raised a genuine issue of material fact concerning her qualification as a purchaser under the cited Code provision. Ensminger has adduced evidence to indicate that she was, in effect, the owner of the property from the time of its purchase in 1975, and that she paid valuable consideration for the property by assuming all expenses related to the property from the time of purchase. As such, we are unable to say that as a matter of law the plaintiff is entitled to foreclose upon the property. ⁹

In conclusion, we hold that the plaintiff is entitled to summary judgment as to the issue of liability with respect to defendant Phyllis Helmick, individually, for the taxable year 1975. We shall also grant plaintiff summary judgment as to liability alone against the estate of Ernest D. Helmick, Sr., for all the taxable years in question. As to the amount, we shall require plaintiff to submit documents within fifteen (15) days of our Order which reflect the balance of the assessments, including appropriate interest and penalties, and taking into account any payments made toward the outstanding balance. We shall not enter summary judgment in the United States ' favor and against defendants Ernest D. Helmick, Jr., and Amy Ensminger concerning the 1979 conveyances of property. An appropriate order and judgment will be entered.

ORDER and JUDGMENT

HERMAN, District Judge: AND NOW, this 28th day of March, 1986, in accordance with the accompanying Memorandum, IT IS ORDERED AND ADJUDGED that pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment be and hereby is entered in favor of the United States of America, plaintiff, and against:

1. defendant Phyllis Helmick, individually, as to the issue of liability alone, for the taxable year 1975;

2. the estate of Ernest D. Helmick, Sr., by defendant Phyllis Helmick, executrix, and defendant David R. Dodd, co-executor, as to the issue of liability alone, for the taxable years 1967, 1969, 1970 and 1975 through 1979, inclusive.

IT IS FURTHER ORDERED that plaintiff's motion for summary judgment with respect to the conveyance of property from the late Ernest D. Helmick, Sr., to defendant Ernest D. Hemick Jr., be and is denied.

IT IS FURTHER ORDERED that plaintiff's motion for summary judgment with respect to the foreclosure of liens on property owned by defendant Amy I. McClintock be and is denied.

IT IS FURTHER ORDERED that plaintiff be and is directed to submit within fifteen (15) days of this Order evidence establishing the amount of damages to which its is entitled as to defendant Phyllis Helmick individually and as executrix of the estate, and as to defendant David R. Dodd, co-executor of the estate. Defendants Helmick and Dodd shall have fifteen (15) days after such filing within which to respond as to the issue of damages.

¹ Ernest D. Helmick, Sr. died unexpectedly in an automobile accident on July 4, 1979 .

² Since the filing of this action, Amy I. McClintock has remarried; her present name is Amy I. Ensminger.

³ Defendant Phyllis Helmick and the late Ernest D. Helmick, Sr., were assessed taxes totalling $280,913.97 as of March 8, 1979 . On the same dates these assessments were made, the I.R.S. made notices and demands for payment upon them. See Exhibits A1 and A2 to Affidavit of Harkins. Consequently, pursuant to I.R.C. §§6321 and 6322 , tax liens in the assessed amount were filed against all property and rights to property belonging to the Helmicks as of the dates of the assessments. Such liens continue until either the taxes, interest and penalties are paid, or the liens lapse by reason of time.

⁴ The assessment for 1975 was for $103,346.66.

⁵ Phyllis G. Helmick, individually, and the Estate of Ernest D. Helmick, Deceased, Phyllis G. Helmick, and Dauphin Deposit Bank & Trust Co., Co-executors v. Commissioner of Internal Revenue, docketed at 16489-79.

⁶ These two sections are commonly referred to as the constructive fraud provisions of the Act because under these two sections, the intent and knowledge of the transferor and transferee are not in issue. United States v. Gleneagles Investment Co., 565 F.Supp. 556, 573 (M.D. Pa. 1983); see also Farmers Trust Co. v. Bevis, 331 Pa. 89, 200 A. 54 (1938).

⁷ The son claims to have had no knowledge about his father's solvency immediately before and after the conveyance.

⁸ As stated above, the father and son purchased the property in June of 1975. In early 1979, the son conveyed his interest to the father, who in turn conveyed the property to his daughter. The conveyance was arranged in this fashion apparently to avoid the Pennsylvania realty transfer tax, which exempts parent-child conveyances, but not child-to-child conveyances.

⁹ In its reply brief, the United States contends that if the son and daughter paid all the expenses attributable to the land, yet the land was titled in part in the father's name, resulting trusts arose, subject to the restrictions set forth in Pa. Stat. Ann. title 21, §601 (Purdon 1955). We must reject this argument. Plaintiff's lien attached only to the interest of Ernest Helmick, Sr., in the parcels. Here, the plaintiff has not refuted the children's contention that the father had no beneficial interest in their respective parcels of land. It is well settled in Pennsylvania that where the trustee (i.e., Ernest D. Helmick, Sr.) has no beneficial interest in the land, the land is not bound by a judgment or similar adjudication against the trustee. Kauffman v. Kauffman, 266 Pa. 270, 109 A. 640 (1920). Thus, the plaintiff is not entitled to summary judgment with respect to the realty in question.

 

 

[75-2 USTC ¶9742] United States of America , Plaintiff v. Gerald Lord, Helen Lord, Lord Plumbing and Heating, Inc., and Freedom National Bank of New York , Defendants

U. S. District Court, East. Dist. N. Y., 78 U. C. 1608, 8/11/75

[Code Secs. 7401 and 7403]

Assessment of taxes: Prima facie correctness of: Summary judgment: Material issue of fact.--Because the filing of tax assessments constitutes prima facie evidence that the taxes are due and that the amount charged is correct, and the taxpayers did not allege facts sufficient to show that the assessments were incorrect, the government's motion for summary judgment for the amount assessed, plus statutory interest, was granted. However, summary judgment to set aside an alleged fraudulent conveyance of real property by the taxpayers and to foreclose the federal tax lien against that parcel of property was denied because a significant factual dispute existed as to whether the conveyance was actually fraudulent.

Howard J. Steehel, Assistant United States Attorney, David Trager, United States Attorney, Brooklyn, N. Y., for plaintiff. Jeffrey D. Snow, Department of Justice, Washington , D. C. 20530, for defendants.

Memorandum of Decision and Order

MISHLER, Chief Judge:

This is an action to set aside an alleged fraudulent conveyance of real property and to foreclose a federal tax lien against that parcel of property. Beginning on July 26, 1968 , and continuing until April 30, 1970 , eight separate tax assessments were filed against Lord Plumbing and Heating, Inc. (the Corporation) for unpaid withholding and Federal Insurance Contributions Act taxes. The government alleges that after some of these assessments were made, the Corporation conveyed a parcel of real property to Gerald and Helen Lord, in an attempt to hinder or defraud its creditors. According to the government, the Corporation was insolvent at the time it made the conveyance and no fair consideration was received for the transfer. Defendants Gerald and Helen Lord state that the Corporation was only nominally the owner of the property, that the Corporation was not insolvent at the time of the transfer, and that fair consideration was given for the property in that the transfer was a repayment to Mrs. Lord for a home which she had given up to help start the Corporation. The total tax liability is $92,537.83. The government now moves pursuant to Rule 56 of the Federal Rules of Civil Procedure for summary judgment, awarding that amount to the government, setting aside the conveyance, and foreclosing the government's lien on the property.

With regard to summary judgment for the amount of the taxes owed, the filing of the tax assessments constitutes prima facie evidence that the taxes are due and that the amount charged is correct. Welch v. Helvering [3 USTC ¶1164], 290 U. S. 111, 115, 54 S. Ct. 8, 9 (1933); Paaty v. United States [71-1 USTC ¶9346], 442 F. 2d 1154 (3d Cir. 1971); United States v. Lease [65-2 USTC ¶9478], 346 F. 2d 695 (2d Cir. 1965). The burden is on the taxpayer to demonstrate that the assessments are incorrect. United States v. Lease, supra. Defendants here do not deny that the assessments have been filed, nor do they challenge the amounts listed as due and owing. They argue only that it was their understanding that an arrangement had been reached with the Internal Revenue Service whereby the general contractor for whom the Corporation was working would make the tax payments directly. However, regardless of any such arrangement, the assessments were filed against the Corporation and the Corporation is ultimately responsible for the taxes. The defendants have not alleged sufficient facts to show that the assessments are incorrect; they have not met the burden imposed on a party opposing summary judgment to show that there is a real factual dispute. United States v. Prince [65-2 USTC ¶9552], 348 F. 2d 746, 748 (2d Cir. 1965). Therefore, the government's motion for summary judgment in the amount of $92,537.83, plus statutory interest thereon must be granted.

Summary judgment will not be granted, however, when there is a factual dispute as to a material issue. See, e.g., United States v. W. T. Grant Co., 345 U. S. 629, 635, 73 S. Ct. 894, 898 (1953); Associated Press v. United States, 326 U. S. 1, 6, 65 S. Ct. 1416, 1418 (1945); Wright, Federal Practice and Procedure, ¶2725. The question of the alleged fraud surrounding the conveyance of the real property presents a significant factual dispute. The government relies on the New York Debtor and Creditor Law §§ 271, 272, 273 and 275 in arguing that the transfer was a fraudulent conveyance intended to hinder the government, and any other creditor, from collecting monies owed to it by the Corporation. The defendants, Gerald and Helen Lord, contest this characterization of the transfer. In a motion for summary judgment, the opposing party need only show that a true factual dispute does exist; it need not prove conclusively that its version of the truth is correct. First National Bank of Arizona v. Cities Service Co., 391 U. S. 253, 288, 88 S. Ct. 1575, 1592 (1968). Defendants have submitted sufficient evidence to create a real dispute as to the insolvency of the Corporation at the time of the transfer and as to the giving and receiving of fair consideration for the transfer. Those issues must be resolved by a judge or jury after trial. It would not be proper for the court at this time to draw inferences concerning the true nature of the conveyance from the outward appearances of the transaction. Empire Electronics Co. v. United States , 311 F. 2d 175 (2d Cir. 1962).

The motion of the government for summary judgment in the amount of $92,537.83 plus statutory interest pursuant to Rule 56 of the Federal Rules of Civil Procedure is granted. The government's motion for summary judgment setting aside the fraudulent conveyance is denied and it is

SO ORDERED.

There being no just reason for delay in the entry of the judgment against Lord Plumbing and Heating, Inc., the Clerk of the Court is directed to enter judgment in favor of the government and against the defendant, Lord Plumbing and Heating, Inc., in the amount of $92,537.83 and interest, from April 30, 1970 and the action shall continue on the other claim stated against the remaining defendants.

 

 

[72-2 USTC ¶9712] United States of America , Plaintiff Northwestern National Bank of Minneapolis , Defendant

U. S. District Court, Dist. Minn., Fourth Div., No. 4-71 Civ. 471, 9/11/72

[Code Secs. 6321-6323]

Lien for taxes: Motion for summary judgment: Bank's liability: Good faith: Misrepresentations.--The government's motion for summary judgment in its claim to rights in a cashier's check issued by a bank to the taxpayer was denied. The government claimed that the taxpayer took the check from the bank for value, in good faith, and without notice of prior claims to it, and consequently was a holder in due course. The bank denied this claim and maintained that taxpayer made basic misrepresentations in acquiring the check. The issue of good faith and misrepresentations involved factual determinations that were in dispute.

Rob ert G. Renner, United States Attorney, Minneapolis , Minn. , for plaintiff. Lawrence C. Brown, 1300 Northwestern Bank Bldg., Minneapolis , Minn. , for defendant.

Order

LORD, District Judge:

This matter is before the Court pursuant to plaintiff's motion for summary judgment brought under Rule 56, Federal Rules of Civil Procedure.

On March 12, 1970, the defendant Northwestern National Bank of Minneapolis issued cashiers check #137812 in the amount of $1,480.16 to Daniel P. Pierce. The check represented the proceeds of a H. E. W. Federally Insured student loan procured by Pierce from the bank.

On April 7, 1970, the District Director of Internal Revenue for the District of St. Paul, Minnesota, made a marijuana transfer tax assessment against Pierce in the amount of $1,590.16. Daniel Pierce had been in default for a federal marijuana transfer tax for the period ending April 6, 1970. Notice of the assessed tax and demand for payment was made upon Pierce on April 8, 1970. It is alleged in Plaintiff's complaint that Pierce did not pay the amount due.

On April 6, 1970 the Minnesota State Crime Bureau came into possession of cashiers check #e137812. ¹ A notice of levy was served on the Minnesota State Crime Bureau on April 8, and the check was turned over to the Treasury Department on April 9. Also on April 9, Pierce represented to the bank that the cashiers check #137812 was lost. Relying on Pierce's representations, the bank on that date, "stopped payment" on the check, and issued another cashiers check in a like amount to Pierce. Pierce promptly negotiated the second check. When the United States presented the check ² for payment on April 24, 1972, the bank refused to honor the check. ³

There are two basic issues that are raised at this time. First, it must be determined at what point in time did the United States acquire an interest in the cashiers check. Secondly, what was the nature of the interest acquired by the United States ?

1. The United States claims rights in the check by virtue of a tax lien and levy in compliance with 28 U. S. C. 6321 et seq. Without expressing an opinion as to the validity of the United States ' claim, a bref review of the applicable law may be helpful. It is well settled that questions bearing on the enforcement of a federal tax lien are governed by Federal law. U. S. v. Security Trust & Savings Bank of San Diego [50-2 USTC ¶9492], 340 U. S. 47 (1950), United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963). The question of when the lien arose then, is controlled solely by federal law. 28 U. S. C. 6321 and 6322 provide that a federal tax lien arises from the date of the assessment. Further, once a tax lien arises, the United States in a sense becomes a co-owner of the property to the extent of the lien. Simpson v. Thomas [59-2 USTC ¶9760], 271 F. 2d 450 (4th Cir. 1959). The rights of the United States in the property, remain unaffected by a transfer of the property. U. S. v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958). Consequently, if the United States establishes that it has a valid tax lien, the lien will be valid as against the defendant bank from the date of assessment, April 7, unless the defendant bank can bring itself under the protection of 26 U. S. C. 6323.

2. As to the interest acquired by the United States by virtue of the tax lien, a tax lien attaches to all property of the taxpayer. In order to determine what is property, and what rights a taxpayer may have in a given piece of property, state law is controlling. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960), U. S. v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237 (1960). The question of what rights Pierce had in the cashiers check that were subject to a Federal tax lien is governed solely by Minnesota law.

Plaintiff claims that Pierce took the check from the bank for value, in good faith, and without notice of prior claims to it, and consequently was a holder in due course under Minn. St. 336-3-302. As a holder in due course Pierce would own the instrument free from all claims to it and defenses on it except those enumerated in Minn. St. 336. 3-305.

Defendant denies that Pierce took the check in good faith and thus, the question of good faith is in dispute. Defendant also maintains that Pierce made basic misrepresentations in acquiring cashiers check #137812. ⁴ Since the issue of good faith and misrepresentations involved factual determinations that are in dispute, plaintiff's motion for summary judgment is denied. Rule 56, Federal Rules of Civil Procedure, Warner v. First National Bank of Minneapolis , 236 F. 2d 853 (8th Cir. 1956) cert. denied, 352 U. S. 927 (1950).

¹ It is not clear at this time how the Minnesota State Crime Bureau came into possession of the cashiers check.

² Cashiers check #137812.

³ There were no endorsements or any other indication of due negotiation on the check.

⁴ Consistent with Section 1 of this order, inquiry into Pierce's rights in the cashiers check will be limited to his rights as of April 7, 1970, since it was on this date that the United States acquired an interest in the check. Pierce's activities after April 7, need not be considered.

 

 

[57-1 USTC ¶9685]Rose Faraoni v. The United States of America

U. S. District Court, East. Dist. Mich. , So. Div., No. 13,462, 9/9/55

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Lien for taxes: Property held in tenancy by the entirety.--The taxpayer's wife filed this suit to remove federal tax liens from real property which she and her husband owned as tenants by the entirety. The property was acquired after the husband's federal tax liability had arisen, and the wife did not show who furnished the funds to purchase the property. The court held that the net worth statement furnished to the Tax Court was not determinative of whether or not the taxpayer was insolvent when the conveyances were made, so as to make them invalid. Also, the issue of whether or not the taxpayer had furnished the consideration for the property was a question of fact. Therefore, this case could not be disposed of on motion for summary judgment.

Leslie W. Fleming, for plaintiff. John L. Owen, Assistant United States Attorney, Detroit, Mich., Rob ert B. Pierce, Special Attorney, Internal Revenue Service, Washington, D. C., for defendant.

Opinion of the Court on Motion for Summary Judgment

Opinion of the Court (From the Bench)

THE COURT: The plaintiff in this case has filed suit in an equity action in the Macomb County Circuit Court seeking to remove certain tax liens of the Government from certain real estate described in the bill of complaint, claiming that the tax liens form a cloud on the title. This case was removed from the Macomb Circuit Court to this court by proper removal proceedings; and after removal the Government filed an answer to the bill of complaint and a counterclaim.

In substance it is the contention of the Plaintiff in this case that the tax liense files by the Government against the real estate in this case are invalid, and that the conveyances of real estate to the Plaintiff and her husband, who is the taxpayer in this matter, were valid conveyances, as tenants by the entireties; and being tenants by the entireties, the Plaintiff contends that under the law of Michigan the tenancy is not severable, it is one so far as both the husband and wife are concerned, and therefore the tenancy can not be dissolved by enforcement of the liens.

The Government contends that the consideration for these conveyances in question came solely from the husband, and that none of the consideration was from the Plaintiff. That is denied by the Plaintiff, and therefore constitutes a question of fact.

It appears that the tax liability of the taxpayer, the Plaintiff's husband, arose in this case as of December 31, 1942 , 1943, 1944 and 1946. It also appears that the conveyances in question and the real estate involved here were acquired by the Plaintiff and her husband on certain dates set forth in the bill of complaint beginning December 14, 1944, and May 13, 1946, December 20, 1947, and January 7, 1948, and another parcel on January 12, 1951. It appears that the last parcel which was conveyed to the Plaintiff and her husband on January 12, 1951, had actually been owned by the taxpayer a number of years before the tax liability arose. Therefore, it is virtually conceded by the Plaintiff, as I understand it, that Plaintiff does not seriously contest the right of the Government to proceed against the parcel described in paragraph 4(c) of the bill of complaint.

[Fraudulent Conveyance Act]

The Government contends that these conveyances are fraudulent within the meaning of the Michigan fraudulent conveyance act, and particularly offend Sec. 26887 of Michigan Statutes Annotated, which is Sec. 7 of the fraudulent conveyance act of the State of Michigan . That section provides:

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

There is another section of that act, Sec. 4, which provides: "Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors, without regard to his actual intent, if the conveyance was made or the obligation is incurred without a fair consideration."

That brings into play the question of insolvency. It is the contention of the Plaintiff that unless the conveyances in question rendered the taxpayer insolvent, that the tenancies are not subject to the tax lien, and the liens filed against the real estate under such circumstances are invalid. The Government contends that these conveyances were made with intent to defraud, actual intent to defraud creditors including the Government. Possibly the Government is the only creditor, I do not know.

This fraudulent conveyance act, the Michigan fraudulent conveyance act, affects transfers of all property, real or personal, tangible or intangible. It is not limited to transfers of real estate. As a matter of fact, the defining section, which is Sec. 1 of the act, provides that a conveyance includes every payment of money, assignment, release, transfer, lease, mortgage or pleadge, of tangible or intangible property, and also the creation of any lien or encumbrance.

It is the claim of the Government here that the husband, using his own individual funds, purchased this property, and that the wife paid none of the consideration from her own personal and separate estate. This is denied by the Plaintiff. The Plaintiff does not go on and attempt to spell out or allege where the funds came from. It may be that the Plaintiff would not know. I do not know. But it would seem that the Plaintiff should know where the funds came from to purchase this property, at least whether any of the funds came from the Plaintiff.

The early case of Newlove v. Callahan, in 85 Mich. , 897, the court says:

"It would be a gross injustice to permit debtors to apply money which should be applied to the payment of their debts to the creation of an estate which would be beyond the reach of their creditors. Had the entire estate been placed in the wife's name, there could have been no question but what same would be regarded as fraudulent under the statute, and there is no less a fraud upon creditors because the title has been taken in the names of the defendants jointly. In other words, estates in the entirety can not be created at the expense of creditors and held in fraud of the latter's rights."

In the case of Lamariee v. Rob inson, 841 Mich. , 508, that was a case involving a bill in aid of execution, where certain real estate was purchased on land contract. It was actually purchased before the obligation in question here was entered into. That was a promissory note. The property was purchased in 1919 on land contract. The promissory note involved here, which was the basis of the execution, was given in 1930, and the contract was paid up and the deed given in 1934. The Court held that the fact that the note was given after the contract was entered into was not material insofar as the consideration paid on the contract after the note was given, and they held that in view of that fact that the tenancy by the entirety would not avail the debtor anything. They cite this Newlove case in 88 Mich. , in support of that holding.

Also, in the case of Detroit R. R. v. Levell, 234 Mich., 572, where the debtor promised to pay the railroad a certain sum of money when and if the railroad was built within a certain length of time, and it was actually built within that time, and in the meantime he had purchased the real estate in question there and had made it joint with his wife, the Court, is in considering the fraudulent conveyance act involved in this suit which was a bill in aid of execution, said:

"The conveyance which on the record put this property beyond the reach of creditors was concededly without consideration, voluntarily and gratutiously made, as defendants claim, to protect the wife, a cause only open to question when it deprives creditors of their rights. Incidentally the deeds would operate to render the husband execution-proof as to the farm during her life, and if he survived her would give him a clear title to the whole of it. An equitable maxim for test of voluntary conveyances given without consideration is that 'A man should be just before he is generous.' Touching that thought this court said, speaking through Chief Justice Campbell, in Fellows v. Smith, 40 Mich. , 689, this language which seems to me to be pertinent to this case:

`Where a conveyance from a husband to a wife is a voluntary one, without valuable consideration, it is void in law as against creditors, because it transfers property they could have reached had no such transfer been made. An actual, fraudulent design is not necessary to defeat a voluntary conveyance as against existing creditors.'"

In Dunn v. Minnena, 323 Mich. , 687, which was an insolvency case, nevertheless the Court held that "The transaction must be considered with reference to the effect on the rights of the creditor. Notwithstanding the purpose for which the payments were made, they immediately constituted an investment in property ostensibly beyond the reach of creditors. Without reference to actual intent the result was a constructive fraud against which relief may be granted."

It seems clear from the fraudulent conveyance act that where insolvency is established, that actual intent to defraud is not necessary. But this is not the only situation where a conveyance may be declared illegal. There is the other section of the Act which provides that where a conveyance is made with actual intent to defraud, or made for the purpose to hinder and delay and defraud creditors, and actual intent is involved, the conveyance is in effect invalid.

[Net Worth Statement as Proof of Solvency]

It is the claim of the Government here that the taxpayer was rendered insolvent. The Plaintiff denies that. The Plaintiff claims that the net worth statement submitted in the Tax Court in this matter positively indicates that there was no insolvency. The Government also claims that there was insolvency. The Government also claims that there was an actual intent to defraud the Government, that it was a part of a plan to defraud the Government.

Insolvency, in the opinion of the Court, is a question of fact, and the Court is of the opinion that the net-worth statement in the Tax Court not only is not res judicata of the question of insolvency, but a networth statement is made for an entirely different purpose, and not for the purpose of establishing real values. Therefore, that is a question of fact, which this court does not feel can be decided on a motion for summary judgment.

Secondly, the Government also contends that the consideration for this property moved entirely from the husband. That is denied. And of course, that is a question of fact, which can only be decided upon a trial of the case.

Therefore, under the facts as they appear here on the pleadings, the Court is of the opinion that the motion for a summary judgment can not be granted, but must be denied. The issues involved in this matter, which are some issues of fact, would be and could be decided only upon the trial of the case. Under the Government's theory here, if true--which could only be decided upon a hearing on the merits--the husband here, by having acquired these properties jointly, and not having placed them in his wife's name, as the sole owner, as her separate estate, has taken property that should have been used to pay his debts, and has invested it in this real estate. And therefore, the Court is of the opinion that if that is true, which I am not expressing an opinion on, if that is the case, then the liens would be well taken, or the liens would be valid and could be foreclosed.

It seems to the Court that if the liens are valid, they can be foreclosed. I just can not see any other argument to that. Maybe I am wrong about that.

Also here, as to insolvency, it is a different situation where the Government is involved than another creditor. Here these tax returns were fraudulent; that is, the Tax Court has held that. And I think as to that aspect, I would have to consider that the decision of the Tax Court is res judicata. The tax returns were fraudulent, and having been fraudulent, the Government was misled, and they could not at the end of 1942, 1943, 1944 and possibly at the end of 1946, have known that the taxpayer was indebted to the Government. They did not know that until sometime, I do not know just when, after they made their investigation. And even then it was not properly decided, I suppose, until the Tax Court passed on it, and that was just recently, I do not know when, but within the last year sometime, I think. So that, as to laches, I do not feel that this is a case where the Government has been guilty of laches in asserting their liens. Secondly, even as to insolvency, if it was necessary to show insolvency as to the time that the conveyance was made the Government would have no way of knowing at that time that the taxpayer was insolvent. Under the fraudulent conveyance act "insolvency" is defined there. Sec. 2 of that Act reads:

"A person is insolvent when the present fair saleable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured."

So, insolvency is spelled out in this Act.

The Court is of the opinion that the cases relied upon by the Plaintiff, the Shaw, the Nathanson, and I think the Hutchinson cases, are not necessarily controlling here at this stage of the case on a motion for summary judgment.

For the reasons that the Court has already given, and there may be others that I have overlooked, I fell that this is a matter that has been pending for quite some time, and counsel have been very considerate in furnishing the Court with very fine briefs and oral arguments in this matter. They have argued the matter twice orally. They have filed extensive briefs. The Court has considered the briefs and the arguments of counsel. I want to commend both counsel for their preparation and presentation of this matter. The Court feels that there are some factors involved here that are disputed questions of fact that are pertinent to the issues here, and can be decided only at a hearing on the merits. And therefore, the Court denies the motion for summary judgment.

 

 

[54-1 USTC ¶9357] United States of America , Appellant v. Ruthe Hicks, Individually, etc., et al., Appellees

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 14727, 212 F2d 356, April 30, 1954

Appeal from the United States District Court for the Southern District of Florida.

Priority of tax claim over dower interest: Summary judgment.--The Government brought action against taxpayer's widow, claiming that she had received a specified amount from the estate without consideration, thereby rendering the estate insolvent and unable to pay taxes. The widow in her answer alleged that she had received from the estate only her dower interest and sums for which she gave consideration. Held, the District Court erred in granting the widow's motion for summary judgment without trying the case on the merits.

James L. Guilmartin, United States Attorney, Miami, Fla., H. Brian Holland, Assistant Attorney General, Ellis N. Slack, Melva M. Graney, A. F. Prescott, John J. Kelley, Jr., Special Assistants to the Attorney General, Washington, D. C., for appellant. Walter S. C. Rogers, Miami , Fla. , Benjamin W. Yancey, New Orleans , La. , for appellees.

Before HUTCHESON, Chief Judge, and HOLMES and BORAH, Circuit Judges.

PER CURIAM:

This appeal from a summary judgment entered upon the complaint and answer involves income tax liability for the taxable years 1943 and 1944, and from January 1st to November 7th of the year 1945.

The complaint alleged the making of an assessment of income taxes and interest in the amount of $24,857.56 upon the income of Ward R. Mincer, for the periods sued for. Paragraph 13 of the complaint alleged the taxpayer's death, that thereafter, on about Dec. 6, 1946 , the appellee received from taxpayer's estate $56,549.43, without giving any consideration therefor; and that since that time the estate is, and has been, insolvent.

In her answer, appellee, Ruthe Hicks, the taxpayer's widow, denied the allegations in paragraph 13 of the complaint and alleged that she had only received from the taxpayer's estate her dower interest and sums for which she gave good and valuable consideration, and that the government owed her approximately $6000 on unpaid refund.

On May 13th, the appellee filed a motion for summary judgment on the ground that the pleadings and affidavit of record show that the defendant is entitled to judgment as a matter of law, and on June 1, 1953, the district court granted the motion, saying, "There is no genuine issue of any material fact as to this defendant either individually or as executrix, and the defendant is entitled to a judgment as matter of law".

The United States is here insisting: that, though the government's claim is as matter of law superior to the amount claimed by appellee as her dower interest in taxpayer's estate, the case is not one for summary judgment on the pleadings; that issues of fact tendered on the pleadings have not been in any way resolved; that it was error to proceed to judgment; and that the judgment must be reversed and the cause remanded for trial on the merits.

We agree with the appellant that this is so. The judgment is, therefore, reversed and the cause is remanded for trial and determination on the merits.

 

 

[77-2 USTC ¶9724]In the Matter of Donald G. Dail, Bankrupt, Plaintiff v. United States of America , Defendant

U. S. District Court, East. Dist. N. C., Bankruptcy No. 75-252-BK-4, 10/28/77

[Bankruptcy Act Sec. 17(a)(1)]

Bankruptcy and receivership: Discharge of taxes: Assessments: Willful attempts to evade tax.--The District Court denied the government's motion for a partial summary judgment on the issue of whether the bankrupt's taxes were, under Sec. 17(a)(1) of the Bankruptcy Act, due and owing within the three years preceding bankruptcy because the government did not assess a deficiency within three years after the taxes became due. The taxes would have been discharged in bankruptcy except for the fact that the government alleged that the tax liability resulted from a willful attempt to evade taxes. This was an issue of fact that could not he decided from facts or pleadings, and therefore the bankrupt's motion for summary judgment was also denied.

Trawick H. Stubbs, Jr., P. O. Drawer 1654, New Bern, N. C. 28560, for plaintiff.

Opinion and Order

MOORE, Bankruptcy Judge:

On November 10, 1975 , the Plaintiff filed a voluntary petition in bankruptcy. On December 23, 1976 , the Plaintiff filed a complaint against the Defendant alleging that certain taxes had been discharged in the bankruptcy case when the Plaintiff's discharge in bankruptcy was entered on July 12, 1976 . On March 28, 1977 , the Defendant filed an answer denying the essential allegations of the complaint and requesting judgment against the Plaintiff in the amount of NINETY-ONE THOUSAND SEVEN HUNDRED SIXTY-TWO AND 35/100 DOLLARS ($91,762.35), plus statutory interest. The Defendant also alleged that the tax liability was the result of fraud or willful intent to evade taxes on the part of the Plaintiff.

The Plaintiff is represented by Mr. Trawick H. Stubbs, Jr., Attorney at Law, Post Office Drawer 1654, New Bern , North Carolina 28560 . The United States is represented by Mr. George M. Anderson, United States Attorney, Eastern District of North Carolina, and Mr. L. Bruce Locke, Attorney, Tax Division, Department of Justice, Washington , D. C., is appearing for the United States Attorney.

On July 2, 1977 , the parties filed a stipulation of facts in this case. On September 19, 1977 , the Plaintiff filed a Motion for Summary Judgment. On October 15, 1977 , the Defendant filed a Motion for Partial Summary Judgment. The respective motions of the parties are accompanied by briefs which are a part of the record in this case.

Facts

The Plaintiff and his wife timely filed a joint income tax return for the year 1969. The Plaintiff timely filed individual income tax returns for the years 1970 and 1971. The tax returns were audited by the Internal Revenue Service. On August 17, 1973 , the Internal Revenue Service mailed to the Plaintiff and his wife a thirty-day letter, Form L-191A (Rev. 3-69), together with the revenue agent's report. The agent's notes, which are a part of the stipulations, indicate that the Plaintiff, through his counsel, disagreed with the proposed statutory deficiency and that Plaintiff did not desire a conference and had no intention of trying to present any documentation to support taxpayer's reported taxable income. The agent's notes further indicate that the Plaintiff was requested to file a consent, but refused. The revenue agent completed his audit of Plaintiff's tax returns on or about June 29, 1973.

On August 20, 1973 , and September 6, 1973 , the Plaintiff's attorney corresponded with the Internal Revenue Service expressing some interest in compromising the Plaintiff's tax liability for the years 1969, 1970 and 1971. On October 3, 1973, the Plaintiff's attorney communicated to the Internal Revenue Service his intention to file an offer in compromise of the Plaintiff's tax liability for the years in question. On October 29, 1973, Plaintiff's attorney submitted to the Internal Revenue Service two properly executed Form 870's. The 870's were dated October 29, 1973. The 870's waived the restrictions on assessment and collection of deficiency in tax and constituted an acceptance of the assessment; however, each 870 clearly stated that the waiver and acceptance were conditional and were to be of no effect if the offer in compromise was not accepted. On May 21, 1975, the Plaintiff submitted two offers in compromise, Forms 656, to the Internal Revenue Service. The offers were rejected by the Internal Revenue Service on September 16, 1975. Plaintiff filed his voluntary petition in bankruptcy on November 10, 1975. On March 17, 1976, the Internal Revenue Service mailed to Plaintiff's attorney Form L-296.

Issues

Both the Plaintiff's motion and the Defendant's motion raised the question of whether or not the taxes are discharged under the provisions of Section 17a(1) of the Bankruptcy Act.

Consideration of Issue

Section 17a(1) of the Bankruptcy Act provides as follows:

A discharge in bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in part, except such as (1) are taxes which became legally due and owing by the bankrupt to the United States or to any state or any subdivision thereof within three years preceding bankruptcy; provided, however, that a discharge in bankruptcy shall not release a bankrupt from any taxes (a) which were not assessed in any case in which the bankrupt failed to make a return required by law, (b) which were assessed within one year preceding bankruptcy in any case in which the bankrupt failed to make a return required by law, (c) which were not reported on a return made by the bankrupt and which were not assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of admin istrative or judicial remedies available to the bankrupt, (d) with respect to which the bankrupt made a false or fraudulent return, or willfully attempted in any manner to evade or defeat, or (e) which the bankrupt has collected or withheld from others as required by the laws of the United States or any state or political subdivision thereof, but has not paid over; but a discharge shall not be a bar to any remedies available under applicable law to the United States or to any state or any subdivision thereof, against the exemption of the bankrupt allowed by law and duly set apart to him under this act; and provided further, that a discharge in bankruptcy shall not release or effect any tax lien;

In order to determine the major issue under consideration, it is necessary to resolve three subsidiary issues which may be stated as follows: (1) Were the taxes in question legally due and owing within three years preceding bankruptcy? (2) Were the taxes not reported on a return made by the bankrupt and not assessed prior to bankruptcy because prohibited pending the exhaustion of admin istrative or judicial remedies available to the bankrupt? (3) Did the taxes result from a false or fraudulent return or willful attempt of the bankrupt to evade or defeat the taxes?

The United States concedes in its memorandum that the taxes became legally due and owing on the date that the tax returns were due to be filed by the Plaintiff, which at the latest in this case would be April 15, 1972 . The bankruptcy petition was filed on November 10, 1975, more than three years after the taxes were due and, therefore, the taxes are dischargeable unless the taxes are within the exception proviso of Section 17a(1) of the Bankruptcy Act.

The United States , in its answer to the complaint, alleges that the taxes resulted from the bankrupt's filing a false or fraudulent return or his willful attempt to evade or defeat the taxes. This contention, if correct, would cause the taxes to be nondischargeable and entitle the Defendant to judgment. Obviously, this contention will require a determination of intent on the part of the bankrupt and the amount of the deficiency cannot be determined from the pleadings and stipulations.

The most difficult issue for determination is whether or not the taxes in question are taxes "which were not reported on a return made by the bankrupt and which were not assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of admin istrative or judicial remedies available to the bankrupt". Section 17a(1) of the Bankruptcy Act was enacted in 1970 and there are very few reported decisions interpreting this provision. The cases which have considered Section 17a(1)(c) have concluded that taxes resulting from omission of gross income or disallowance of deductions are taxes which are not reported. In The Matter Of Constance Mary Ferwerda, Bankrupt, 75-2 USTC Section 9568 (ED WISC 1975); In re Indian Lakes Estates, Inc. [70-2 USTC ¶9487], 428 F. 2d 319 (5th Cir. 1970); In re Wukelic, 38 A. F. T. R. 2d 76-6046 (6th Cir. 1976); In re Greve, 39 A. F. T. R. 2d 77-525 ( WD OKLA 1976). The phrase "taxes which are not reported" means tax liability not reported as distinguished from the information giving rise to the liability. 1A Collier, Bankruptcy (14th Ed. 1976), Section 17.14(4) at 1620. The taxes in the present case result from omission of gross income and disallowance of deduction.

The proviso in question also requires that the taxes not be assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of admin istrative or judicial remedies available to the bankrupt. The cases have already determined that if the taxpayer has signed an Internal Revenue Service Form 872, it is in pursuit of his admin istrative and judicial remedies and the taxes are not dischargeable under Section 17a(1)(c) of the Bankruptcy Act. In The Matter of Constance Mary Ferwerda, Bankrupt, 75-2 USTC Section 9568 (ED WISC 1975; In re Indian Lakes Estates, Inc. [70-2 USTC ¶9487], 428 F. 2d 319 (5th Cir. 1970); In re Wukelic, 38 A. F. T. R. 2d 76-6046 (6th Cir. 1976); In re Greve, 39 A. F. T. R. 2d 77-525 ( WD OKLA 1976). In the case of In re Greenan, 40 A. F. T. R. 2d 77-5390 (WD NY 1977), the Court held that where the Internal Revenue Service had two days to assess the taxes after the expiration of the ninety-day period established by the ninety-day letter, the tax was discharged. One author had the following comments on the proviso in Section 17a(1)(c):

"Probably the most significant exception involves 'taxes . . . which were not reported on a return made by the bankrupt and which were not assessed prior to bankruptcy by reason of a prohibition on assessment pending the exhaustion of admin istrative or judicial remedies available to the bankrupt.' In a federal tax context, that means deficiencies in income, estate and gift taxes, which in general cannot be assessed until the taxpayer has received a formal notice of the proposed deficiency and has been afforded an opportunity to litigate it to finality in the Tax Court. One writer contends that the only federal taxes saved from discharge and loss of priority by this exception are those for which a notice of deficiency had already been sent before bankruptcy, where bankruptcy occurs during litigation or during the ninety-day period allowed for instituting such litigation. That argument, in the last analysis, rests on the view that the draftsmen really did not understand tax law so should not be deemed to have meant what they said. For it is not merely during the pendency of a proceeding that assessment is prohibited. From the very inception of the tax liability, assessment of additional tax is prohibited unless the full procedure is followed. I believe, therefore, that any unassessed federal income, estate or gift tax deficiency, no matter how old the liability may be, cannot be discharged or denied priority, whether the matter at the time of bankruptcy had reached the Tax Court, was actively subject to admin istrative negotiations, or was simply held in an inactive file under extensions of the statute of limitations.

I must qualify that statement in one respect: The moment the restrictions on assessment are removed (by the taxpayer's execution of a waiver thereof, by his failure to file a timely petition to the Tax Court with respect to a deficiency notice, or by a Tax Court decision), the exception is no longer applicable. If bankruptcy occurs before that moment, the tax is protected from discharge and loss of priority. But if bankruptcy occurs later, although before there is time to assess the tax, make initial collection efforts, and decide that it is necessary to protect the lien by filing, the tax (if over three years old) will be discharged and the priority lost, unless one of the other exceptions applies."

Plumb, Federal Tax Liens and Priorities in Bankruptcy--Recent Developments, Journal of the National Conference of Referees in Bankruptcy, April, 1969, 37, 44.

The comment from Collier regarding this proviso is as follows:

"The exception in (c) is not as clear as possible. A conceivable construction of it could be that if the Government made a pre-bankruptcy assessment (once the prohibition was lifted), the tax is dischargeable. But if no assessment was made, even if it could have been, the tax is not dischargeable. This construction is illogical; the distinction serves no apparent purpose. The meaning that should be attributed to the language is that the tax may be dischargeable if an assessment could have been made before bankruptcy (whether it was or not), and the tax debt is more than three years old. If actual assessment at any time before bankruptcy was a key factor to effectuate non-dischargeability, there would be no need for the second proviso in Section 17a(1) removing tax liens from dischargeable tax debts."

1A Collier on Bankruptcy, Section 17.14(4) (14th Ed. 1976).

The rationale expressed in Colliers appears to be quite logical and is well supported with common sense even if there are no cases supporting this position.

However, the United States in this case takes the position that the Internal Revenue Service may not make an assessment until after compliance with Section 6213 of the Internal Revenue Service Code (26 U. S. C. 6213), which provides that an assessment cannot be made until the expiration of the ninety-day time set in the ninety-day letter from the Internal Revenue Service. In other words, the Internal Revenue Service, by controlling the date of the ninety-day letter, can also control the "prohibition" contained in the Bankruptcy Act. This view seems untenable. The real question is whether or not the ninety-day letter could have been issued or could the tax have been assessed. The prohibition referred to in Section 17a(1)(c) is a prohibition against "assessment" in the sense that if the taxes are not actually assessed in three years after they are due solely because of the taxpayer's pursuit of his admin istrative or judicial remedies, not because of the Internal Revenue Service's failure to issue a ninety-day letter, then the taxes are not discharged.

Even so, the issue still remains in this case as to whether or not the taxpayer's execution of Form 870 on October 29, 1973 , or the execution of Form 656 on May 21, 1975 , was the Plaintiff's "pursuit of admin istrative or judicial remedies".

In the present case, the Plaintiff executed an Internal Revenue Service Form 870 on October 29, 1973 , as to each of the tax years in question. The Form 870 contains a contingency providing that if an offer in compromise was not accepted by the Commissioner, then the waiver is of no effect or force. The Form 870 states that its execution by a taxpayer does not extend the statutory period of limitations for refund, assessment or collection of the tax. In the Form 870, it is clearly stated that the taxpayer waives assessment; however, the conditional nature of the Form 870 in question causes the document to be more of an offer to waive the assessment subject to the Commissioner's acceptance of an offer in compromise. However, whether the Form 870 be considered as an unconditional waiver of the assessment or as an offer to waive the assessment, it did not toll the statute of limitations and it did not prohibit the actual assessment of the tax. The fact that the Internal Revenue Service did not assess the tax or issue its ninety-day letter was not because it was prohibited from doing so, but simply because it did not do so. The offer in compromise was not submitted to the Internal Revenue Service by the taxpayer until May 21, 1975 (see Stipulation No. 9), which is more than three years after the 1971 taxes were due on April 15, 1972.

Conclusions of Fact and Law

It is concluded that the taxes owed by the bankrupt taxpayer in this case were due on or before April 15, 1972 . It is further concluded that, although the taxes in question were not reported by the taxpayer, the taxes were not assessed by the United States for reasons other than because of the taxpayer's pursuit of his admin istrative or judicial remedies as is provided in Section 17a(1)(c). It is further concluded that the United States has alleged that the taxes were, in fact, the result of a fraudulent return prepared and submitted by the bankrupt taxpayer or the result of the taxpayer's willful intent to evade taxes.

In view of the above conclusions, the Plaintiff-Bankrupt's Motion for Summary Judgment should be denied, and the Motion of the United States for a Partial Summary Judgment should be denied, now therefore,

IS IS ORDERED that the Plaintiff's Motion for Summary Judgment in this case be, and the same hereby is, denied, and

IT IS FURTHER ORDERED that the Motion of the United States for Partial Summary Judgment in this case be, and the same hereby is, denied.

 

 

[78-2 USTC ¶9712] United States of America , Plaintiff v. Anthony V. Filigno et al., Defendants

U. S. District Court, West. Dist. of Wash. , C 77-251L, 8/31/78

[Code Sec. 7403--result unchanged by '76 Tax Reform Act]

Deficiencies: Erroneous determination of assessment: Tax lien foreclosure suits: Summary judgment.--Summary judgment was granted for the government in a tax lien foreclosure suit. Taxpayer did not offer any substantial evidence in reply to the summary judgment motion.

[Code Sec. 6323--result unchanged by '76 Tax Reform Act]

Mortgage lien: Foreclosure: Priority: Summary judgment.--A third-party motion for summary judgment to foreclose on taxpayer's mortgage was not allowed because the date of default on the mortgage was unclear. The motion for summary judgment establishing the priority of the mortgage vis-a-vis the tax lien also was denied, since it was unclear under the facts that the mortgage had priority under state law.

Susan Barnes, Assistant United States Attorney, for plaintiff. Raymond Royal, "U" District Bldg., 1107 N. E. 43rd St., Seattle, Wash. 98105, for Filigno. William M. Rob inson, 910 Bank of California Center , Seattle , Wash. 98164 , for S. A. Hilmes. William C. Severson, W554 King County Courthouse, Seattle , Wash. 98104 , for King Co.

Memorandum and Order on Various Motions for Summary Judgment and for Permission to Amend Answers

LINDBERG, District Judge:

These matters come on for consideration on the motions for summary judgment of the plaintiff, and the defendants. Hilmes and Anthony V. and Carrie N. Filigno. The Filignos have also requested permission to amend their original answers by substitute pleadings which have already been filed and served herein.

(1) Plaintiff's Motion for Summary Judgment. The plaintiff has submitted a certificate of assessment which supports the allegations in its complaint as to the amount of tax deficiency and interest to April 15, 1970 . The Government's assessment must be taken as presumptively correct; it is Mr. Filigno's burden to show error in or the invalidity of the assessment. Valley Title Co. v. Commissioner of Internal Revenue [77-2 USTC ¶9643], 559 F. 2d 1139, 1141 (9th Cir. 1977); Rockwell v. Commissioner of Internal Revenue [75-1 USTC ¶9324], 512 F. 2d 882, 885 (9th Cir.), cert. den., 423 U. S. 1015 (1975); United States v. Rexach [73-2 USTC ¶9527], 482 F. 2d 10, 15-16 (1st Cir.), cert. den., 414 U. S. 1039 (1973). Summary judgment is appropriate upon submission of the Commissioner's certificate of assessment where the taxpayer has failed to meet his burden. E.g., Person v. New York Post Corporation, 427 F. Supp. 1297, 1307 (E. D. N. Y. 1977). Also, it is the taxpayer's burden to show that the Government erred in imposing its penalty under 26 U. S. C. §6651(a)(3) (1970). Norton v. United States [77-1 USTC ¶9296], 551 F. 2d 821, 827 (Ct. Cl.), cert. den., 434 U. S. 831 (1977); Deffendall v. United States [74-2 USTC ¶9780], 386 F. Supp. 509, 512 (D. C. Ore. 1974).

In reply to the Government's memorandum, Filigno's attorney cites one case, United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1142 (9th Cir. 1970), which was apparently mentioned to him by an employee of the Internal Revenue Service in Seattle and which, its argued, is inapplicable to the instant facts. The Government neither relies on Overman, nor is it wholly applicable to the instant facts since here Mr. Filigno's assessment occurred during the Filignos' marriage. Accordingly, the defendant's opposition to the Government's motion is deemed to be without merit for failure to present a list of authorities as required by Local Rules, W. D. Wash. CR 7(b)(2).

Moreover, the suggestion by Filigno's attorney that significant factual issues are present which warrant denial of summary judgment is weak and unconvincing. Under Fed. R. Civ. P. 56(c), "[t]he judgment sought shall be rendered forthwith if the pleadings . . . together with the affidavits . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In my opinion, the Filignos' affidavits do not raise any substantial question as to either the propriety of the Commissioner's determination that extra tax was owed for 1967 (e.g., Gilbert v. Commissioner of Internal Revenue [77-1 USTC ¶9324], 552 F. 2d 478 (2d Cir. 1977)) or the correctness of the assessment itself (KFOX, Inc. v. United States [75-1 USTC ¶9253], 510 F. 2d 1365 (Ct. Cl. 1975)). As for the vague and conclusory allegations of duress, fraud, incapacity and the like experienced by Mr. Filigno, I first note that the defendant's original answer as well as his proposed amended answer both lack any reference to such affirmative defenses. See, Fed. R. Civ. P. 8(c). Second, I hold as a matter of law that the statements contained in the affidavits of Mr. and Mrs. Filigno are insufficient to either overcome the presumption of official regularity which arises in tax lien foreclosure suits, United States v. Trager, 53 F. R. D. 654, 655-56 (E. D. Mo. 1971), or create a genuine issue that the Government's assessment was arbitrarily determined or otherwise erroneous. Higginbotham v. United States [77-2 USTC ¶16,265], 556 F. 2d 1173, 1175 (4th Cir. 1977); Bar L Ranch, Inc. v. Phinney [70-1 USTC ¶9399], 426 F. 2d 995, 999 (5th Cir. 1970).

(2) Hilmes' Motion for Summary Judgment against Plaintiff and Defendants Filigno. Hilmes' answer and counterclaim alleges that she is the obligee of a note and mortgage recorded in 1962. These documents were allegedly executed by the Filignos and the latter is said to encumber a parcel of similar legal description to the one described to be the Filigno residence at Paragraph 13, page 4 of the Complaint. Hilmes also claims to be an unsatisfied judgment creditor of the Filignos under a King County Superior Court judgment entered on January 5, 1978 .

Hilmes seeks to have her mortgage lien foreclosed under R. C. W. §61.12.040 (1976) and to have her mortgage lien declared superior to the interests of the parties. ¹ The plaintiff argues that HILMES' motion to summarily foreclosure her mortgage should be denied because a genuine issue exists as to whether there has been a default and, also, that foreclosure may be barred under R. C. W. §4.16.040(2) (1976). ² Hilmes' affidavit states merely that the mortgage was executed and recorded in November 1962 and that no payments have been made thereon. The document, itself, provides that the $1,400.00 is to be paid "according to the terms of [a] certain promissory note bearing even date herewith" and goes on to set forth multiple covenants and conditions. Since the terms of the underlying obligation have not been furnished to the Court, it is impossible to determine if and when default on the note--and, hence, on the mortgage--occurred. In addition, Hilmes has failed to set forth any specific default as to the remaining terms of the mortgage. Summary judgment foreclosing the mortgage must be denied since to do otherwise would require the Court to indulge in speculation and conjecture.

Hilmes' request for summary judgment establishing her priority vis a vis the I. R. S. lien also lacks merit. Under 26 U. S. C. §6323(a) (1970) "[t]he lien imposed by section 6321 shall not be valid as against any . . . holder of a security interest . . . or judgment lien creditor . . . until notice thereof . . . has been filed." Section 6321 merely provides that, upon nonpayment of taxes, after demand by the Government, the tax owing, interest, assessable penalties and the like becomes a lien upon all property and rights thereto belonging to the taxpayer. A Section 6323(a) security interest includes

any interest in property acquired by contract for the purpose of securing payment or performance of an obligation . . .. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

26 U. S. C. §6323(h)(1) (1973).

Although mortgages are clearly Section 6323(h)(1) security interests, Hilmes has failed to establish, as a matter of law, that her interest "existed" at the crucial point in time. The fact that her mortgage was recorded protected her interest only with respect to subsequent good faith purchasers and mortgagees who gave value. R. C. W. §65.08.070 (1976). In Washington , even mortgagees who fail to record are entitled to priority over later arising judgment lienors. E.g., Dawson v. McCarty, 21 Wash. 314, 319 (1899). Thus it is clear that Hilmes' security interest would have been protected against subsequent judgments against the FILIGNOS for purposes of Section 6323(h)(1) if, when notice of the tax lien was filed on August 2, 1971 , not more than six years had lapsed from the date of default on Hilmes' mortgage. The priority dispute in Dawson , however, did not involve a statute of limitations problem since there the conflict emerged in the context of a mortgage foreclosure suit. Dawson v. McCarty, supra, 21 Wash. at 315. As noted above, the instant case may or may not involve such a problem. Moreover, if it does, there are no Washington cases determining whether the failure of a mortgagee to foreclose within the period prescribed by R. C. W. §4.16.040 (1976) deprives a Washington mortgagee of the priority protection found in Dawson for purposes of Section 6323(h). The parties have failed to address this issue nor do I find it necessary to do so in order to rule on the priority aspect of Hilmes' summary judgment motion. The foregoing analysis establishes that genuine issues of material fact and/or mixed fact and law exist which make summary judgment establishing Hilmes' priority inappropriate.

(3) The Filignos' Motions. Two motions have been submitted by the Filignos: one for summary judgment, the other for permission to amend their respective answers to the plaintiff's complaint. The issues involved in the former have already been adequately addressed in the preceding discussion which indicates that only those portions of Hilmes' counterclaim which rely on the 1968 judgment should be dismissed. The request to amend answers is now moot as to Anthony Filigno in view of my decision to grant the plaintiff's motion for summary judgment. Finally, no opposition has been expressed opposing the amendment of Carrie Filigno's answer and her first amended answer was filed and served last April. Her motion to amend is granted under Fed. R. Civ. P. 15(a).

NOW THEREFORE, IT IS ORDERED, ADJUDGED AND DECREED AS FOLLOWS:

(1) that the plaintiff's motion for summary judgment against defendant, Anthony Filigno, be and the same is hereby GRANTED;

(2) that the motion for summary judgment of defendant Hilmes be and the same is hereby DENIED;

(3) that the motion for summary judgment of the defendants Filigno against Hilmes be and the same is hereby DENIED except insofar as the same is GRANTED as set forth immediately below;

(4) that those portions of Hilmes counterclaim based on the judgment entered on January 5, 1968 in King County Superior Court against the defendants Filigno or any lien arising therefrom be and the same are hereby DISMISSED;

(5) that the motion for leave to amend the answer of Anthony Filigno be and the same is hereby DENIED;

(6) that the motion for leave to amend the answer of Carrie Filigno be and the same is hereby GRANTED.

The Clerk is directed to send an uncertified copy of this order to each counsel of record.

¹ Although a promissory note was mentioned in HILMES' answer and counterclaim, it is apparent from the memorandum in support of her summary judgment motion that only the mortgage and judgment claims are relied on in support of the motion. Authorities supporting HILMES' claim for summary judgment based on the 1968 judgment do not persuade me that HILMES' judgment continues to exist under Washington law. R. C. W. §4.56.210 (1976), see also, Grub v. Fogle's Garage, Inc., 5 Wn. App. 840, 843-44 (1971).

² R. C. W. §61.12.040 (1976) provides, "[w]hen default is made in the performance of any condition contained in a mortgage, the mortgagee . . . may proceed . . . to foreclose the equity of redemption contained in the mortgage." Under R. C. W. §4.16.040(2) (1976), a six year statute of limitations is imposed on actions arising from breach of written contracts and agreements.

 

 

[67-2 USTC ¶9579] United States of America , Plaintiff v. Tatiana G. Herzfeld, Thomas E. Rosetti, Chief Property Clerk, New York City Police Department, and The City of New York , Defendants

U. S. District Court, So. Dist. N. Y., 65 Civ. 429, 271 FSupp 185, 7/21/67

[1954 Code Sec. 6321]

Lien for taxes: Property in custody of police: Legal nature of money held: New York law.--The Government's motion for summary judgment to enforce tax liens against money in the possession of the property clerk of the New York police department was denied since a factual question existed as to whether the money rightfully belonged to the delinquent taxpayer or was illegally acquired. Moreover, the Court found it unnecessary at this point in the proceedings to decide whether the burden imposed under New York law on the Government to prove that the money held was lawfully obtained by the taxpayer was unconstitutional.

Rob ert M. Morgenthau, United States Attorney, Dawnald R. Henderson, Assistant United States Attorney, New York, N. Y., for plaintiff. J. Lee Rankin, Corporation Counsel, Nathan B. Silverstein, Assistant Corporation Counsel, New York , N. Y., for defendants.

Opinion

BRYAN, District Judge:

This is an action by the United States to enforce a tax lien against $13,150.00 held by the defendant Rosetti as Chief Property Clerk of the New York City Police Department. Jurisdiction is based on 28 U. S. C. §§ 1340, 1345, and Int. Rev. Code of 1954, §§ 7402(a), 7403. The United States now moves for summary judgment pursuant to Rule 56, F. R. C. P.

The facts, at least insofar as they have been thus far developed, appear to be undisputed. On March 3, 1959 , an indictment charging defendant Herzfeld with fifty-one counts of criminal abortion was returned by the New York County Grand Jury. On March 4 an arrest warrant and a search warrant issued from the New York Court of General Sessions for the arrest of Herzfeld and the search of her apartment at 176 East 64th Street in New York City . These warrants are in no way challenged in the present action. On March 5 the warrants were executed; the search resulted in the seizure of the $13,150.00 in cash which is the subject of this action. The money is presently in the possession of the defendant Rosetti. However, the particulars of the March 5 seizure--the steps taken by the police, the reactions of the defendant, the location and denomination of the currency--are not spelled out in the papers submitted on this motion.

The defendant Herzfeld pleaded guilty to the fifth count to cover the indictment on November 4, 1959. She is presently residing in Tel Aviv, Israel . While personal service in this action has been effected upon her pursuant to 28 U. S. C. §1655, for all practical purposes she has defaulted with respect to the sum here involved. The dispute is thus between the United States and the Police Property Clerk.

The United States lays claim to the fund involved by reason of two unsatisfied tax assessments against defendant Herzfeld. One, in the amount of $27,402.58, was assessed on March 11, 1959, and notice of the lien was duly filed on March 16, 1959 with the Register of the City of New York . Another assessment for income tax liabilities in the amount of $297,581.31 was returned on March 15, 1961; notice of this lien was filed with the Register of the City of New York on March 16, 1962. Notices of levy were served on the defendant Rosetti on March 12, 1959 and September 24, 1962. His failure to honor these levies led to this action.

The position of the Police Property Clerk has been clarified by his answer to interrogatory fifteen served by the government, and calling upon the defendant to "set forth any fact or facts which would indicate that the property seized and now in the possession of * * * Thomas E. Rosetti, was not the property of * * * Tatania G. Herzfeld and/or that said property was not legally acquired." The property clerk's response, in pertinent part, was "that said Herzfeld carried on the activity of illegal abortions and pleaded guilty on November 4, 1959; that the moneys were kept by her at the premises 176 East 64th Street, New York; that she failed to show the Police that said moneys were lawfully obtained; and, in general, all the facts and circumstances of the case." It appears that no statement concerning the source of the funds was ever secured from Herzfeld, ¹ and there is little likelihood that she will appear as a witness at the trial.

The legal bases for the property clerk's retention of monies alleged to be the proceeds of illegal abortions are spelled out in some detail in the Administrative Code of the City of New York §435-4.0; see N. Y. Code Crim. Pro. §§ 685-691. Under subsection (6) "all property or money suspected of having been unlawfully obtained or stolen or embezzled or of being the proceeds of crime or derived through crime * * *, that shall come into the custody of any member of the police force, * * * shall be given, as soon as practicable, into the custody of * * * the property clerk." ² Property which remains unclaimed for a period of three months is paid into the police pension fund. ³ Provision is made for the return of property to one who establishes that he is the rightful owner; ⁴ most important, insofar as these parties are concerned, is the requirement that a claimant has the burden of establishing that the "property or money was held and used in a lawful manner." ⁵

It is common ground that New York law determines whether or not the defendant Herzfeld has any property to which the tax lien may attach. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); see United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958); Int. Rev. Code of 1954, §6321. Naturally enough, the government's rights by reason of the lien can rise no higher than the taxpayer's property interest in the contested find. City of New York v. United States [60-2 USTC ¶9767], 283 F. 2d 829 (2d Cir. 1960). It is also undisputed that under the law of New York a wrongdoer has no possessory interest in property illegally acquired. Hofferman v. Simmons, 290 N. Y. 449, 49 N. E. 2d 523 (1943); United States v. Clinton [66-2 USTC ¶9625], 260 F. Supp. 84, 88 (S. D. N. Y. 1966); United States v. Pagan [55-2 USTC ¶9600], 140 F. Supp. 711 (S. D. N. Y. 1955).

The submissions of the parties disclose that there is a clear issue of fact as to whether the $13,150.00 was the personal property of the defendant Herzfeld, as the government contends, or the proceeds of illegal abortions as the Police Property Clerk contends. The testimony of the police officers who conducted the search and seizure may well throw light on this issue. Summary judgment is therefore inappropriate. See United States v. Clinton , supra; United States v. Lester [65-1 USTC ¶9221], 235 F. Supp. 115 (S. D. N. Y. 1964); Hofferman v. Simmons, supra; People v. Sylvester, 19 N. Y. S. 2d 606 (Newburgh Recorder's Court 1940).

Anticipating that little or no proof will be adduced at the trial, the government has launched a vigorous constitutional attack against §435.4.0(f) of the Administrative Code which explicitly places the burden of proving that the "money was held and used in a lawful manner" upon the claimant, here the United States standing in the shoes of Herzfeld. Most of the constitutional objections concerning lack of notice and hearing are wide of the mark. The New York law provides for the full adjudication of claims. N. Y. C. de Crim. Pro. §§ 685-89; Administrative Code of the City of New York §435-4.0(c), (d). And the New York courts recognize that notice and a hearing are constitutional prerequisites to a forfeiture proceeding. People ex rel. Rob ert Simpson Co. v. Kempner, 208 N. Y. 16, 101 N. E. 794 (1913); see Tracey v. Course, 58 N. Y. 147, 149 (1874). The hearing customarily is had in a plenary civil action when the claimant brings suit against the authorities in conversion, Carr v. Hoy, 2 N. Y. 2d 185, 139 N. E. 2d 531 (1957), or replevin. Micholowski v. Ey, 4 N. Y. 2d 277, 150 N. E. 2d 399 (1958). Moreover, in this action to foreclose a tax lien the government is obviously not disadvantaged by any hypothetical failure to provide notice and hearing. This case accordingly does not present the issue whether the claim of an innocent third party may be irrevocably defeated by the mere lapse of three months. ⁶

The government's objection to the arbitrary shifting of the burden of proof to the claimant to prove that the money was held in a lawful manner is not so easily overcome. It is true that as a general rule the United States has the burden of proving that the taxpayer has a property interest under state law which can be reached by the federal lien. Note, Federal Priorities and Tax Liens, 63 Colum. L. Rev. 1259, 1285 & n. 251 (1963), citing United States v. Stock Yards Bank [56-1 USTC ¶9418], 231 F. 2d 628 (6th Cir. 1956) (Stewart, J.); see Hall v. United States [66-2 USTC ¶9643], 258 F. Supp. 173 (S. D. Miss. 1966). To this extent the burden imposed by subsection (f) is fully consistent with established practice. In addition, the burden imposed on the claimant by the Administrative Code, challenged here as unconstitutional, is not dissimilar to provisions found in federal law; for example, 19 U. S. C. §1615 imposes the burden of proof upon the claimant seeking the return of property in actions for forfeiture under the customs law. See The Marion Phillis, 36 F. 2nd 688 (2d Cir. 1929). There is, then, precedent for taking a person's property away and then challenging him to prove his title when he seeks to get it back.

But perusal of the New York authorities discloses some troublesome cases. Roxy Athletic Club, Inc. v. Simmons, 80 N. Y. S. 2d 277 ( App. Term. 1st Dep't 1944 ), reversing 44 N. Y. S. 2d 47 (City Ct. N. Y. County 1943), apparently authorized the Police Property Clerk to retain monies which were simply suspected, but not proven, to be the proceeds of crime. This was true although the plaintiff claimant had been acquitted in a prosecution for violation of the gambling laws, a holding which was adhered to in Rivera v. Rosetti, 38 Misc. 2d 1030, 239 N. Y. S. 2d 691 (Civ. Ct. N. Y. County 1963), and Sochemaro v. Rosetti, 6 Misc. 2d 23, 161 N. Y. S. 2d 454 (Mun. Ct. 1957). So too, in Costello v. Simmons, 269 App. Div. 823, 55 N. Y. S. 2d 735 (1st Dep't 1945), aff'd per curiam, 295 N. Y. 801, 66 N. E. 2d 581 (1946), the court found issues of fact requiring trial when the property clerk simply challenged the claimant to prove that money accidently left in a taxicab was not the proceeds of gambling. The Costello decision prompted one New York judge to observe, "It seems to me a shocking thing that our police can seize a citizen's property and then when he seeks to get it back challenge him to prove his title to the satisfaction of a jury." Gonzalez v. Leuci, 120(85) N. Y. L. J. 993, col. 4 ( Nov. 1, 1948 ). Several of these cases involving the Police Property Clerk demonstrate that monies alleged to be illegal proceeds "seem to float in a state of suspension untouchable by either the authorities or the miscreant with the advantage leaning toward the police authorities by reason of possession which the courts seem reluctant to disturb." 1959 New York Opinions of the Attorney General 132, 133 (emphasis added.)

While examination of the New York authorities indicates that some cases of this nature might raise problems of constitutional dimension, it is by no means clear that this is one of them. I am not inclined to assess the Administrative Code's burden of proof provision as an abstract question of constitutional law. On this record at this time no constitutional issue capable of determination is presented. In any event when the case is tried the evidence may well render immaterial any abstract questions of burden of proof. Compare United States v. Clinton [66-2 USTC ¶9625], 260 F. Supp. 84 (S. D. N. Y. 1966).

The government's motion for summary judgment is denied.

¹ The defendant Property clerk has stated, in response to an interrogatory served by the government, that "Herzfeld made no statement to Det. Theresa L. Heath, N. Y. DAO Squad, who seized the said moneys, or to any other police officer, as to whether the said moneys were lawfully acquired or the proceeds of illegal abortions." Furthermore, the "defendant Rosetti has no knowledge or information as to any such statement to the District Attorney's Office of the County of New York ."

² "Custody of property and money.--All property or money taken from the person or possession of a prisoner, all property or money suspected of having been unlawfully obtained or stolen or embezzled or of being the proceeds of crime or derived through crime or derived through the conversion of unlawfully acquired property or money or derived through the use or sale of property prohibited by law from being held, used or sold, all property or money suspected or having been used as a means of committing crime or employed in aid or in furtherance of crime or held, used or sold in violation of law, all money or property suspected of being the proceeds of or derived through bookmaking, policy, common gambling, keeping a gambling place or device, or any other form of illegal gambling activity and all property or money employed in or in connection with or in furtherance of any such gambling activity, all property or money taken by the police as evidence in a criminal investigation or proceeding, all property or money taken from or surrendered by a pawnbroker on suspicion of being the proceeds of crime or of having been unlawfully obtained, held or used by the person who deposited the same with the pawnbroker, all property or money which is lost or abandoned, all property or money left uncared for upon a public street, public building or public place, all property or money taken from the possession of a person appearing to be insane, intoxicated or otherwise incapable of taking care of himself, that shall come into the custody of any member of the police force, magistrate, or criminal court, and all property or money of inmates of any city hospital, prison or institution except the property found on deceased persons that shall remain unclaimed in its custody for a period of one month, shall be given, as soon as practicable, into the custody of and kept by the property clerk."

³ §435-4.0(e); see §B 18-3.0; United States v. New York [36-1 USTC ¶9119], 82 F. 2d 242, 244 (2d Cir. 1936).

⁴ §435-4.0(c).

⁵ "f. Lawful property right to be established.--In any action or proceedings against the property clerk for or on account of any property or money in his custody, a claimant from whose possession such property or money was taken or obtained, or any other claimant, shall establish that he has a lawful title or property right in such property or money and lawfully obtained possession thereof and that such property or money was held and used in a lawful manner. In any such action or proceeding, a claimant who derives his title or right of assignment, transfer or otherwise from or through the person from whose possession such property or money was taken or obtained, shall further establish that such person had a lawful title or property right in such property or money and lawfully obtained possession thereof and that such property or money was held and used in a lawful manner."

⁶ See §435.40(e). Most forfeiture statues, unlike those in the instant case, provide for various forms of remission to relieve cases of hardship. Compare N. Y. Agriculture & Markets Law §44(3); N. Y. Public Health Law §3353(8); N. Y. Public Service Law §24; 18 U. S. C. §3617; 19 U. S. C. §1618; 49 U. S. C. §782.