Trusts for third parties Page1

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Wendell L. Walwyn and Herma Wendell, his wife, Plaintiffs v. United States of America, Defendant

U.S. District Court, East. Dist. N.Y. , CV 97-3042, 6/11/99 , 51 FSupp 2 d 320, 51 FSupp2d 320

[Code Sec. 6321 ]

Tax liens: Property subject to: Constructive trust: Nominal owner: Equitable owner.--A federal tax lien did not attach to real property that a delinquent taxpayer held as a constructive trustee for relatives who were the equitable owners of the home. The equitable owners, who took title in the name of their more affluent brother-in-law in order to comply with local mortgage income criteria, paid the necessary cash and fees for the purchase, made all payments on the mortgage, resided in the home, and made improvements to the property. The taxpayer was merely a "straw purchaser" because he paid nothing for the property, did no work on it, never exercised control over it, never occupied the house and never made a claim of ownership. The property was not considered a gift from the taxpayer because of his relatively distant relationship to the equitable owners and by their assertion of a beneficial interest in the property. Finally, permitting the IRS to succeed in dispossessing the equitable owners from their home would be a gross perversion of equity and law.

Albert M. Demarco, 65 Broadway, Garden City , N.Y. 11040 , for plaintiffs.

Bartholomew Cirenza, Wendy Kisch, Departmendt of Justice, Washington , D.C. 20530 , for defendant.

MEMORANDUM, FINDINGS OF FACTS AND LAW, ORDER AND JUDGMENT

WEINSTEIN, Senior District Judge:

Plaintiffs seek a declaration that the home they and their children live in is theirs. The government, which has tax claims against a relative, Edward Charles, has sought to impose a lien on it.

As indicated below, the home is the plaintiffs'. Edward Charles does not now have, and never has had, an interest of any value in the property.

A bench trial was conducted. After circulation to the parties of the court's tentative conclusions and receipt of the parties' proposed findings and objections, the following are found as fact and law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.

FACTS

Plaintiffs, the Walwyns, successfully bid on a house (probably forfeited to the City of New York for failure to pay taxes), needing extensive rehabilitation, at an auction held by the City on December 17, 1987 . Because they had a number of children and their income was limited, plaintiffs believed that they could not comply with the purchase money mortgage income criteria of the City. They decided to take title in the name of a more affluent relative, a brother-in-law, Edward Charles.

It was plaintiffs' funds that supplied the necessary cash and fees for the purchase. Charles used the Walwyn funds to make the payment required by the bid, taking title in his own name and giving the City a purchase money mortgage as purported "owner." At the time of purchase Charles agreed with the Walwyns that they were the "true" owners.

The Walwyns did not understand the implications of leaving title in Charles' name. They did not intend to harm anyone. In fact, no one was harmed or injured by the fact that title was taken in their brother-in-law's name. From the time the deed was placed in Charles' name on July 22, 1988 , all payments on the purchase money mortgage have been made by the Walwyns. The City has not suffered any loss. The City makes no complaint.

Nevertheless, title was taken in the name of Charles to mislead the City into believing that the purchaser could "afford" the property as required by the City's guidelines for a purchase money mortgage. To this extent plaintiffs' hands are not completely clean.

The Walwyns paid the cost of the house out of their earnings and the sale of the property they had owned in St. Thomas . Following the purchase, and while they lived there with their children, they invested money and considerable effort in improving the home. Mr. Walwyn is a carpenter. He installed new windows and with his wife did a great deal of other work to enhance the property. This contribution to the value of a home by the labor of new owners with little capital is known in New York as "sweat equity." All mortgage, tax payments, and costs for materials used to improve the home were paid for by the occupants, the Walwyns.

The brother-in-law, Edward Charles, paid nothing and did no work on the property. He never exercised control. He never occupied the house. He was a "straw purchaser"--one who purchases for another. He has never made a claim of ownership.

LAW

Under some circumstances property purchased in the name of a relative may be considered a gift to that relative by the person supplying the funds. Restatement of Trusts (Second) §442 (1959) (Purchase in Name of Relative); 5 Austin Wakeman Scott, The Law of Trusts §442 (4th ed. William Franklin Fratcher, 1989). Usually, the relative is a spouse, child or parent. Id. In this case the relationship with the brother-in-law does not suggest that a gift by the Walwyns should be "presumed." Id. He was not the "natural object of a bounty" such as this home. Restatement of Trusts (Second) §443 (1959).

In any event, any presumption of a gift to a relative is rebutted when the person who paid the purchase price "manifests an intention that the transferee should now have the beneficial interest in the property." Id. In such a case the owner in name holds the property in trusts for the equitable owner, the person who paid for the property. See Id. Parole evidence may be relied upon to rebut the inference of a gift. Foreman v. Foreman, 251 N.Y. 237, 167 N.E. 428 (1929) (Cardozo, C.J.); Restatement of Trusts (Second) §443, Cmt a; 5 Austin Wakeman Scott, The Law of Trusts §443; New York Annotations to the Restatement of the Law of Trusts §§442, 443 (1947).

As Chief Judge Cardozo noted in Foreman:

The rule is now settled by repeated judgments of this court that the [law] does not obstruct the recognition of a constructive trust affecting an interest in land where a confidential relation would be abused if there were repudiation, without redress, of a trust orally declared.

251 N.Y. at 240, 167 N.E. at 429; see also Torres v. 36,256.80 U.S. Currency, 25 F.3d 1154, 1158 (2d Cir. 1994) (citing Foreman as "the leading case," and noting that "[c]onstructive trusts continue to be imposed by New York courts").

This case does not involve a dispute about the validity of a conveyance, but about the existence of a trust in favor of the true purchasers. Thus the government's reliance on New York General Obligations Law Section 5-703 requiring a writing to enforce an agreement to convey real property is inapt. See Richard A. Givens Practice Commentaries, N.Y. Gen. Oblig. Law §5-701, §5-701 at 307 (McKinney 1989) ("a constructive trust on assets which in good faith must belong to one other than the . . . nominal owner . . . is not considered an enforcement of an oral contract although it may depend on oral testimony in some cases").

Also unavailing is the government's argument that abolition of the law of purchase money resulting trusts by a New York 1830 statute, now New York Estates Powers and Trusts Law section 7-1.3, requires it to prevail. That provision was designed to prevent fraud on creditors through secret trusts and to give a remedy to a defrauded creditor. See Margaret Valentine Turano Practice Commentary N.Y. Est. Powers & Trusts Law §7-1.3, at 201 ( McKinney 1992) ("the resulting trust is not abolished"); id. at 13 (Supp. 1999) ("the purchase-money resulting trust, may in the right circumstances be replaced by the common law remedy of a constructive trust").

The government's plaint regarding the possibility of a successful fraud by the Walwyns against unnamed creditors is not relevant. This case is not designed to have a bearing on any possible claim of the City of New York , a vendor of products or services to the Walwyns, or on liability of the Walwyns for possible Internal Revenue claims against them. It operates only as between the parties to the present suit based upon tax debts owed by Edward Charles.

APPLICATION OF LAW TO FACTS

It would be a gross perversion of equity and law were the government to succeed in dispossessing the Walwyns and their children from the home they struggled to pay for and so lovingly restored. Were the situation reversed, that is to say, were the taxes owed by the Walwyns, the government certainly would not permit an escape from its levy on the property on the ground that it belonged to Edward Charles, the nominal title holder. Mutuality is required. Turnabout is fair play under law and equity. The demands of the government's fisc do not justify the overreaching proposed by the United States .

The plaintiffs have had fee title to the property since July 22, 1988 . Placing nominal title in the name of Edward Charles did not harm the United States .

Edward Charles does not now have, and never did have, an interest in the property.

The defendant does not have a valid lien against the property to collect Edward Charles' tax debt.

The defendant's tax levy and seizure of the property are void.

The property should be released from the defendant's tax levy.

The defendant should be enjoined from enforcing the tax levy and from selling the property.

CONCLUSION

Judgment is granted to plaintiffs against the United States . The United States lien against the Walwyn property is vacated.

Costs and disbursements to the plaintiffs.

SO ORDERED.

 

 

 

William Goldstein, Trustee, Plaintiff v. United States of America , Defendant

U.S. District Court, No. Dist. Ohio , East. Div., 1:91CV0969, 9/2/92

[Code Secs. 6321 and 7430 ]

Lien for taxes: Property subject to lien: Trusts for third parties.--A levy against trust assets made in order to recover a deficiency assessed against the deceased trustor was enjoined, since the property did not belong to the trustor or to his estate at the time that the assessment was made. The IRS assessed the deficiency against the trustor nearly three years after the date of the trustor's death. Since the trust became irrevocable upon the trustor's death, neither the trustor nor his estate had legal title to the trust assets on the date of the assessment. Furthermore, the IRS failed to prove that the trustor had fraudulently transferred his property without adequate consideration and, in any event, such a claim of fraud was time barred under state ( Ohio ) law. Thus, the levy on the trust property was enjoined. Although the IRS did not come forward with facts to support its theory of a fraudulent conveyance, court costs and attorney's fees were not awarded, since the trustee did not prove that the IRS position was not substantially justified.

MEMORANDUM AND ORDER

ALDRICH, District Judge:

Plaintiff William Goldstein, trustee, ("Trustee") seeks in this action to enjoin a levy brought by the Internal Revenue Service ("IRS") against assets placed in a trust by Alvin Goldstein, Trustee's uncle ("Trustor"). The IRS has levied against the trust assets in order to recover a tax deficiency assessed against the deceased Trustor.

Four months after the Trustee had filed his complaint, the defendant still had not filed a response. Accordingly, the Trustee filed a motion for default. The Court granted the Trustee's motion for default and set a hearing for May 15, 1992 to assess the Trustee's relief. At the hearing, however, the IRS pointed out that while the Court had entered a default pursuant to Fed. R. Civ. P. 55(a), the Court had not entered a default judgment pursuant to Fed. R. Civ. P. 55(b). The IRS also argued that the Court's entry of default should be set aside, pursuant to Fed. R. Civ. P. 55(c), because service of the Trustee's complaint upon the IRS was deficient. The parties agreed that the Court's entry of default should be vacated; that the IRS would waive the defense of failure of service; and would file an answer by June 1, 1992 ; and that the Trustee would file a motion for summary judgment by June 17, 1992 .

As agreed, the IRS has filed its answer, and the Trustee has moved for summary judgment. Because the Court finds that the IRS has failed to genuinely put into issue any material fact, and that the Trustee is entitled to judgment as a matter of law, the Trustee's motion for summary judgment is now granted.

I.

The following material facts are not in dispute. On April 17, 1979 , the Trustor created a revocable trust agreement, appointing his nephew as Trustee. At the same time that the trust was created, the Trustor executed a will containing "pour-over" provisions that funded the trust with the residue of the deceased Trustor s estate, upon his death. Although the Trustor retained the right to modify or revoke the trust during his lifetime, the trust became irrevocable upon the Trustor's death. The Trustor died on January 24, 1984 .

On January 31, 1983 , a year before his death, the Trustor placed over $50,000 in cash and a promissory note into the trust. It is unclear whether other assets later "poured over" into the trust upon the Trustor's death. In any event, shortly after the Trustor's death, the IRS audited the 1982 federal tax return of the Trustor and his wife. On April 11, 1985 , the IRS sent a notice of deficiency to the Trustor and his wife for $22,061.59. The Trustor's estate contested the amount of this deficiency, and on September 17, 1987 , the United States Tax Court held that there was a deficiency for the 1982 tax year in the amount of $10,277.00. Estate of A. Goldstein v. Comm'r, No. 27174-85, slip op. (T.C. Sept. 17, 1987).

On November 16, 1987 , the IRS issued to the co-administrators ad litem of the Trustor's estate (one of whom was the Trustee) a notice of assessment in the amount of $16,700.70, which included the Trustor's $10,277.00 tax deficiency as well as residual interest. The Trustor's estate was insolvent at that time, and no payment was made. More than three years later, on April 22, 1991 , the IRS issued a notice of levy to the Trustee, seeking to attach the trust assets in payment of the assessment of taxes owed by the Trustor's estate. The notice of levy stated that the total amount due had grown to $27,969.58.

The Trustee seeks with this complaint to enjoin the IRS from proceeding on its levy against trust assets. The Trustee argues that the trust assets, upon which the IRS is attempting to levy, did not belong to the Trustor or to the Trustor's estate when the IRS issued its 1987 notice of assessment. The Trustee thus contends that the IRS cannot levy upon the trust assets to satisfy the Trustor's tax deficiency, since neither the Trustor nor the Trustor's estate owned the trust assets at any critical time. The Trustee also argues that he is entitled to judgment as a matter of law, and that he is entitled to reimbursement for the costs of litigating this action.

II.

Federal Rule of Civil Procedure 56(c) governs summary judgment motions and 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 a judgment as a matter of law . . .

The nature of materials properly presented in a summary judgment pleading is set forth in Federal Rule of Civil Procedure 56(e):

Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein . . . The court may permit affidavits to be supplemented or opposed by depositions, answers to interrogatories, or further affidavits. 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 denial of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.

However, the movant is not rehired to file affidavits or other similar materials negating a claim on which its opponent bears the burden of proof, so long as the movant relies upon the absence of the essential element in the pleadings, depositions, answers to interrogatories, and admissions on file. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).

In reviewing summary judgment motions, this Court must view the evidence in the light most favorable to the non-moving party to determine whether a genuine issue of material fact exists. Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970); White v. Turfway Park Racing Assn., Inc., 909 F.2d 941, 943-44 (6th Cir. 1990). A fact is "material" only if its resolution will affect the outcome of the lawsuit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Determination of whether a factual issue is "genuine" requires consideration of the applicable evidentiary standards. Thus, in most civil cases the Court must decide whether reasonable jurors could find by a preponderance of the evidence that the [non-moving party] is entitled to a verdict." Id. at 252.

III.

Liens imposed upon a taxpayer's property by the IRS, in order to recover taxes that the taxpayer owes but has not paid, are governed by 26 U.S.C. §6321 . This statute states that

[i]f a person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest . . . or assessable penalty . . .) 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.

In this case, the Trustee does not dispute that the deceased Trustor is liable for unpaid taxes, nor does the Trustee dispute the right of the IRS to place a lien on the deceased Trustor's property to recover amounts owed for taxes. Rather, the Trustee argues that the IRS's lien cannot be satisfied out of the trust assets because the trust assets are not "property [or] rights to property, whether real or personal, belonging to" the deceased Trustor.

In support of this argument, the Trustee cites 26 U.S.C. §6322 :

the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time.

(Emphasis added.) Here, the IRS issued its notice of assessment on November 16, 1987 . This date is nearly three years after the date of the deceased Trustor's death, (January 24, 1984), at which time the trust became irrevocable. Once the trust became irrevocable, the trust res became separate property, and legal title to the trust assets no longer was, or could be, owned by the Trustor or his estate. George T. Bogert, Trusts §30 (1987). See also, Schofield v. Cleveland Trust Co., 21 N.E.2d 119 ( Ohio 1939) (revocable trust becomes irrevocable at death, absent showing of fraud, and trust res not reachable by subsequent creditors). Thus, the Trustor owned no property rights in the trust assets at the time the IRS issued its notice of assessment.

However, the IRS responds that it may reach the trust assets nonetheless because the Trustor's transfer of assets into the trust was fraudulent. The IRS alleges that the transfer of trust assets to the Trustee rendered the Trustor insolvent, and was that the transfer was made without fair consideration. The IRS argues that Ohio law in effect at the time of the conveyance holds that the Trustor's transfer of assets was fraudulent and may be set aside:

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

Ohio Rev. Code §1336.04 (1961).

There are two problems, however, with the IRS's argument. First, the burden is upon the IRS to prove that the Trustor transferred assets into the trust without fair consideration, and that the transfer resulted in the Trustor's insolvency. Cellar Lumber Co. v. Holley, 224 N.E.2d 360, 362-63 (Ct. App. 1967). In its response to the Trustee's motion for summary judgment, the IRS states that it

is unable to present by affidavit facts essential to establish [fraud] . . . for the reason that such facts are not within possession of [the IRS] and are believed to be in possession of [Trustee]. On May 28, 1992 , defendant served on plaintiff interrogatories requesting such facts, but plaintiff has not yet answered the interrogatories.

Declaration in opposition to summary judgment at 1. Although the IRS's response to the Trustee's motion for summary judgment did not put material issues of fact genuinely into dispute, the Court did not rule at that time because discovery requests were pending. See, e.g., Garrett v. City and County of San Francisco , 818 F.2d 1515 (9th Cir. 1987) (additional discovery necessary to oppose summary judgment should be allowed).

Since that time, however, the Trustee has served its answers to the IRS's interrogatories on July 9, 1992 . Nearly two months have passed; however, the IRS has not moved for additional discovery. Nor has the IRS presented the Court any facts to support its theory of fraud since that date. In fact, the Court has been provided no facts in support of the IRS's position. Because the IRS has failed to put into genuine dispute the fact of the Trustor's insolvency, or a failure of consideration, summary judgment is appropriate in this case.

Moreover, there is a second problem with the IRS's fraud defense. The Trustor's conveyance of the assets into trust took place, at the latest, on January 24, 1984 , when the Trustor died. The IRS has never asserted a claim against the Trustor for fraudulent conveyance, pursuant to Ohio Rev. Code §1336.04, although the statute of limitations applicable to that code section is four years. Ohio Rev. Code §2305.09. Even assuming that the IRS did not discover the allegedly fraudulent transfer of assets into trust until November 16, 1987 , the date on which the IRS issued its notice of assessment, the IRS's claim of fraud is time-barred.

In sum, the IRS has failed to show that there are genuine issues of material fact, and the Trustee is entitled to judgment as a matter of law. Accordingly, the Trustee's motion for summary judgment is granted, and the IRS is enjoined from proceeding upon its levy against the Trustee.

IV.

The Trustee has also moved for reimbursement of court costs and attorney's fees incurred in bringing this action, pursuant to 26 U.S.C. §7430 . Title 26 U.S.C. §7430 provides that the Court may award reasonable litigation costs to the prevailing party. However, 26 U.S.C. §7430(c)(4)(A)(i) also states that a party is not a "prevailing party" unless that party "establishes that the position of the United States was not substantially justified."

Although the IRS has not come forward with facts to support its theory of a fraudulent conveyance in this case, neither has the Trustee shown that the IRS's position was not substantially justified. Rather, the Trustee has merely proved that the IRS was unable to carry its burden of proof. Accordingly, the Trustee's motion for reimbursement of court costs and attorney's fees is denied.

V.

In summary, the Trustee's motion for summary judgment is granted, and the IRS is enjoined from proceeding upon its levy against the Trustee. However, the Trustee did not establish that the position of the IRS was not substantially justified; consequently, the Trustee's motion for reimbursement of court costs and attorney's fees is denied.

IT IS SO ORDERED.

 

 

 

Associated Cemetery Management, Inc. Employees' Profit Sharing Trust, Z. C. Barnes, George Cramer, Raymond Henchek, Orville Livingston, Charles Martin, Clyde Seivers, William H. Staley, William Stuart, Trustees, Respondents v. Bruce Brent, John Fehlandt, Edward Hansen, Patrick Lapp, Donald Lloyd, Ralph Shipley and Neil Thompson, Trustees Associated Cemetery Management, Inc.; and June Hazelton, Robert Chase, Paul Hickey and Max Bates, Respondents v. Florence P. Williams and United States of America, Appellants

Supreme Court of Mo., Div. Number One, No. 55744, 11/13/72

[Code Sec. 6323]

Lien for taxes: Validity: Bona fide purchaser.--Government's lien was held invalid because of a prior purchase for value. Taxpayer had sold stock, on which the Government tried to place a tax lien, to a trust. The Government's contention that the sale contract was merely an agreement to agree was overruled. The trust was held to be a bona fide purchaser since it had paid adequate consideration, and the sale occurred in an arm's-length transaction.

Oscar S. Brewer, Whitney F. Miller, Hillix, Brewer & Myers, 2715 Commerce Tower, Kansas City, Mo., for respondents. Daniel L. Brenner, Fred J. Petzold, Brenner, Lockwood & O'Neal, 800 Lathrop Bldg., 1005 Grand Ave., Kansas City, Mo., for appellants.

HALL, Judge:

In 1955, Mr. and Mrs. E. L. Williams were divorced. The property settlement and the decree provided for alimony payments to Mrs. Williams of $500 per week for her life. The litigation before us is concerned mainly with (1) whether Mrs. Williams has lost her security rights in certain stock pledged for the alimony, and (2) is the stock subject to a federal income tax lien against Mr. Williams. The trial court ruled yes on the first and no on the second.

Mr. Williams was in the business of operating cemeteries. He agreed to pledge stock in his cemetery corporations to secure the alimony payments. Later, he wanted to sell the stock to an employees' profit sharing trust to be created by some of his associates. The consideration was to be $2,400 in cash and a $2,122,600 promissory note from the trust. ¹

Mrs. Williams agreed to release the stock to be sold, on condition, that out of the payments to be made by the trust to Mr. Williams on the note, $500 per week would be disbursed to her instead of to Mr. Williams until her death or payment to her of $250,000 taken from the excess of annual note payments by the trust above $100,000, whichever occurred first. In event of default, the stock was to be delivered to Mrs. Williams, who would have the stock reissued in the name of Mr. Williams and by her foreclosed as collateral security under the original pledge agreement. These provisions were contained in two documents: one an agreement between Mr. and Mrs. Williams made September 24, 1956 and the other in what was called "collateral pledge agreement", made February 18, 1957 .

Matters did not go smoothly financially. Another employee foundation established by Mr. Williams claimed prior ownership of much of the cemetery stock. It turned out that Mr. Williams and business associates had "borrowed" most of the money which the cemetery corporations were supposed to have set aside to provide services upon death of those who had made prepayment for such services. Creditors were asserting claims against the cemetery corporations.

Some of the trustees applied to the court for guidance and a receiver was appointed. By February 1958, the affairs of the cemetery corporations were in chaos, the trust was in default on its note, and Mrs. Williams was not receiving her $500 weekly payments. She was threatening litigation, which the trust desired to avoid, as it had neither the resources nor personnel to litigate, so the two entered into a standby agreement. Mrs. Williams agreed that if the trust would pay her $200 per week for 118 weeks and $300 per week thereafter for life until $250,000 was paid, she would forebear asserting any indebtedness against the trust arising out of the note or requiring that Mrs. Williams assert rights for her benefit under the various prior contracts. If the payments ceased, both the trust and Mrs. Williams would be restored to their respective positions (except for payments made). The trust agreed, while insisting that it denied that any of her rights existed.

The trust then paid Mrs. Williams $200 per week for 118 weeks and $300 per week for the next 415 weeks, until June 3, 1968, when the payments ceased. Altogether Mrs. Williams received $148,400 from the trust under the standby agreement.

In the meantime, the court directed that all claims against the trust be filed or be forever barred. Mrs. Williams made claim for $101,600. The United States made claim for a tax lien against the cemetery stock held by the trust for unpaid income taxes due from Mr. Williams. After an evidentiary hearing, the trial court denied the claims of Mrs. Williams and the government. Both appealed. We have jurisdiction because of the amount in controversy, since the appeals were pending here on January 1, 1972.

The receiver had asked the court to determine all claims and liens upon property of the trust. Mrs. Williams asserted in her claim that there was still due her $101,600 under the collateral pledge agreement and that she had a first lien on all the cemetery stock held thereunder. She asked for judgment against the trust for the $101,600 and a declaration that she was the owner of the stock and the $2,122,600 note.

The United States contended it was entitled to a lien on the cemetery stock, claiming that although the stock had been purchased by the trust, the transfer occurred after the federal tax lien had attached to the property of Mr. Williams.

In the trial Mrs. Williams was contending the trust was obligated to make the payments to her until $250,000 was paid and that the cemetery stocks were collateral for the payment. She asked the court to order the stocks sold to pay her $101,600 claim and also for a judgment against the receivership estate for any deficit. Mrs. Williams took the position that the standby agreement did not cancel any of the prior agreements.

Some five months after the hearing closed, Mrs. Williams moved to amend her claim, which the trial court refused to permit. While continuing to maintain that she had a lien on the cemetery stock, Mrs. Williams sought to raise the amount for which she sought judgment from $101,600 to $159,600, contending she was entitled to receive $500 per week from the trust as long as the default in payment by the trust continued. In effect, she was asserting by her proposed amendment that the trust was obligated under the standby agreement to go on paying her indefinitely. At the hearing, her position had been that what she was entitled to was $101,600 plus interest, representing the balance due on her $250,000 claim. In refusing the amendment the trial court pointed out that it was late and constituted a change from the original claim. Additionally, the trial court found in its conclusions of law that the standby agreement "contains no promise by the Trust to pay any sum of money to Florence P. Williams and created no debt or obligation of any kind running from the Trust to Florence P. Williams." We agree with the trial court's conclusion. The standby agreement was for the purpose of forestalling litigation during the time payments continued. Once payments ceased, the parties returned to the original status quo, except for payments made during the interim. In fact, at the hearing on the motion for new trial, Mrs. Williams' counsel acknowledged his agreement with the above finding of the trial court.

The receiver asks that Mrs. Williams appeal be dismissed, asserting she is trying to litigate here on a theory different from that pursued below. It is true Mrs. Williams asserts novation and partial assignment in her brief, theories not mentioned below and therefore not available here. But her basic theory, both here and below, is that she has a lien or security interest in the cemetery stock which survived the sale of the stock to the trust and the financing plan used by Mr. Williams and the trust to pay for it. We therefore decline to dismiss the appeal and will consider the lien claim on the merits.

We are convinced the trial court erred in its conclusion and finding that Mrs. Williams does not have a lien upon the cemetery stocks held by the bank.

From the outset Mrs. Williams and counsel were at pains to insure collateral security for the alimony which Mr. Williams had agreed to pay her at $500 per week for her life. On July 1, 1955, he agreed by written contract to turn the cemetery stock over to Mrs. Williams' attorney to be held as collateral security for payment of the alimony. On default, Mrs. Williams was authorized to withdraw from the escrow whatever number of shares she considered necessary to make up the default.

Then Mr. Williams decided to sell the stock, provided he could induce Mrs. Williams to release it. On September 24, 1956, they entered into another agreement. By this agreement, Mrs. Williams agreed to release the stock for sale to the employees' profit sharing trust, but also for delivery to a bank as escrow and collection agent. Mrs. Williams was to receive $500 per week from the payments to be made to Mr. Williams upon the note to be executed by the trust until her death, or until she had received $250,000 from a trust fund which was to be built up from 25% of the excess over $100,000 of the total annual prepayments made by the trust on the note, or until default on the note. On default the bank, despite any provision in the contract of sale to the contrary, was not to deliver the stock to Mr. Williams, but rather to Mrs. Williams to be held as collateral security under the above mentioned July 1, 1955 agreement. The stock was to be reissued in the name of Mr. Williams, who was to furnish Mrs. Williams with signed stock assignments in blank and failing to do so, Mrs. Williams' attorney was constituted attorney in fact to execute the stock transfers in Mr. Williams' name.

On February 18, 1957, Mr. Williams and the trust executed the above mentioned collateral pledge agreement. This called for disbursements by the bank to Mrs. Williams of $2,000 every four weeks until her death, or until she was paid $250,000 from the trust fund, or until final default on the note. The bank was denominated escrow agent and pledgeholder and in event of default under the note was directed to foreclose by delivery of the certificates to Mrs. Williams, together with blank assignments, unless the death of Mrs. Williams had occurred or she had received $250,000 from the trust fund. If the certificates were delivered to Mrs. Williams, the note executed by the trust, which was in the amount of $2,122,600, was to be marked "Cancelled" and returned to the trust.

Thereafter, as earlier indicated, the standby agreement of February 24, 1958 was entered into, but this agreement in no wise discharged the earlier agreements and specifically provided that in event of default in the payments the parties would be "fully restored to our respective positions as of this date."

Mrs. Williams had a pledge lien on the cemetery stock held by her lawyer pursuant to the agreement of July 1, 1955, executed to assure her that Mr. Williams would meet his alimony obligations. "Where the chattel is in the possession of a third person a pledge may be created by assent of the pledgor and notification by either pledgor or pledgee, to the third person, that the chattel has been pledged to the pledgee." Restatement, Security, Sec. 8, p. 22; National Bank of Commerce v. Flanagan Mills & E. Co., 268 Mo. 547, 188 S. W. 117, 121; 72 C. J. S., Pledges, Sec. 19(6), p. 23.

It is clear from the agreement between Mr. and Mrs. Williams made September 24, 1956, and the collateral pledge agreement of February 18, 1957, that Mrs. Williams retained her lien interest when the stock was given to the bank as escrow agent and pledgeholder. In the event of default by the trust, the stock was not delivered to Mr. Williams but directly to Mrs. Williams, who was to cause it to reissue in Mr. Williams' name with the blank endorsements and she had the power of attorney to do so if Mr. Williams refused to cause the transfer himself. Under these conditions, Mrs. Williams did not lose her lien on the stock.

The cause must therefore be remanded as to Mrs. Williams for the trial court to determine how much is owing from Mr. Williams to Mrs. Williams on the alimony payments, with a lien to be declared upon the cemetery stock to the extent required to satisfy the amount due. In arriving at the amount due, Mr. Williams, or the trust in seeking to reduce the amount of the lien upon the stock which it has purchased, would be entitled to credit for any amounts paid Mrs. Williams by Mr. Williams or on his behalf as alimony payments, weekly or otherwise, not limited to the payments made by the trust.

As to the government's tax lien claim, the trial court denied it on the basis that Mr. Williams had bona fide agreed to sell the stock for a valuable consideration to a purchaser for value--the trust--before the tax lien attached. ² This relates to the contract of August 10, 1956 made between Williams and the trust and others by which Williams agreed to sell the stock and it was agreed the trust would buy, subject to Williams making arrangements with Mrs. Williams to release the stock from escrow with her attorney.

Briefly, under the August 10, 1956 contract, a group of service cemetery corporations controlled by Williams sold their assets to an operating company. Williams agreed to have his cemetery corporations pay the operating company 98% of the revenues in return for management services and agreed to sell the cemetery corporation stock to a tax exempt profit sharing trust to be created by the operating company. Mr. Williams agreed not to compete in the cemetery or mausoleum business in the United States for ten years. The operating company obligated itself to the trust in sufficient amounts to pay the trust's obligation to Mr. Williams.

The government argues the August 10, 1956 agreement was no more than "an agreement to agree" with specified conditions precedent. We are of the opinion, however, that the requirements set forth in the agreement are covenants of the parties enforceable against the party who might breach one of them.

United States v. Boston and Berlin Transportation Co., (D. N. H.) 188 F. Supp. 304, is directly in point. In that case one Lavigne contracted with the defendant to purchase his trucking business for $27,000. Title to the business could not pass until the I. C. C. approved the sale. The purchase price was not to be paid until the sale was completed and title passed. Before title passed the government placed a lien on the business for taxes. The government contended that the original contract was merely an "agreement to agree" with conditions precedent and the purchaser took subject to the lien since title and the purchase did not change hands until the I. C. C. gave approval. The court rejected that view.

In the case at bar the same problem occurs. Here we have a case where a prompt and immediate closing was impossible. Numerous technical arrangements had to be worked out between the parties and third parties, but as the court said in the Boston and Berlin Transportation case, 188 F. Supp. at 306: ". . . The approval . . . was not a condition precedent to the validity of the contract because the parties were under an obligation to attempt to secure such approval . . ."

While the operating company and the trust did not have title to the stock as of August 10, 1956, there was certainly an interest in the property on that date within the meaning of Treas. Reg. Sec. 301.6323-1(a)(2)(i)(a). ³

The government's contention that full and adequate consideration was not given until February 18, 1957 is without merit in light of United States v. Boston and Berlin Transportation Co., supra, and Treas. Reg. 301.6323-1(b)(1): ". . . An adequate and full consideration in money or money's worth, as used in Sec. 6323(c), means that the consideration must have been adequate and full equivalent reducible to a money value. A purchase of property made in the ordinary course of business (that is, a transaction which is bona fide and made at arm's length) will be considered as made for an adequate and full consideration in money or money's worth . . ."

The judgment of the trial court is reversed as to the claim of Florence P. Williams and remanded with directions to recognize her lien against the cemetery corporation stocks held under the collateral pledge agreement of February 18, 1957 and to conduct a new hearing to determine the amount of alimony remaining unpaid, and is affirmed as to the claim of the United States of America.

¹ It is apparent there was little hard cash displayed or advanced and equally apparent that the successful carrying out of the complicated undertakings referred to herein depended entirely on the continuing generation of a large amount of income by the cemetery corporations.

² 1954 Internal Revenue Code, Title 26 U. S. C. Sec. 6323(c)(1) defines when the notice of a lien provided in Sec. 6321 shall not be valid in the case of securities: ". . . as against any . . . purchaser of such security, for an adequate and full consideration in money or money's worth, if at the time of such . . . purchase such . . . purchaser is without notice or knowledge of the existence of such lien."

³ Treas. Reg. Sec. 301.6323(a)(2)(i)(a) states: ". . . (i) As used in Sec. 6323 and this section: (a) The term 'purchaser' means a person who, for a valuable present consideration, acquires property or an interest in property . . ."

 

 

 

Atlas, Inc., Plaintiff v. United States of America , Defendant

U. S. District Court, Dist. N. D., Southwest, Civil No. A77-1066, 459 FSupp 1000, 11/20/78

[Code Secs. 6321 and 6323]

Tax liens: Validity of lien--property acquired with embezzled funds: Priority over judgment creditor: Effect of lis pendens notice.--The District Court held that a federal tax lien was superior to the plaintiff's judgment lien because the tax lien on the disputed property was properly filed before the judgment for the plaintiff was rendered. The plaintiff's earlier filing of a lis pendens notice was not sufficient to defeat the federal tax lien because the amount of the plaintiff's lien had not yet been established. However, the taxpayer did not, under state law, own the lien property to the extent that she used funds embezzled from the plaintiff to acquire it. Since a federal tax lien can attach only to a taxpayer's property interest under state law, it was held that the government's lien attached only to that portion of the subject property that was not purchased with funds embezzled from the plaintiff.

Patrick Durick, P. O. Box 400 , Bismarck , N. D. 58501, for plaintiff. Gary Annear, Assistant United States Attorney, Fargo, N. D. 58108, for defendant.

Memorandum Decision and Order

VAN SICKLE, District Judge:

This is a quiet title action brought by Atlas, Inc. against the United States . Trial was had before the Court on October 16, 1978 . Atlas claims title to the former residence of Arlene Dohn, located at 1714 Avenue "D" East, Bismarck , North Dakota , by virtue of a judgment of the Burleigh County District Court, dated February 22, 1977 . The judgment of the Burleigh County District Court provides that Arlene Dohn held the subject property in trust for Atlas and the judgment conveyed Arlene Dohn's interest in the property to Atlas.

The United States claims an interest in Mrs. Dohn's former residence by virtue of a lien for unpaid taxes. The Notice of Federal Tax Lien was filed in the Burleigh County Register of Deeds' office on December 1, 1976 .

The issues presented are whether the tax lien of the United States is void, whether it is an encumbrance on the subject property; and if not, what are the relative interests of the parties in the subject property.

On or about October 9, 1972 , Mrs. Arlene Dohn, a bookkeeper for Atlas, Inc. began embezzling funds from Atlas. She continued to embezzle funds until her activities were discovered in October of 1975.

During the period October 9, 1972 to October 10, 1975 , Mrs. Dohn embezzled a total of $390,723.48 for Atlas. The funds were obtained by altering checks drawn on Atlas and depositing them in the personal checking account of Mrs. Dohn in the Dakota Northwestern Bank, Bismarck , North Dakota .

When Mrs. Dohn's activities were discovered, a lawsuit was started against her by Atlas in the Burleigh County District Court. Atlas prayed for judgment against Mrs. Dohn in the total of the embezzlement and further requested that a constructive trust be imposed on certain properties she had purchased through the use of embezzled funds. Among the properties Atlas sought to have a constructive trust imposed upon was the personal residence of Arlene Dohn. In conjunction with the action against Mrs. Dohn, a lis pendens was filed on October 12, 1975 .

The house Mrs. Dohn lived in at the time of her employment by Atlas was purchased by her in December of 1967 for $19,700. She paid $2,400 down and financed the balance with the First Federal Savings and Loan Association, Bismarck , North Dakota . Mrs. Dohn made payments of $160 per month on the home and on September 27, 1972 , the payment date immediately preceding her first embezzlement of funds, the balance due and owing on her house was $15,882.67. During the period she was embezzling funds from Atlas, Mrs. Dohn continued to make her monthly payments of $160 per month. On October 8, 1975 , Mrs. Dohn paid to First Federal a personal check in the amount of $13,931.93. Of this amount, $13,849.35 went to pay off the principal due on the house at the time.

During the period she was embezzling funds from Atlas, Mrs. Dohn made improvements to her residence including an expenditure of $5,465.51 for a cement patio and fence. She paid for these improvements out of her personal checking account with the Dakota Northwestern Bank.

On December 1, 1976 , a date subsequent to the filing of the lis pendens, the Internal Revenue Service filed with the Burleigh County Register of Deeds a Notice of Federal Tax Lien under the Internal Revenue Laws. The amount of the lien was $220,757.49 and the tax liability arose because the funds that Mrs. Dohn embezzled from Atlas, Inc. were not declared by her as income.

On February 22, 1977, the District Court of Burleigh County entered judgment for Atlas and against Arlene Dohn for the sum of $289,546.70, and for a constructive trust on, among other properties, the home which is the subject matter of this lawsuit.

Both parties recognize that the money illegally obtained from Atlas by Mrs. Dohn was includable within her "gross income" and taxable to her in the years it was received. James v. United States [61-1 USTC ¶9449], 366 U. S. 213 (1961). The question before the Court is whether specific property which may have been partially paid for out of the embezzled funds can be levied upon by the government for the purpose of satisfying the tax obligation arising from the embezzlement.

The federal tax lien arises under Title 26 U. S. C. §6321 which provides as follows:

"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. Aug. 16, 1954 , c. 736, 68A Stat. 779."

The general tax lien of the government, which arises as soon as taxes are assessed and which attaches to all property and rights to property of the tax debtor, prevails against all other unperfected liens with a few statutory exceptions, including judgment lien creditors. Whenever the tax lien of the United States competes with that of the judgment lien creditor, it must be determined whether the United States filed notice of its lien in the proper place prior to the time the competing lienor established his status as a judgment lien creditor. 26 U. S. C. §6323. The tax lien here was properly filed before the judgment of the Burleigh County District Court. Atlas, however, contends that, under North Dakota law, their filing of a notice of lis pendens in connection with their suit to impress a contructive trust on the property gives their equitable lien priority over the federal tax lien. ¹ I do not agree.

Atlas fails to recognize that it is a matter of federal and not state law as to when a lien has acquired sufficient substance and has become so perfected as to defeat a federal tax lien. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963). For a lien to be sufficiently established to defeat a federal tax lien, the identity of the lienor, the property subject to the lien, and the amount of the lien must be established. In this case, it is clear that the amount of the lien was not established at the time of the filing of the federal tax lien. Whether the equitable lien existed in this case was contingent upon Atlas' proof in its suit. Until it established that the embezzled funds were used to purchase some or all of the property involved, and until it received a judgment from the Burleigh County District Court impressing a lien on such property, its lien was not perfected to the extent required by federal law so that it will defeat a valid federal tax lien.

In United States v. Pioneer American Ins. Co., supra, the Supreme Court dealt with a mortgage which was superior to the federal tax lien. The mortgage provided for reasonable attorney's fees, and under state law the right to attorney's fees was enforceable at the time of default, which was prior to the filing of the federal tax lien, and the suit seeking such attorney's fees was also filed prior to the filing of the federal tax lien. The Court held that under federal law, the claim for attorney's fees was not so perfected as to defeat the federal tax lien because the amount of the attorney's fees was not finally fixed in amount until after the federal tax lien was filed. Accordingly, the Court held that the mortgage was superior to the tax lien as to principal and interest but not as to attorney's fees. In City of Dallas v. United States [67-2 USTC ¶9118], 369 F. 2d 645 (5th Cir. 1966), the City of Dallas had a city tax lien pursuant to a city ordinance before the filing of the federal tax lien; however, the exact amount of the lien was unknown until after the filing of the federal tax lien. The court held that since the city lien was not certain in amount on the dates the federal liens were perfected, it was inchoate and inferior to the federal lien. In United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957), a vendor of realty filed a suit to impress certain property with an equitable vendor's lien for the unpaid purchase price and contemporaneously filed a notice of lis pendens. According to Texas law, the equitable lien came into being at the time of the conveyance, and this predated the federal tax lien as did the filing of the suit to impress the lien. The court noted that the lien's standing under Texas law was not enough, but that the lien must satisfy federal standards. The court discussed the effect of the filing of the notice of lis pendens as follows:

"Since the Vendor, asserting here his equitable vendor's lien, has neither the status of a 'mortgagee, pledge, purchaser, or judgment creditor,' the right of the Government to the tax lien (footnote omitted) under Section 6321 is not affected by the race between the Notice of Tax Lien . . . and the Vendor's lis pendens for recordation (footnote omitted) under Section 6323, and the question of priority must be determined by other considerations . . . the principal factor being that the lien which is first in time is first in right, . . . if, but only if, the one first in time is specific and perfected in the Federal sense." 247 F. 2d at 287.

Similarly, in this case, until there was a judgment impressing a trust on specific property in favor of Atlas, under the federal test to be applied, the equitable lien was contingent and cannot, therefore, take precedent over the previously filed federal tax lien, and this is so even though Atlas filed its notice of lis pendens before the federal tax lien was filed.

Since Atlas' lien was not certain in amount on the date the federal tax lien was perfected, it was inchoate and inferior to the federal tax lien. Atlas, however, is not out altogether. Although federal law determines whether a state lien is sufficiently choate so as to defeat a federal tax lien, it must first be determined whether the taxpayer had property or a right to property to which the federal tax lien could attach, and this is a matter of state law. Aquilino v. United States , 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960).

The Supreme Court, in Aquilino, stated the rule that state law determines the question of the taxpayer's property rights to which a federal tax lien can attach as follows:

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute.'" 363 U. S. at 512-513.

See also United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522, 80 S. Ct. 1282, 4 L. Ed. 2d 1371 (1960).

The import of this is that a federal tax lien can only attach to a property interest of the taxpayer which exists under state law, and if the taxpayer does not own the property or have rights to the property under state law, then the federal tax lien could not attach to such property, and, thus, the federal tax lien could not take precedence over a third person's property or right to property in the subject matter of the action.

In Aquilino, the Court dealt with a situation where subcontractors claimed a right to monies owed the contractor by the owner. The government sought to enforce a tax lien on all property of the contractor. The Court noted that such claims of the subcontractors were not choate but held that if, under the applicable New York law, the contractor were found to hold the monies in trust for the subcontractors, then the contractor would not have such a property interest that the federal tax lien could attach. In Durham , the Court also held that where a general contractor did not have a property interest in the total amount due under a construction contract, the federal tax lien could attach only to that amount of funds which remain unpaid after the owners have deducted a sum sufficient to pay the subcontractors. In Dennis v. United States [74-1 USTC ¶9391], 372 F. Supp. 563 (E. D. Va. 1974), the district court held that a federal tax lien could not attach to monies held by the taxpayer which had been embezzled from the owner since under the common law, no title passed to the embezzler, and, thus, the taxpayer did not have a right of ownership to which the tax lien could attach.

It is general rule of common law that no beneficial ownership is acquired by an embezzler, but that such ownership remains in the victim, who is the beneficial owner of a constructive trust which is imposed on such monies or property purchased with such money. See 38 A. L. R. 3d 1354. I find this to be the rule in North Dakota . Under Section 59-01-06 of the North Dakota Century Code, ² one who obtains property by a wrongful act holds the property as an implied trustee for the one who is entitled to the property. The wongdoer obtains no more than naked legal title to the property and holds it as a trustee for the benefit of the party who should have it. See Redman v. Biewer, 48 N. W. 2d 372 (N. D. 1951); Hyland v. Tousley, 275 N. W. 340 (N. D. 1937); Arntson v. First National Bank of Sheldon, 167 N. W. 760 (N. D. 1918); Widman v. Kellogg, 133 N. W. 1020 (N. D. 1911). Generally, where a constructive trustee has invested such funds or has purchased other property, the real owner can follow it wherever it can be traced. See Restatement of Restitution §202 (1936).

Since it is undisputed that Mrs. Dohn embezzled approximately $390,000 from Atlas, it is clear that she obtained no property rights in these funds and that she obtained no rights to any property which was purchased with these embezzled funds but would instead hold the same as constructive trustee for Atlas, who is the rightful owner. Since a federal tax lien can attach only to a property interest of the taxpayer which exists under state law, it is clear that the federal tax liens now in issue could not attach to that part of the subject property that was purchased with proceeds from the embezzlement.

Obviously, any equity that Mrs. Dohn had in her house prior to the time of the embezzlement would not have been purchased with proceeds from the embezzlement. Thus, the $2,400 Mrs. Dohn had paid down and the $1,417.33 she had paid toward the principal before the embezzlement started would be a property interest to which the federal tax lien could attach. After Mrs. Dohn began embezzling funds from Atlas, she continued to make her monthly payments of $160 toward the mortgage. Mrs. Dohn also continued to work and receive a salary. It is my conclusion from viewing the evidence that these monthly mortgage payments were paid from her salary rather than from the embezzled funds. The regularity of the payments both before and after the embezzlement lead me to conclude that the mortgage payments of $160 per month came from Mrs. Dohn's salary. Thus, any amount paid toward the principal during this time would also be a property interest of Mrs. Dohn to which the federal tax lien could attach. This amounted to $2,033.32. However, when Mrs. Dohn gave First Federal her personal check of $13,931.93 to pay off the principal due on the house, she was no longer working with her own funds. Her salary itself would not allow for such a large expenditure. No explanation, other than the embezzlement, has been given to account for this sum, so I conclude that the remainder of the principal mortgage on the house was paid for with monies embezzled from Atlas. I also conclude that the expensive improvements conducted at the residence after the beginning of the embezzlement were paid for out of the embezzled funds, Mr. Dohn obtained no property rights in these. Since the federal tax lien can attach only to a property interest of the taxpayer, it could not attach to that part of the residence paid for with proceeds from the embezzlement.

Therefore, for the reasons above stated, I find that the United States is entitled, with respect to its federal tax lien, to priority over the judgment lien of Atlas, Inc., in the sum of $5,850.65. As to the remainder of the value of the residence, the federal tax lien does not attach.

Counsel for the Plaintiff will prepare and submit appropriate form of judgment in conformity herewith.

This memorandum is deemed to comply with the provisions of Rule 52, Federal Rules of Civil Procedure.

Judgment

This action came on for trial before the Court, Honorable Bruce M. Van Sickle, District Judge, presiding, and the issues having been duly tried and a decision having been duly rendered,

It is ORDERED AND ADJUDGED that plaintiff Atlas, Inc. is the fee simple owner in and to the following described real estate in Burleigh County , North Dakota :

The East Sixty-five (65) feet of the West Seventy-five (75) feet of Lots Thirteen (13), Fourteen (14), Fifteen (15) and Sixteen (16), Block Nineteen (19), Flannery and Wetherby Addition to the City of Bismarck, North Dakota,

subject to a federal tax lien in the amount of Five Thousand Eight Hundred Fifty and 65/100 Dollars ($5,850.65) assessed against Arlene M. Dohn, said tax lien being numbered 178722 in the office of the Register of Deeds of Burleigh County, North Dakota, and it is further

ORDERED AND ADJUDGED that as to plaintiff, Atlas, Inc., said tax lien and the notice thereof is limited to the amount of Five Thousand Eight Hundred Fifty and 65/100 Dollars ($5,850.65), and that the defendant be forever enjoined and restrained from asserting, claiming or setting up any right, title or interest in or to said real estate except as stated herein, and it is further

ORDERED AND ADJUDGED that upon tender to the defendant of the sum of Five Thousand Eight Hundred Fifty and 65/100 Dollars ($5,850.65) the defendant shall execute a release of the tax lien above mentioned.

¹ North Dakota Century Code Section 28-05-07 deals with the effect of filing a notice of lis pendens. That section provides in relevant part as follows:

"In a civil action in a district court affecting the title to real property, the plaintiff, at the time of filing the complaint . . . may file for record with the register of deeds of each county in which the real property is situated a notice of the pendency of the action, containing the names of the parties, the object of the action, and a description of the real property affected. From the time of filing only shall the pendency of the action be constructive notice to a purchaser or encumbrancer of the property affected thereby, and every person whose conveyance or encumbrance is subsequently executed or subsequently recorded shall be deemed a subsequent purchaser or encumbrancer with notice and shall be bound by all proceedings taken after the filing of such notice to the same extent as if he were a party to the action. . . ."

² North Dakota Century Code Section 59-01-06 deals with the creation of implied trusts and provides in relevant part as follows:

"2. One who gains a thing by fraud, accident, mistake, undue influence, the violation of a trust or other wrongful act, is, unless he has some other or better right thereto, an implied trustee of the thing gained for the benefit of the person who would otherwise have had it;"

 

 

 

Securities and Exchange Commission, Plaintiff v. Herbert G. Paige, Pasha Service Corporation, Defendants

U. S. District Court, D. C., Civil Action No. 81-2066, 7/30/85

[Code Secs. 6321, 6332 and 6532]

Liens: Levy: Embezzled funds: Constructive trust: Escrow.--Embezzled funds and assets purchased with such funds were held by the embezzler in trust for the victim under Florida law. Accordingly, the embezzler lacked a right of ownership to which tax liens relating to the unpaid income taxes of the embezzler could attach. Embezzled funds deposited in the embezzler's personal accounts thereby commingling the trust funds with his personal property gave rise to a constructive trust on the entire commingled accounts. The present proceeding was not barred by the statute of limitations under Code Sec. 6532(c)(1) where the intervenor-victim sought an enforcement of a previous court order directing a transfer to it of the embezzled funds placed in escrow which were in constructive custody of the court, because such assets were in constructive custody of the court when the notice of levy was served and were immune to levy under Code Sec. 6332(a). Thus, the embezzler was not entitled to reduce his personal tax liability by payments to the IRS from the escrow assets, the escrow agent was required to turn over the escrow assets to the intervenor-victim, and the IRS was required to pay the intervenor-victim all escrow money and the value of escrow assets paid to the IRS by the escrow agent to reduce the embezzler's personal tax liability.

Theodore A. Levine, Gary G. Lynch, James G. Mann, Jared L. Kopel, 500 N. Capital St., Washington, D. C. 20549, for plaintiff. Stephen Rubin, 600 Maryland Ave., S.W., Washington, D. C. 20024, Mitchell H. Stabbe, 888 17th St., N.W., Washington, D. C. 20006, Gregory S. Hrebiniak, Dept. of Justice, Washington, D. C. 20530, for intervenor-plaintiffs. Brian H. Siegel, Weil, Gotshal & Manges, 1101 Connecticut Ave., N.W., Washington, D. C. 20530, for defendant.

Memorandum Opinion

JOHNSON, District Judge:

Intervening claimants, General Cinema Corporation (GCC), and the United States of America on behalf of the Internal Revenue Service (IRS), have jointly moved the Court to determine the proper ownership of the assets this Court required Herbert Paige (Paige) to place in an escrow established pursuant to a Final Judgment entered herein against Herbert Paige. Upon consideration of the joint stipulation of facts and the supporting and opposing memoranda of law, the Court enters the following findings of fact and conclusions of law.

The pertinent facts in this case have been stipulated and that stipulation is set out en toto below.

Stipulation of Facts

1. GCC purchased in 1970 all the stock of American Beverage Corporation (ABC) from Julius Darsky, Herbert Paige's father-in-law, for whom Paige was working. ABC, which owned bottling plants in Ohio , Texas , and Florida , became the beverage division of GCC.

2. GCC had no previous beverage bottling experience. The management and control of GCC's beverage operation was thus entrusted to Paige.

3. After the buy-out, Paige continued with GCC as an employee. Paige was the chief operating officer of GCC's beverage division from 1970 through 1972. From 1972 through 1978, Paige was employed as president of GCC Beverages, Inc., a GCC subsidiary. In 1975, Paige became a senior vice president of GCC, and in 1977, he was elected to the board of directors of GCC.

4. Prior to the commencement of Paige's employment with GCC, he was employed by ABC, a company controlled by his father-in-law. Crown Cork & Seal Co., Inc. (Crown) had made periodic payments of competitive allowances, rebates, or discounts by check to ABC in connection with its purchases of metal cans and bottle caps both prior to and after the acquisition of ABC by GCC. The amounts of such payments were determined by multiplving the volume of goods purchased by ABC from Crown by a negotiated discount rate.

5. In or about August 1970, Paige assumed responsibility within GCC for negotiating the terms of purchases of metal cans and bottle caps from suppliers of metal cans and bottle caps, including Crown, and for negotiating the amount and manner of payment of competitive allowances, rebates, or discounts to GCC by such suppliers. Paige held that responsibility from 1970 through about October 1978.

6. Around the fall of 1970, shortly after becoming the Chief Operating Officer of GCC's bottling operations, Paige caused Pasha Service Corporation (Pasha) to be incorporated and 90 percent of its stock to be issued to himself. On or about October 1970, Crown, at Paige's direction, redirected some of Crown's periodic payments to Pasha. Paige never disclosed to GCC the existence of Pasha or the payments to Pasha.

7. From about October 1970 through October 1978, Crown made about 42 payments of funds to Pasha for a total sum of about $5.9 million. All of such funds were paid by checks made out to Pasha.

8. Crown mailed the Pasha checks to Paige at his office at GCC in Miami . Upon receipt of the checks, Paige sent them to an "accountant". This accountant deposited the checks in a bank account maintained in Pasha's name, and then wrote out checks to Paige drawn on the Pasha bank account. Such checks were delivered to and deposited by Paige in bank accounts maintained in his name. The total total amount of all checks drawn on the Pasha bank account and deposited in Paige's bank accounts was approximately $5.1 million. The accountant was permitted by Paige to retain for his own use the funds remaining in the Pasha bank account. By such acts, Paige and Pasha misappropriated and wrongfully converted to their own use and benefit the funds paid to Pasha by Crown and deprived GCC of the use and benefit of such funds.

9. In early 1979, the existence of Pasha and Paige's scheme was discovered by GCC through an audit which determined that the price of cans from Crown was high. Paige was then immediately contacted in March of 1979 by GCC and informed that GCC had learned of the existence of Pasha. Paige immediately confessed to the scheme, and immediately promised to pay the $5.9 million to GCC.

10. In 1981 the Securities and Exchange Commission (SEC) filed a complaint against Crown, accusing it of violations of the Securities Exchange Act of 1934. Crown signed a consent decree agreeing to make accurate reports to the SEC and to keep accurate records, but Crown did not admit fault, maintaining that its payments to Pasha were intended by Crown to go to GCC in the normal course of Crown's business.

11. To determine the amount of the payments to Paige, GCC dispatched teams of auditors to GCC's bottling plants. It was ultimately determined that Pasha had received approximately $5.9 million from Crown. Paige has never repaid GCC any of this money. Crown and GCC entered into an Agreement whereby Crown has paid to GCC $5,863,123.74 between 1979 and 1984 in additional rebates supplementing the normal rebate payments owed by Crown to GCC as a result of their continuing business relationship.

12. In June 1979, GCC instituted a lawsuit against Paige and Pasha in Florida state court. On May 6, 1983 , the Circuit Court of the State of Florida , 11th Judicial Circuit, granted GCC's motion for summary judgment on conversion. On July 15, 1984 , GCC further obtained summary judgment of liability against Paige and Pasha upon a finding by the Court that Paige had committed fraud and theft, and had breached his fiduciary duty to GCC. On November 1, 1984 , the Florida Circuit Court awarded GCC a final judgment of $26.1 million (treble actual damages plus costs and attorneys' fees). Paige now claims he is destitute and that all his assets were placed into the escrow account established by this Court as described below.

13. In 1981, the SEC concluded an investigation into Paige's activities and instituted an action against him in this court. On July 14, 1982 , this court entered a Final Judgment of Permanent Injunction as to Herbert G. Paige which required that Paige disgorge himself of certain of his assets and place them in a court-ordered and court-supervised escrow account. The escrow assets were purchased by Paige with funds from the same general personal checking accounts into which he had deposited the Crown payments.

14. An Escrow Agreement dated July 28, 1982 , was entered into between Paige and Richard E. Brodsky (Brodsky) as escrow agent. Under its terms, Paige delivered assets to Brodsky consisting of: (1) cash; (2) securities; (3) tangible personal property (i. e., a gold watch and three automobiles); (4) interests in real property (i. e., a fee interest in a condominium residence and a leasehold interest in commercial property); (5) beneficial interests in certain partnerships; and (6) certain notes payable. The Escrow Agreement provided that: (1) Brodsky was to hold the escrow assets as agent of the Court until he received further instructions from the Court; (2) Brodsky was empowered to sell or lease any of the escrow assets and to "retain the proceeds of such sales after expenses"; (3) Brodsky was authorized to disburse funds as directed by written instructions of Paige and the SEC jointly, except that at any time up to June 14, 1984, he could (if instructed by Paige in a notarized writing) deliver all or any part of the escrow assets to GCC; and (4) Paige was not to receive directly or indirectly the benefit or use of, or interest on, any of the escrow assets. As more fully discussed below, certain of the escrow assets were delivered by Brodsky to the IRS and certain others were sold by Paige and/or Brodsky, with the proceeds being turned over to the IRS, for crediting on an account of the federal tax liens against Paige, thereby reducing Paige's personal income tax liability.

15. In another related matter, the United States Attorney for the Southern District of Florida, on June 6, 1983, charged Paige with mail fraud in violation of 18 U. S. C. Section 1341. The information recited:

The purpose of PAIGE's scheme and artifice was to obtain money from CROWN Cork & Seal Company, Inc. which was a major supplier of GENERAL CINEMA CORPORATION and its subsidiary GCC Biverages [sic], Inc. From October, 1970 through October, 1978, defendant Herbert G. PAIGE caused CROWN Cork & Seal Co., Inc. to make 42 payments totaling $5.9 million dollars to PASHA Service Corporation. These payments generally went directly to defendant Hervert [sic] G. PAIGE for his personal use and benefit instead of properly for the use and benefit of GENERAL CINEMA CORPORATION and GCC Beverage, Inc.

16. Pasha, Paige's dummy corporation, made a Subchapter "S" election with respect to federal income taxation. Paige reported his ninety percent (90%) portion of the Pasha payments by Crown as personal income from 1970-1978. Paige received no money from Pasha or Crown in 1979. Herbert Paige and his wife filed a joint federal income tax return for the year 1978, but they did not fully pay the $925,466.52 in taxes due for that year. $447,785.81 of unpaid 1978 tax and interest was assessed by the IRS on August 27, 1979 . On November 4, 1981 , a Notice of Federal Tax Lien was filed in Dade County for the unpaid balance of $447,785.81. Herbert Paige and his wife filed a joint federal income tax return for the year 1979 but did not pay the taxes due. $358,938.03 of unpaid 1979 tax and interest was assessed by the IRS on December 15, 1980 . On June 8, 1981 , a Notice of Federal Tax Lien was filed in Dade County for $358,938.03.

17. On June 27, 1983 , the government served a Plea Memorandum which detailed the Paige scheme and artifice. Paige and his attorney, Hugo Black, Jr., Esquire, signed the attached plea letter. On August 16, 1983 , Paige entered a guilty plea before the Honorable Norman C. Roettger, Jr. Paige later testified at deposition:

Q. What did you understand that you were pleading guilty to, on a factual basis?

A. Mail fraud.

Q. And what about the facts that you were indicating that you were pleading guilty of? What facts were they?

A. Converting $5.9 million belonging to General Cinema, to me.

18. On May 8, 1984 , this Court granted GCC's motion for leave to intervene as a party plaintiff in the SEC's pending action against Paige and Pasha and ordered the SEC and Brodsky to show cause why GCC's motion for transfer of the escrow assets to it ought not be granted. The SEC responded that it had no objection to GCC's motion. Brodsky's response sought to delay court action as to the disposition of the escrow assets. On June 8, 1984 , the Court ordered the escrow assets transferred to GCC. Neither Paige nor Brodsky took any action to implement this Order. As a result, on August 14, 1984 , GCC moved for a supplemental order directing Brodsky to furnish an accounting of his handling of the escrow account and directing Paige to appoint GCC's attorneys as his attorney-infact to execute the documents necessary to transfer the escrow assets to GCC. The Court entered such an Order on August 30, 1984 .

19. On September 21, 1984 , Brodsky was served with a Notice of Levy by the IRS with regard to the following obligations still owed by Paige to the IRS:

                        DATE                        Unpaid

TAX                  BALaNCE         TAX         Statutory

PERIOD                   DUE    Assessed         Additions       Total

1978 ......         
08/27/79
    $375,769          $139,672    $515,441

1979 ......         
12/15/80
     185,684           213,982     399,675

                                                              $915,116

The Notice of Levy directs Brodsky to turn over to the IRS "[a]ll property, rights to property, money, credits, and bank deposits now in your possession and belonging to this taxpayer." Brodsky then filed a Request for Instructions with the Court, asking whether he should obey the Court's June 8, 1984 , and August 30, 1984 orders directing that the escrow assets be turned over to GCC or the IRS pursuant to their Notice of Levy. GCC served a Response to Escrow Agent's Request for Instructions stating that the Escrow Agent had ignored the Court's orders. The Court denied Brodsky's request for instructions. Brodsky still refused to turn the escrow assets over to GCC compelling GCC to move for an order to Brodsky to show cause why he should not be held in contempt for failure to obey this Court's orders for failure to explain or account for apparent discrepancies in his management of the escrow assets.

20. Paige's personal tax liability has been reduced by $243,350.00 by payments to the IRS from the escrow assets or cash from Paige as follows:

Date                      Amount                                 Source

11/12/82
 ....       $12,000.00               

Sale

 of Rolls Royce

07/16/82
 ....       30,000.00               Cash Payment by Paige

06/07/83
 ....       75,000.00           
Sale
 of 

Alpha
 
Land

 Partnership

06/08/83
 ....       29,000.00           
Sale
 of 

Alpha
 
Land

 Partnership

04/07/83
 ....       13,550.00               

Sale

 of 1977 Mercedes

04/07/83
 ....       9,800.00                

Sale

 of 1978 Mercedes

07/05/84
 ....       74,000.00                

Sale

 of Lavel Lease

 

It appears to be agreed by both sides that the money illegally obtained by Paige under the above-recited scheme, was includable within his gross income and taxable to him in the year it was received. James v. United States [61-1 USTC ¶9449], 366 U. S. 213 (1961). The question before the Court is whether the specific property obtained through the scheme can be levied upon by the government for the purpose of satisfying the tax obligation arising as a result of its passage into Paige's possession.

Title 26 U. S. C. §6321 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. [Emphasis added.]

The sole express limitation of this section is that the property on which levy is made be property "belonging to" the delinquent taxpayer. The lien does not extend to property in the taxpayer's custody, whether acquired by legal or illegal means, which belongs to someone else. Dennis v. United States [74-1 USTC ¶9391], 372 F. Supp. 563 (E. D. Va. 1974).

It is well established that while federal law determines whether a state lien is sufficiently choate so as to defeat a federal tax lien, it must first be determined whether the taxpayer had property or a right to property to which the federal tax lien could attach, and this is a matter of state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-513 (1969); Metropolitan Dade County v. United States [81-1 USTC ¶9173], 635 F. 2d 512, 514 (5th Cir. 1981). In Aquilino v. United States , supra, the Supreme Court held:

The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpaver had "property" or "rights to property" to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute."

Id. 363 U. S. at 512-513.

It is a general rule of common law that no title is acquired by an embezzler, but that such title remains in the victim, who is the beneficial owner of a constructive trust which is imposed on such monies or on property purchased with such money. 38 A. L. R. 3d 1354; Dennis v. United States , supra, 372 F. Supp. at 567. Both Florida and federal legal precedent are clear that a thief obtains no title to the stolen property and holds such property and the proceeds thereof in trust for the victim. If, under state law, the property belongs to the victim, no government lien based on the thief's failure to pay taxes can be imposed upon it.

It is the position of IRS that no constructive trust ever arose in favor of GCC since the funds in question were not stolen or converted from GCC by Paige. Rather, IRS contends that there was a voluntary transfer of assets from Crown to Paige and/or Pasha which effectively transferred title and ownership of the funds to Pasha and Paige. The Court is not persuaded by this argument. The Court determines that Paige converted funds belonging to GCC to himself. By stipulation #17 above, the parties have stipulated to the fact that on August 16, 1983, Paige entered a guilty plea and that he indicated that he was pleading guilty of "converting $5.9 million belonging to General Cinema" to himself. The Court will not go behind that stipulation.

Since it is undisputed that Paige has been convicted of or has admitted to the theft and conversion of the Crown payments, it is clear that he obtained no title to or property rights to any of these funds or property which was purchased with these stolen or converted funds, but would instead hold the same as constructive trustee for the rightful owner. Therefore, the Court determines that the federal tax liens in question could not attach to monies which had been stolen or converted from the rightful owner since under the common law, no title passed to Paige and he thus did not have a right of ownership to which the tax liens could attach.

IRS next contends that if a constructive trust has arisen with respect to the escrowed assets, it arose after the government's lien which is, therefore, superior. The Court also rejects this position. A constructive trust exists from the time of the occurrence of the circumstances giving rise to the duty to surrender the property in question to another. United States v. Fontana [82-1 USTC ¶9237], 528 F. Supp. 137 (S. D. N. Y. 1981). Where the title to property is acquired by one person under such circumstances that he is under a duty to surrender it, a constructive trust immediately arises. There is no foundation whatsoever for the notion that a constructive trust does not arise until it is decreed by the court. It arises when the duty to make restitution arises, not when the duty is subsequently enforced. 5 Scott, Trusts [3d ed.] §462.4.

The Court likewise sees no merit in IRS' arguments that GCC has been compensated for its loss by virtue of a subsequent agreement with Crown Cork & Seal. Once it was discovered that $5.9 million in payments from Crown intended for GCC had been embezzled, the long-standing business relationship between GCC and Crown was threatened. In order to avoid the threat of litigation, GCC and Crown entered into an agreement whereby Crown would pay to GCC a supplemental rebate in addition to the regular rebate to which GCC was entitled. It is the position of IRS that these supplemental rebates have compensated GCC for its loss. The Court is not convinced by this argument. First of all, GCC has given consideration for this agreement with Crown by not severing the business relationship with Crown and taking its business elsewhere. Secondly, GCC was deprived of the use of the embezzled funds from 1970 when the embezzlement began, through 1984 when the supplemental rebates by Crown were completed. Moreover, the supplemental rebates paid by Crown to GCC represented the principal of the embezzled funds only. GCC has never been compensated for the $4.6 million in interest which the Florida court included in GCC's damages. Therefore, the Court determines that the agreement between GCC and Crown has not compensated GCC for the damages it incurred as a result of Paige's embezzlement scheme.

IRS next argues that the proceedings are barred by the statute of limitations provided in §6532(c)(1) of the Internal Revenue Code. GCC, by this proceeding, is seeking enforcement of the Court's June 8, 1984 order that the escrow assets be transferred to GCC. At the time the Notice of Levy was served, the escrowed assets were in the constructive custody of the Court, having already been placed in an escrow account under the jurisdiction of this Court. The Court determines, therefore, that pursuant to §6332(a) of the Internal Revenue Code, because the escrowed assets were already in the constructive possession and actually under the jurisdiction of the Court, they were immune to levy. Therefore, the statute of limitations argument advanced by IRS must be rejected.

Finally, the Court turns its attention to the issue of whether the escrowed assets are the proceeds of accounts wherein Paige commingled the stolen funds. Under Florida law, when a trustee wrongfully commingles trust funds with his own, equity will impress the trust on the entire mass with which the trust fund has thus been commingled. Myers v. Matusek, 98 Fla. 1126, 125 So. 360 (1929); Newsome v. Torpa Shipbuilding & Engineering Co., 100 Fla. 1173, 131 So. 115 (1930), modified and rehearing denied, 100 Fla. 1179, 137 So. 882. A mixed bank account in which a trustee has deposited both trust and other funds constitutes a commingled mass. Citizen's State Bank v. Jones, 100 Fla. 1492, 131 So. 369 (1930); City Bank of Ft. Lauderdale v. Hart, 102 Fla. 529, 136 So. 446 (1931). The Court, therefore, finds that the escrowed assets purchased from the money accounts were also held in trust by Paige for GCC, and that Paige had no legal right or interest in the escrowed assets. Therefore, Paige had no legal right or interest in the escrow assets previously turned over to the government to satisfy Paige's federal tax liability.

Based upon the foregoing, the Court determines that Herbert Paige obtained no title or right to the stolen or converted funds and that he held those funds in constructive trust for GCC. The Court also determines that Paige deposited the stolen funds in his personal accounts thereby commingling the trust funds with his personal property and thereby giving rise to a constructive trust on the entire commingled account. Next, the Court determines that the trust follows the money into any form it takes, thus giving rise to a constructive trust on the escrowed assets purchased with the money in the commingled accounts. And finally, the Court determines Paige may not reduce his personal federal income tax liability by payments to the IRS from the escrow assets or from cash in the escrowed accounts.

An Order consistent with this Memorandum Opinion will issue this date.

Order

Upon consideration of the joint stipulation of facts, the memoranda of law submitted by the IRS and GCC, and the Court having determined by Memorandum Opinion of even date that all assets placed by Herbert Paige in the escrow established by the Court are the property of GCC by operation of fact and law, it is this 30th day of July, 1985

ORDERED that within twenty (20) days of the date of this Order, the escrow agent shall turn over to GCC through its counsel, all escrow assets in his possession pursuant to this Court's previous Orders; and it is further

ORDERED that within twenty (20) days of the date of this Order, IRS shall pay to GCC through its counsel, all the escrow money and the value of all escrow assets previously paid by the Escrow Agent and/or Paige to the IRS in order to reduce the personal tax liability of Herbert Paige.

 

 

 

The First National Bank of Cartersville v. Lamar B Hill v. United States of America

U. S. District Court, No. Dist. Ga., Rome Div., Civil Action No. 2422, 406 FSupp 351, 12/23/75

[Code Sec. 6323(a)]

Lien for taxes: Priority: Equitable lien pursuant to state law: Embezzled funds.--A federal lien for taxes on funds embezzled by a bank president had priority over the bank's earlier claim of an equitable lien resulting from a constructive trust in its favor by reason of the fact that the fraudulently obtained funds could allegedly be traced to some or all of its president's real estate investments. Here, neither the property subject to the bank's lien nor the amount of such lien was established at the time the federal tax lien was filed, so it was still contingent and not perfected to the extent required to defeat the valid federal tax lien.

Neel and Smith, Box 159 , Cartersville , Ga. , for plaintiff. Gettle, Fraser & Berthold, Suite D-116, Paces 75 Park, 1401 W. Paces Ferry Rd., Atlanta Ga., Beverly B. Bates, Assistant United States Attorney, Atlanta, Ga., for defendant.

Order

O'KELLEY, District Judge:

This action is before the court on the motion of the United States for partial summary judgment. The issue for determination is whether the federal tax has priority over an equitable lien claimed by the First National Bank of Cartersville (hereinafter referred to as "the Bank") as to certain real property. This case arises out of the following factual situation. Lamar B. Hill was president of the Bank from January 1, 1969 , until February, 1972, and during this period he embezzled approximately $4,700,000.00 from the Bank. The United States made assessments for Hill's unpaid tax liabilities plus interest and statutory penalties on these embezzled funds in the amount of $3,621,511.04, and notices of the federal tax liens were duly recorded in the office of the Clerk of Bartow County Superior Court on June 6, 1972 , and June 21, 1972 . Judgment was entered on June 30, 1975, in favor of the United States against Hill for the unpaid amount of these assessments including interest and statutory additions accrued to date of judgment in the amount of $4,052,842.60, plus interest on that amount from the date of judgment. On June 30, 1975, judgment was also entered in favor of the Bank against Hill in the amount of $4,694,212.59 principal, plus interest of $1,249,770.17 through June 23, 1975, interest from June 24, 1975, to June 30, 1975, at the rate of seven percent per annum, contractual attorneys' fees of $14,270.43, and costs. Of this amount, approximately $4,601,546.33 represented the principal claim of the Bank against Hill for embezzlement.

The property which is the subject of this action is property which was owned by Hill. The Bank claims that to the extent it can trace the embezzled funds to some or all of this property, it has a claim superior to the federal tax lien by virtue of an equitable lien resulting from a constructive trust pursuant to Ga. Code Ann. §§ 108-106 and -107. This order will deal only with the question of who has priority as to the property which the Bank claims by the equitable lien. The Bank makes some reference to other property which is in its possession, custody, or control and to which the Bank claims priority by virtue of a security interest pursuant to a dragnet clause in a note; however, there is not presently sufficient information in the record to rule on that question.

The Bank relies essentially on Ga. Code Ann. §108-106(2), which provides that a trust is implied "[w]here, from any fraud, one person obtains the title to property which rightly belongs to another." This section is implemented by Ga. Code Ann. §108-107 which provides: "Whenever the circumstances are such that the person taking the legal estate, either from fraud or otherwise, cannot enjoy the beneficial interest without violating some established principle of equity, the court will declare him a trustee for the person beneficially entitled, if such person shall not have waived his right by subsequent ratification or long acquiescence." Where funds are embezzled, the victim can trace such funds into the property in which the embezzler invested them and obtain an equitable lien on such property under Georgia law. United States Fidelity and Guaranty Co. v. Richmond County , 174 Ga. 599 (1932). The Bank thus contends that since it has alleged that some or all of the property which is the subject of this suit was purchased with funds which were embezzled from it, the property is impressed with a constructive trust in its favor. Since the embezzlement and the purchase of the property occurred prior to filing of the tax lien and since the Bank filed a notice of lis pendens in connection with its suit to impress a constructive trust on the property prior to the filing of the tax lien, the Bank contends that its equitable lien takes priority over the federal tax lien.

The Bank fails to recognize that it is a matter of federal and not state law as to when a lien has acquired sufficient substance and has become so perfected as to defeat a federal tax lien. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963); United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957). For a lien to be sufficiently established to defeat a federal tax lien, the identity of the lienor, the property subject to the lien, and the amount of the lien must be established. United States v. Pioneer American Ins. Co., supra. In the case sub judice, it is clear that the property subject to the lien is not established, nor was the amount of the lien established at the time of the filing of the federal tax lien. Whether the equitable lien exists in this case is contingent upon the Bank's proof in its suit. Until it establishes that the embezzled funds were used to purchase some or all of the property involved, and until it gets a judgment by a court pursuant to Ga. Code Ann. §108-107 impressing a lien on such property, its lien is not perfected to the extent required by federal law so that it will defeat a valid federal tax lien. Several analogous cases amplify this situation. In United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963), the Court dealt with a mortgage which was superior to the federal tax lien. The mortgage provided for reasonable attorney's fees, and under state law the right to attorney's fees was enforceable at the time of default, which was prior to the filing of the federal tax lien, and the suit seeking such attorney's fees was also filed prior to the filing of the federal tax lien. The Court held that under federal law the claim for attorney's fees was not so perfected as to defeat the federal tax lien because the amount of the attorney's fees was not finally fixed in amount until after the federal tax lien was filed. Accordingly, the Court held that the mortgage was superior to the tax lien as to principal and interest but not as to attorney's fees. In City of Dallas v. United States [67-2 USTC ¶9118], 369 F. 2d 645 (5th Cir. 1966), the Fifth Circuit dealt with a case where the City of Dallas had a city tax lien pursuant to a city ordinance before the filing of the federal tax lien; however, the exact amount of the lien was unknown until after the filing of the federal tax lien. The court held that since the city lien was not certain in amount on the dates the federal liens were perfected, it was inchoate and inferior to the federal lien. In United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957), the Fifth Circuit had before it a case even more analogous to the present one. In that case a vendor of realty filed a suit to impress certain property with an equitable vendor's lien for the unpaid purchase price and contemporaneously filed a notice of lis pendens. According to Texas law, the equitable lien came into being at the time of the conveyance, and this predated the federal tax lien as did the filing of the suit to impress the lien. The Fifth Circuit noted that the lien's standing under Texas law was not enough but that the lien must satisfy federal standards. In discussing the lien, the court stated:

We need not elaborate on the Federal infirmities of this state lien. It is sufficient to point out that insofar as it bears on the competition for tax priorities, the lien, equitable in nature, arises only because equity in good conscience requires it to accomplish right and justice. Whether it exists depends on the equities which, in turn, depend upon facts . . .. As a secret lien it is, or may be, outranked by many liens of innocent purchasers or others. And, to enforce it, the only remedy available is an equitable action for foreclosure in which the debt and the lien must be established. [Citation omitted.] So, while once established by judgment under the doctrine of relation back, it has a high order in the state hierarchy, until the act of judgment occurs, it is, in the Federal view, as contingent as any other lawsuit.

247 F. 2d at 288-89.

In the present case, the Bank contends that the United States had notice of its claim since it filed a notice of lis pendens at the time it filed its suit. Morrison also discussed this question:

Since the Vendor, asserting here his equitable vendor's lien, has neithr the status of a "mortgagee, pledgee, purchaser, or judgment creditor," the right of the Government to the tax lien (footnote omitted) under Section 6321 is not affected by the race between the Notice of Tax Lien . . . and the Vendor's lis pendens for recordation (footnote omitted) under Section 6323, and the question of priority must be determined by other considerations. . . .

Similarly, in the case sub judice, until there is a judgment impressing a trust on specific property in favor of the Bank, under the federal test to be applied, the equitable lien is contingent and cannot, therefore, take precedence over the previously filed federal tax lien, and this is so even though the Bank filed its notice of lis pendens.

The Bank also claims that it is a "purchaser" within the meaning of 26 U. S. C. §6323(h)(6) and that, therefore, the federal tax lien is not valid pursuant to 26 U. S. C. §6323(a). There is no merit in this contention. The statute deals with purchasers "in the ordinary sense." The Ninth Circuit noted in United States v. Hawkins [56-1 USTC ¶9143], 228 F. 2d 517 (9th Cir. 1955), that "a 'purchaser within the meaning of §3672 [now §6323] usually means one who acquires title for a valuable consideration in the manner of vendor and vendee.'" 228 F. 2d at 519. The Bank's contention that it is a purchaser due to the constructive trust impressed on the property clearly does not come within the above definition.

The Bank has cited the court one case where it was held that the federal tax lien did not take precedence over funds obtained by fraud and also did not take precedence over the victim's claim to property purchased with those funds. See Dennis v. United States [74-1 USTC ¶9391], 372 F. Supp. 563 (E. D. Va. 1974). While the reasoning and decision in that case is appealing, there were no factual questions left undecided since it was stipulated that the funds and property involved were the property of the victim. The court stated that it would not go behind the stipulations. Dennis also did not consider the federal requirement that the claim must be fully perfected and not contingent before the claim could take precedence over a federal tax lien as discussed above.

For the foregoing reasons, the motion of the United States for partial summary judgment is GRANTED. The federal tax lien on all property not in the possession, custody, or control of the Bank takes precedence over the claim of the Bank.

Counsel for the government and the Bank have indicated that the case can be concluded after this ruling. Counsel are directed to present any proposed order to the court in Atlanta at 4:30 p. m. on January 15, 1976 .

 

 

 

The First National Bank of Cartersville v. Lamar B. Hill v. United States of America

U. S. District Court, No. Dist. Ga., Rome Div., No. 2422, 412 FSupp 422, 5/12/76

[Code Sec. 7426]

Nontaxpayer action: Wrongful levy: Property owner: Misappropriation.--A federal tax lien could not attach to a property interest of taxpayer since it was undisputed that taxpayer had embezzled approximately $4,700,000 from the bank; therefore he obtained no title to or property rights in these funds and he obtained no rights to any property which was purchased with these embezzled funds but would instead hold the same as constructive trustee for the bank, who was the rightful owner.

Neel & Smith, Box 159 , Cartersville , Ga. , for First Nat'l. Bank of Cartersville. Gettle, Fraser & Berthold, 116 Paces 75 Park, 1401 W. Paces Ferry Rd. N. W. , Atlanta , Ga. , for Hill. William D. Mallard, Jr., Assistant United States Attorney, Atlanta , Ga. , for U. S.

Order

O'KELLEY, District Judge:

By order dated December 22, 1975, this court held that the federal tax lien of the United States took priority over the equitable liens claimed by the First National Bank of Cartersville [hereinafter referred to as the "Bank"] as to certain property in the name of Lamar Hill which was allegedly purchased with proceeds of funds he embezzled from the Bank. See First National Bank of Cartersville v. Hill [76-1 USTC ¶9254], 406 F. Supp. 351 (N. D. Ga. 1975). The Bank now moves this court for reconsideration of that order, alleging that such interpretation of the relative priorities would result in the Bank's being denied due process of law. There is also before the court a motion of the Commercial Bank & Trust Company of Griffin , Georgia , for leave to file an amicus curiae brief in support of the Bank's motion for reconsideration. The Commercial Bank & Trust Company is involved in other litigation in this court which involves similar issues. The motion for leave to file an amicus brief is GRANTED.

The United States has not responded to the Bank's motion for reconsideration but has filed a motion for partial summary judgment as to certain other property or funds of Lamer Hill which is in the possession of the Bank securing several of his promissory notes. The United States seeks to obtain priority on the excess of any amounts necessary to satisfy such promissory notes.

The facts of this case are set out in the December 22, 1975 , order. Briefly, Lamar Hill was the president of the Bank, and during such tenure he embezzled approximately $4,700,000 from the Bank. The United States made assessments for Hill's unpaid tax liabilities plus interest and penalties on these embezzled monies in an amount over $3,600,000 and duly filed the notice of federal tax liens. Judgments have been entered against Hill in favor of the United States for over $4,000,000 and in favor of the Bank for over $5,800,000. The question before the court initially, and now on the motion for reconsideration, is the relative priority of the federal tax liens vis-a-vis the constructive trusts claimed by the Bank on property purchased by Hill, allegedly with the embezzled funds.

In the December 22, 1975, order, this court noted that federal rather than state law governed in determining whether a state-created lien is sufficiently choate so as to prevail over a federal tax lien, see United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963); United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957), and held that at the time of the filing of the federal tax lien in the case sub judice the property subject to the Bank's lien had not yet been established and the amount of the lien had not been established so as to take priority over the tax lien. In so holding, this court relied on United States v. Pioneer American Ins. Co., supra; City of Dallas v. United States [67-2 USTC ¶9118], 369 F. 2d 645 (5th Cir. 1966); and United States v. Morrison, supra. Each of these cases dealt with situations where the federal tax lien was being sought against the property of the taxpayer. Pioneer American Ins. Co. dealt with a provision for attorney's fees in a mortgage on the taxpayer's property, City of Dallas dealt with a city tax lien on the taxpayer's property and Morrison dealt with an equitable vendor's lien for the unpaid purchase price of property purchased by the taxpayer. It has now been pointed out to the court by the amicus curiae that while federal law determines whether a state lien is sufficiently choate so as to defeat a federal tax lien, it must first be determined whether the taxpayer had property or a right to property to which the federal tax lien could attach, and this is a matter of state law. The extent of Hill's property interest in the property he allegedly purchased with proceeds of the embezzled funds was not considered in this court's December 22, 1975 , order. It is contended that if Hill had no property interest in property purchased with embezzled funds, then there would be no property to which the federal tax lien could attach.

As to the principle that state law determines the question of the taxpayer's property rithts to which a federal tax lien can attach, the Supreme Court very succinctly stated the rule in Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960):

The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had "property" or "rights to property" to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute." [Footnote and citation omitted.]

Id. at 512-513. See also United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960); United States v. Hershberger [73-1 USTC ¶9289], 475 F. 2d 677 (10th Cir. 1973); Ideco Division of Dresser Industries, Inc. v. Chance Drilling Co., 422 F. 2d 165 (5th Cir. 1970); United States v. Gurley [69-2 USTC ¶9562], 415 F. 2d 144 (5th Cir. 1969). The import of this is that a federal tax lien can only attach to a property interest of the taxpayer which exists under state law, and if the taxpayer does not own the property or have rights to the property under state law, then the federal tax lien could not attach to such property, and, thus, the federal tax lien could not take precedence over the person with the rights of ownership in the property. In Aquilino, the Court dealt with a situation where subcontractors claimed a right to monies owed the contractor by the owner. The united States was seeking to enforce a tax lien on all property of the contractor. The Court noted that such claims of the subcontractors were not choate but held that if, under the applicable New York law, the contractor were found to hold the monies in trust for the subcontractors, then the contractor would not have such a property interest that the federal tax lien could attach. In Durham, the Court also held that where a general contractor did not have a property interest in the total amount due under a construction contract, the federal tax lien could attach only to that amount of funds which "remain unpaid after the owners have deducted a sum sufficient to pay the subcontractors." 363 U. S. at 526. In Hershberger, the Tenth Circuit held that where a wife owned an undivided one-half interest in homestead property under Kansas law, a federal tax lien against the husband could not attach to such interest. This holding was based on the fact that under state law, the wife had a present property interest rather than merely an exemption. In Gurley, the Fifty Circuit held that a federal tax lien could not attach to property of the taxpayer if such property were held as an estate by the entireties since under applicable Florida law, such an estate could not be charged with the individual debts of either spouse. In Dennis v. United States [74-1 USTC ¶9391], 372 F. Supp. 563 (E. D. Va. 1974), the district court held that a federal tax lien could not attach to monies held by the taxpayer which had been embezzled from the owner since under the common law, no title passed to the embezzler, and, thus, the taxpayer did not have a right of ownership to which the tax lien could attach.

It is a general rule of common law that no title is acquired by an embezzler, but that such title remains in the victim, who is the beneficial owner of a constructive trust which is imposed on such monies or on property purchased with such money. 38 A. L. R. 3d 1354; Dennis v. United States , supra. This is also the rule in Georgia . Adams v. McGehee, 211 Ga. 498 (1955); Luther v. Clay, 100 Ga. 236 (1897). In such a situation, the property remains that of the original owner, and the embezzler holds such property as the constructive trustee of the owner. Adams v. McGehee, supra; Luther v. Clay, supra; cf. Murray County v. Pickering, 196 Ga. 208 (1943); Stover v. Atlantic Ice & Coal Corp., 154 Ga. 228 (1922). Where the constructive trustee has invested such funds or has purchased other property, the real owner can follow it wherever it can be traced. Adams v. McGehee, supra; United States Fidclity & Guaranty Co. v. Richmand County, 174 Ga. 599 (1932); Knight v. Knight, 75 Ga. 386 (1885).

Since it is undisputed that Hill embezzled approximately $4,700,000 from the Bank, it is clear that he obtained no title to or property rights in these funds and that he obtained no right to any property which was purchased with these embezzled funds but would instead hold the same as constructive trustee for the Bank, who is the rightful owner. Since a federal tax lien can attach only to a property interest of the taxpayer which exists under state law, it is clear that the federal tax liens now in issue could not attach to any of the subject property if such property were purchased with proceeds from the embezzlement. Accordingly, this court's order of December 22, 1975 , holding that the United States has priority to the subject property is vacated and set aside, and the motion of the United States for partial summary judgment is DENIED. The Bank must have the opportunity to establish that the property in question was purchased with the embezzled funds. To the extent that the Bank can establish this, no federal tax lien can attach to such property.

The latest motion for partial summary judgment filed by the United States seeking priority on the excess of any amount obtained from the sale of property or from funds presently held by the Bank to secure certain promissory notes must also be denied for the same reasons discussed above. If the Bank can establish that the property and funds held by it to secure the above-noted promissory notes were obtained by Hill with embezzled funds, no federal tax lien can attach thereto. Accordingly, the motion of the United States for partial summary judgment filed March 9, 1976 , is DENIED.

The clerk of court is hereby directed to set this case (including the pending companion cases) for trial commencing July 7, 1976 .

 

 

 

M. Rael ( Israel ) Schwarz and Frederica H. Schwarz, Appellants v. United States of America , Appellee

(CA-4), In the United States Court of Appeals for the Fourth Circuit, No. 6254, 191 F2d 618, Decided September 10, 1951

Appeal from the United States District Court for the District of Maryland, at Baltimore.

Property subject to lien: Real estate: Trust created in favor of "wife."--A deed of record, purporting to create an estate by entireties in the taxpayer and a woman with whom he had participated in a marriage ceremony, was ineffective in creating such an estate since the parties were not lawfully married inasmuch as the taxpayer already had a living wife. The deed did not create a joint tenancy, or a tenancy in common, as held by the lower court, but rather resulted in a trust, resulting or constructive, in favor of the woman who purchased the real estate with her own funds under the erroneous belief, fraudulently impressed upon her by the taxpayer, that she was his wife. There was no theory under which the government could subject this property to a lien to satisfy income taxes and penalties unpaid and owing by the taxpayer. The judgment of the District Court was reversed on this point.

Lien for income taxes: Annuity payments: Judgment ordering agreement for lump-sum settlement.--An order of the lower court directing that payments under certain annuity contracts be paid to the government to satisfy income tax liens outstanding against the taxpayer was affirmed as proper under Code Sec. 3678 which permits such a receivership agreement. The lower court's judgment, however, was modified to protect the taxpayer's rights with respect to the payment of a lump sum should the government and the insurance company reach an agreement, by requiring that the taxpayer agree also, or in the event he did not agree, by providing that the contracts should be sold at public auction.  Affirming, modifying and reversing the decision of the District Court, 50-2 USTC ¶9516, reported at 515 CCH ¶9062.

Samuel Bogorad (Wilson R. Toula on brief) for appellants. Virginia H. Adams, Special Assistant to the Attorney General, (Theron Lamar Caudle, Assistant Attorney General; Ellis N. Slack and Lee A. Jackson, Special Assistants to the Attorney General; Bernard J. Flynn, United States Attorney, and Frederick J. Green Jr., Assistant United States Attorney, on brief) for appellee.

Before PARKER, SOPER and DOBIE, Circuit Judges.

PARKER, Circuit Judge:

This is an appeal in an action to obtain a judgment for a deficiency in income taxes, with penalties and interest, and to subject to the payment thereof two annuity contracts of the taxpayer and a half interest in a tract of land which had been deeded to him and his wife as tenants by the entireties. There was judgment in favor of the United States for $96,766.55, the amount of the taxes with penalties and interest; and the annuity contracts and the half interest in the tract of land were subjected to the payment of the judgment. In the case of the annuity contracts, the insurance company which had issued them was directed to pay into court to be applied on the judgment all amounts to which the taxpayer might be entitled as they should become due, with provision for a lump sum payment in discharge of the obligations thereunder if the insurance company and the government could reach an agreement with regard thereto. In the case of the half interest in the tract of land, the court held that this was subject to sale on the ground that the conveyance to the taxpayer and his wife did not create an estate by entireties because they were not validly married at the time of the conveyance. Taxpayer and his wife have appealed from the judgment, contending: (1) that the court was without jurisdiction; (2) that the portion of the order dealing with the annuity contracts is void because not providing for their sale at public auction; and (3) that the court erred in holding the half interest in the tract of land subject to the tax lien, since the land was purchased with the wife's money and was conveyed to her and her husband with intent that a tenancy by entireties be created and without reason on her part to think that she was not validly married to her husband at the time of the conveyance.

[Jurisdiction of the Court]

There is no merit whatever in the jurisdictional point. 26 USC 3744 expressly provides for bringing suit for recovery of the tax in the District Court of the District in which liability for the tax is incurred or where the taxpayer resides at the time of the commencement of the action. The facts giving the court jurisdiction were set forth in the complaint and established on the trial; and it was, of course, not necessary that the statute be pleaded.

[ Sale of Annuity Contracts]

The order directing that payments under the annuity contracts be made to the "Department of the Treasury" to be applied on the judgment was entirely proper, as this was, in effect, providing a receivership for the enforcement of the tax lien in accordance with 26 USC 3678. We think, however, that the provision for a lump sum payment in case the government and the insurance company agree on it should be modified to provide for agreement by the taxpayer also, with provision that, if he does not agree to the lump sum agreed upon by the government and the insurance company, the contracts shall be sold at public auction and the proceeds applied on the judgment. This will adequately protect the rights of the taxpayer without sacrificing any rights of the government.

[Taxpayer's Interest in Land]

With respect to the interest in land, the facts are that the tract was conveyed to taxpayer and his present wife in the year 1936 by a deed which was intended to convey to them an estate therein by the entireties and which was in all respects sufficient in form to vest such an estate in them. According to the uncontradicted evidence, the land was paid for with the wife's money and was conveyed to her and the taxpayer for the purpose of vesting in them an estate by the entireties at the suggestion of the real estate agent making the sale, who explained to them the advantages of such an estate. At that time, they were living together as husband and wife, having obtained a license to marry followed by a common law marriage in 1933 and having gone through a religious marriage ceremony in 1935, when they were visiting the old home of the wife in Austria . Neither marriage was valid, however, for the reason that, unknown to the wife, taxpayer had at the time another living wife from whom he had not been divorced. The judge below has found that taxpayer practiced a deception upon the wife who is now before us with respect to his marital status; and the uncontradicted evidence is that she did not learn of his former marriage until the pleadings were filed in this case. The former wife died in 1939 and the tax lien was not filed until the following year. Another marriage ceremony was performed in 1941, the reason for which, as given by the wife, was that she desired a record of her marriage and it was impossible to obtain a record of the marriage in Austria because of the state of war then existing.

[State Rule]

It is settled in Maryland that a debtor's interest in an estate by entireties is not subject to sale under execution in satisfaction of his debts. Jordan v. Reynolds, 105 Md. 288; 66 Atl. 37, 9 L. R. A. (N. S.) 1026, 121 Am. St. Rep. 578, 12 Ann. Cas. 51; Masterman v. Masterman, 129 Md. 167, 98 Atl. 537; Annapolis Banking & Trust Co. v. Smith, 164 Md. 8, 164 Atl. 157; McCubbin v. Stanford, 85 Md. 378, 37 Atl. 214, 60 Am. St. Rep. 329. The learned judge below was of opinion, however, that because the parties were not lawfully married at the time of the conveyance to them, an estate by the entireties was not created and that the effect of the conveyance was to vest in them an estate in joint tenancy or a tenancy in common, which was not converted by the subsequent valid marriage into an estate by the entireties. It is well settled, of course, that the marriage of persons holding an estate as joint tenants or tenants in common does not convert such an estate into one by the entireties. 1 Tiffany Real Property 2d ed. 646; 2 Coke on Littleton sec. 187(b); Fulper v. Fulper 54 N. J. Eq. 431, 433. We do not think, however, that the case before us can be disposed of by looking merely to the fact that the parties were not validly married at the time of the conveyance. We have the additional facts, which cannot be ignored, that the wife's money paid for the property, that she directed that it be conveyed to her and the man whom she had fraudulently been led to believe was her husband and that it be conveyed in such way as to vest in them an estate by the entireties. Under such circumstances we think that taxpayer and those claiming under him are estopped to claim any interest in the land beyond the estate by entireties which it was the intention of the parties to create. See Jacobs v. Miller, 50 Mich. 119, 15 N. W. 42; Stone v. Culver, 286 Mich. 263, 282 N. W. 142, 119 A. L. R. 512 and note; McCollum v. Price, 213 Ark. 609, 211 S. W. 2d 895; 26 Am. Jur. p. 701.

Any interest vested in the taxpayer by the conveyance was impressed with a trust in favor of the woman whom he had deceived with respect to his marital status and who put up the money to purchase the land with the purpose that the marital estate of tenancy by the entireties be created by the conveyance. When the purpose of the conveyance failed because there was no valid marital status to which it could attach, there can be no question but that equity would impress the property with a resulting trust in favor of the woman who put up the purchase money. See Rosenthal v. Miller, 148 Md. 226, 129 Atl. 28; Latrobe v. American Colonization Society, 134 Md. 406, 106 Atl. 858; King v. Mitchell, 8 Pet. 326, 349; Oakhurst Land Co. v. Newell, 185 N. C. 410, 117 S. E. 341; 54 Am. Jur. p. 154 sec. 197; Pomeroy Equity Jurisprudence 4th ed. sec. 1032 et seq.; Bogart on Trusts vol. 2 sec. 468 pp. 1442-1443. ¹ The ordinary rule is that, where the wife pays for land and the title is made to her and husband, there is a resulting trust in her favor for the entire property in the absence of clear evidence that the husband was to have a beneficial interest. See Kelly Springfield Tire Co. v. Lester, 190 N. C. 411, 130 S. E. 45; Dixon v. Dixon , 123 Md. 44, 90 Atl. 846, Ann. Cas. 1915D 616. A fortiori, there is a resulting trust in her favor where the evidence shows not only that she furnished the purchase money, but that she did so for the purpose of creating a marital estate which failed for lack of a valid marital status to support it. The typical case of resulting trust where the purpose of a conveyance fails is a resulting trust in favor of the grantor; but, as pointed out in Rosenthal v. Miller, supra, where there is a consideration for the conveyance, the trust results in favor of the party who has furnished the consideration. As said by Judge Walsh in that case:

"Where there are certain trusts, created either by will or deed, which fail in whole or in part, or which are of such an indefinite nature, either as to the purposes or beneficiaries, that courts of equity will not carry them into effect, or which are illegal in their nature and character, a resulting trust will arise to the party creating the trust, or to his heirs and legal representatives, as the case may be. Story's Equity (14th ed.) par. 1592, and cases cited in notes; 26 R. C. L. 1216, pars. 59 and 60. 'When there in [is] a consideration for the conveyance, and it is made upon a trust which is void for uncertainty or otherwise fails, then the grantee takes the beneficial interest.' Trustees, etc. v. Jackson Square Church, 84 Md. 173, 177, 35 A. 8; Pomeroy's Equity, par. 1033; Perry on Trusts sec. 151. The last statement assumes that the consideration was paid by the grantee; if it was paid by some one else, a resulting trust arises in favor of the party furnishing the consideration. Keller v. Kunkel, 46 Md. 565; Euler v. Schroeder, 112 Md. 155, 158, 76 A. 164; Hays v. Hollis, 8 Gill. 357; Pomeroy's Equity, par. 1037; Story's Equity (14th ed.) par. 1597; 26 R. C. L. 1219, par. 64."

And there can be no question but that equity, because of the fraud prepetrated upon the wife with respect to her marital status, would decree a constructive trust in her favor with respect to the property purchased. Hutson v. Hutson, 168 Md. 182, 177 Atl. 177; Mitchell v. Frederick, 166 Md. 42, 170 Atl. 733; Morin v. Kirkland, 266 Mass. 345, 115 N. E. 414; Gebel v. Weiss, 42 N. J. Eq. 521, 8 Atl. 889; Butler v. Butler, 93 Misc. 258, 157 N. Y. Supp. 188; Beidler v. Beidler, -- Fla. --, 43 So. 2d 329; note 14 A. L. R. 2d 918, 935-937.

Very much in point is the case of Hutson v. Hutson, supra, wherein an owner of property, having gone through a marriage ceremony, conveyed the property through a straw party to himself and his supposed wife, as tenants by the entireties. The wife believing that a prior husband was dead erroneously represented herself as unmarried. When it was learned that the prior husband was in fact alive the property owner sued for an annulment of the marriage and also for a decree setting aside the conveyance through which the estate by the entireties had been created. Both suits were successful. That was the appropriate equitable relief there as the result was to restore the property to the owner. Here the appropriate relief is to declare a trust in favor of the wife who was defrauded and thus vest in her the beneficial interest in the property purchased with her funds. Very pertinent is what was said by the Court of Appeals as to the grounds of relief in Hutson v. Hutson, 168 Md. at 188, viz.:

"It is evident from the facts in this case that the appellee intended to give to the appellant an estate by the entireties in the property described in the deeds in which reference has been made. But it is also evident that the gift was predicated upon the theory that he was, at the time of the execution of the deeds, legally married to the appellant and could create the peculiar form of tenancy which he sought to create.

* * *

`The most important incident of tenancy by the entireties is that the survivor of the marriage, whether the husband or the wife, is entitled to the whole, which right cannot be defeated by conveyance by the other to a stranger, as in the case of a joint tenancy, nor by sale under execution against the other.' 1 Tiffany, Real Property, 645.

* * *

"As stated by the chancellor in his opinion filed in this case: 'There is nothing in the record of this case which would support a conclusion that the plaintiff did not intend to enjoy the immunities which ordinarily accompanied the tenancy which he thought he was creating, and it would be highly inequitable to allow a conveyance to stand which would inevitably lead to a result which never was in his contemplation. * * * The case differs from those cases in which both parties knowing they are not married yet hold themselves out as husband and wife, and take title to property as tenants by the entireties."

Whether the trust be considered a trust resulting to the wife because of the failure of the purpose of the conveyance and of her having furnished the purchase money, or as a constructive trust raised in her favor because of the fraud practiced upon her as to the marital status of her husband, we think there can be no doubt that the equitable title in the property was in her when notice of the tax liens was filed amongst the land records and the present suit was brought.

The fact that the tax lien was filed prior to the valid marriage is not material, since at that time the wife was the equitable owner of the entire property and it was not subject to sale under execution for the debts of taxpayer. See Lessee of Smith v. McCann, 24 How. 398; Wiltshire v. Warburton, 4 Cir. 59 Fed. (2d) 611; Sapero v. Neiswender, 4 Cir. 23 Fed. (2d) 403. Questions of notice, if material, do not arise; for the ostensible relationship between the parties was that of husband and wife and the deed on record purported to create an estate by entireties based on that relationship. The case resolves itself to this: The parties were living together publicly as husband and wife and the wife thought that the relationship was legal and valid; acting on this belief, she purchased property with her private funds and had it conveyed to herself and her supposed husband in such way as to create an estate by entireties; the government seeks to take advantage of a fact of which she had no knowledge, which had been fraudulently concealed from her and of which she never learned until the pleadings in the case were filed, to take from her a half interest in the property and apply it to her husband's debts. We know of no principle of law or equity which will permit this to be done.

For the reasons stated, the judgment appealed from will be affirmed in so far as it gives judgment against the taxpayer for the amount of the tax with penalties and interest; it will be modified with respect to the provisions relating to the annuity contracts to provide for sale at auction of taxpayer's rights thereunder in the event that taxpayer fails to agree to a lump sum payment agreed upon between the United States and the insurance company; and it will be reversed in so far as it relates to the tract of land deeded to taxpayer and his wife.

Affirmed in Part

Modified in Part

Reversed in Part

¹ The authorities cited have relation to conveyances in trust where the trust has failed; but there can be no difference in principle between such cases and one where a conveyance intended to create an estate by entireties fails because of the lack of a marital status to give it validity. The principle upon which the resulting trust arises is that, the purpose of the conveyance having been frustrated, the power of equity must be exerted to protect the interest of the person "from whom the consideration comes, or who represents or is identified in right with the consideration." Pomeroy Equity Jurisprudence 4th ed. sec. 1031.

 

 

 

Lewis J. Deak and William Severns, and all other persons similarly situated, Plaintiffs v. The Morris Plan Company of California , a corporation, et al., Defendants. United States of America , Intervener

U. S. District Court, So. Dist. Calif., Central Div., Civil No. 14162-PH, 6/8/56

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

Tax lien: Validity against employee's claim to funds deposited under collective bargaining agreement.--A labor union and the Greek Theatre Productions, Inc., entered into a collective bargaining agreement under which the latter deposited $2,410 in trust with the Morris Plan Company in May 1951 as a security deposit of two weeks' wages of union members employed by the Greek Theatre during 1951. On September 15, 1951 , the Greek Threatre owed William Severns, a member of the union, $2,475 for services rendered during the preceding eleven weeks. The employee's rights to the fund were perfected upon creation of the fund and the nonpayment of wages and were prior and superior to a Federal lien for unpaid admission taxes.

Bodkin, Breslin & Luddy, Orville W. McCarroll, Suite 1225, Citizens National Bank Building, Los Angeles 13, Calif., for plaintiff. Ralph Rosen, for defendant Morris Plan Company of Calif. Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, Robert H. Wyshak, Rembert T. Brown, Assistant United States Attorneys, for defendant Robert A. Riddell, District Director of Internal Revenue, and United States, plaintiffs in intervention.

Findings of Fact and Conclusions of Law

HALL, District Judge:

The above entitled cause came on regularly for trial on the 8th day of May, 1956, the Honorable Peirson M. Hall, Judge presiding, Messrs. Bodkin, Breslin and Luddy by Orville W. McCarroll, Esquire appearing for Lewis J. Deak and William Severns, plaintiffs, Ralph Rosen, Esquire for defendant The Morris Plan Company of California, a corporation, Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, Robert H. Wyshak and Rembert T. Brown, Assistant United States Attorneys, appearing for defendant Robert A. Riddell, District Director of Internal Revenue and United States of America, plaintiffs in intervention; the court having heard the testimony and having examined the proofs offered by the respective parties and the cause having been submitted to the Court for decision and the Court being fully advised in the premises now makes its Findings of Fact and Conclusions of Law as follows:

Findings of Fact

I. That the Association of Theatrical Press Agents and Managers was and is a labor union, being a voluntary non-incorporated association with its principal place of business in the State of New York .

II. That Lewis J. Deak and William Severns were in 1951 and now are members of said Association of Theatrical Press Agents and Managers.

III. That Lewis J. Deak was in 1951 and now is the West coast representative of said Association of Theatrical Press Agents and Managers.

IV. That The Morris Plan Company of California was in 1951 and now is a corporation organized and existing under and by virtue of the laws of the State of California with its principal place of business in the County of Los Angeles , City of Los Angeles , State of California .

V. That Greek Theatre Productions, Inc. was during 1951 a corporation organized and existing under and by virtue of the laws of the State of California with its principal place of business in the City of Los Angeles , County of Los Angeles , State of California .

VI. That Robert A. Riddell during 1951 was the duly appointed, qualified and acting Collector of Internal Revenue for the Sixth Collection District, State of California , United States of America .

VII. That on or about the 13th day of June, 1950 the Association of Theatrical Press Agents and Managers entered into a collective bargaining agreement with the Greek Theatre Productions, Inc. and that said collective bargaining agreement was in full force and effect during the year 1951.

VIII. That pursuant to section 6 of said collective bargaining agreement, said Association of Theatrical Press Agents and Managers had the right to and did demand a security deposit of and from said Greek Theatre Productions, Inc. in the sum of two weeks' wages of employees of said Greek Theatre Productions, Inc. who were members of said Association of Theatrical Press Agents and Managers and who were employed by said Greek Theatre Productions, Inc. in San Francisco and Los Angeles during the year 1951.

(a) That pursuant to said demand and pursuant to an oral agreement, Greek Theatre Productions, Inc. on May 29, 1951 deposited the sum of $2,410.00, in trust, with the Morris Plan Company of California for the benefit of any employees of said Greek Theatre Productions, Inc. who were members of said Association of Theatrical Press Agents and Managers who might be unpaid.

(b) That Greek Theatre Productions, Inc. had no further right in or to said fund except that upon release of said fund by said Association of Theatrical Press Agents and Managers any amount remaining therein at the time of such release would be returned to and paid over to said Greek Theatre Productions, Inc.

(c) That Greek Theatre Productions, Inc. had no right to withdraw said fund or any portion thereof.

(d) That said Association of Theatrical Press Agents and Managers had the sole and exclusive right to withdraw any portion or all of said fund.

IX. That William Severns was employed by said Greek Theatre Productions, Inc. from on or about May 10, 1951 to on or about September 15, 1951 , at a weekly salary of $225.00. That said William Severns was not paid for his services rendered for and on behalf of said Greek Theatre Productions, Inc. for an eleven week period during such term of employment.

X. That there was due, owing and unpaid to said William Severns on September 15, 1951 the sum of $2,475.00 on account of said services so rendered by said William Severns for and on behalf of said Greek Theatre Productions, Inc. pursuant to such employment.

XI. That on the 28th day of August, 1951 the Commissioner of Internal Revenue assessed admission taxes for the month of June, 1951 against the defendant Greek Theatre Productions, Inc. upon the Commissioner's Supplemental Miscellaneous Tax Assessment List No. 14-500/0; that on September 4, 1951 the said Assessment List was received in the office of Robert A. Riddell as Collector of Internal Revenue for the Sixth Collection District of the State of California, United States of America; that on September 5, 1951 Notice and Demand for Payment of said admission taxes was issued to Greek Theatre Productions, Inc.; that on the 11th day of September, 1951 the Collector of Internal Revenue caused a Notice of Lien securing payment of said admission taxes to be filed for record in the office of the County Recorder of the County of Los Angeles, State of California; that on September 19, 1951 Robert A. Riddell, as Collector of Internal Revenue for the Sixth Collection District of the State of California, United States of America caused to be issued and levied a Notice of Lien and Warrant of Distraint upon the Morris Plan Company of California whereby said Robert A. Riddell served and levied upon all property, rights to property, money, credits and all bank deposits belonging to said Greek Theatre Productions, Inc. in the possession of said Morris Plan Company of California to secure payment of revenue taxes due to the United States of America from said Greek Theatre Productions, Inc.

XII. That Greek Theatre Productions, Inc. notified Lewis J. Deak in his capacity as West Coast representative of said Association of Theatrical Press Agents and Managers that wages due to William Severns in the amount of $2,475.00 were unpaid. That said Lewis J. Deak acting in his said capacity as West Coast representative of said Association of Theatrical Press Agents and Managers made an oral demand upon said Morris Plan Company of California to pay over the amount on deposit in said fund to said William Severns; that on September 24, 1951, Lewis J. Deak, acting in his said capacity, served upon said Morris Plan Company of California written affidavit and written demand for payment of the amount on deposit in said fund to said William Severns.

XIII. That said Morris Plan Company of California failed and refused to pay over said fund to said William Severns by reason of said Notice of Levy and Warrant of Distraint served upon it by said Robert A. Riddell.

XIV. That said deposit was represented by a security to wit: a Thrift Savings Account Pass Book.

XV. That plaintiffs Lewis J. Deak, William Severns and all other persons similarly situated, and said Association of Theatrical Press Agents and Managers did not control the payment of wages to employees of said Greek Theatre Productions, Inc.

XVI. That plaintiffs Lewis J. Deak, William Severns, all other persons similarly situated and said Association of Theatrical Press Agents and Managers were not the employers of the members of the Association of Theatrical Press Agents and Managers for the payment of withholding and employment taxes.

Conclusions of Law

I. That a trust was created in favor of the members of the Association of Theatrical Press Agents and Managers who were employees of the Greek Theatre Productions, Inc.

II. That the rights of the members of the union in said fund were perfected when the fund was created.

III. That the rights of Greek Theatre Productions, Inc. were not perfected and could not be perfected until the Association of Theatrical Press Agents and Managers released its claim.

IV. That the deposit was evidenced by a security as defined in Section 3672(b) of the Internal Revenue Code of 1939; That the United States of America acquired no rights in said fund prior to September 19, 1951 .

V. That this was not a class suit and Lewis J. Deak acquired no rights in said fund.

VI. That the rights of William Severns in and to said fund were perfected upon the creation of said fund and the non-payment of wages and were prior in time and superior to any rights acquired by the United States of America by virtue of its Notice of Levy and Warrant of Distraint served on The Morris Plan Company of California on the 19th day of September, 1951.

VII. That the Complaint in Intervention of the United States of America fails to state a cause of action against plaintiffs Lewis J. Deak, William Severns, all other persons similarly situated or the Association of Theatrical Press Agents and Managers, or any of them.

 

 

 

Rocco Damato and Rosario Damato, Partners, trading under the firm name and style of Damato's Gas Station and Garage, Plaintiffs-Respondents v. Leone Construction Company, Inc., a corporation, Defendant and United States of America, Defendant-Appellant

Superior Court of New Jersey , Appellate Div., Docket No. A-356-55, 125 A2d 302, 9/4/56

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

Lien for taxes: Construction work subject to subcontractors' mechanics' liens.--A contractor agreed to erect a filling station for partners. When the work was only partly finished and about two-thirds paid for, the property was condemned for the New Jersey Turnpike. The United States had a lien for unpaid withholding taxes due from the contractor, and most of the subcontractors had filed mechanics' liens, which they consented to have discharged on agreement of the partners to place a part of the unpaid portion of the purchase price in escrow. The court holds that the contractor, as to this property, had no property or rights to property, whether real or personal, belonging to it. Since the rights of the United States could not extend beyond those of the contractor, there is nothing from which its taxes can be paid out of this property.

Charles A. Hoens, Jr., Raymond Del Tufo, Jr., Post Office Building, Newark, N. J., for United States of America. Gustave A. Peduto, Charles A. Rooney, 921 Bergen Avenue, Jersey City, N. J., for plaintiffs-respondents. Harry Nadell, 35 Church Street, Paterson, N. J. (Joseph L. Conn, 262 Main Street, Paterson, N. J., on brief), for defendants-appellants. Dan Kommit, Andrew Consiglio, New Jersey Enameling Corporation, J. Turco Paving Contractor, Inc., Matty Lee, trading as Lee Electric Co., Brunell Lumber & Millwork Co., Peter Giaccio, trading as Star Roofing Co., Edmund Engelke and Ernest J. Sonzogni, trading as Sonsogni-Engelke Co., Clark Door Co., Inc., and Selvin Israel and Emilie Israel, trading as Union Glass Co.

Before Judges SPEAKMAN, ARTESERSE and HANEMAN.

[Liens for Taxes]

HANEMAN, Judge Superior Court:

On September 12, 1951 the District Director of Internal Revenue at Newark, New Jersey, received an assessment list from the Commissioner of Internal Revenue, which list demonstrated that Leone Construction Company, Inc., (hereinafter referred to as Leone), owed the United States withholding taxes on the second quarter of 1951 payrolls in the amount of $3928.81. A Federal Tax Lien was thereafter filed against Leone on November 20, 1951 in the Bergen County Clerk's Office, Book 9, page 468.

On December 3, 1951 the District Director of Internal Revenue at Newark , New Jersey received an assessment list from the Commissioner of Internal Revenue, which list demonstrated that Leone owed the United States withholding taxes on its third quarter of 1951 payrolls in the amount of $3058.62. A Federal Tax Lien was thereafter filed against Leone on February 14, 1952 in the Bergen County Clerk's Office, Book 10, page 133.

On June 27, 1952 the District Director of Internal Revenue at Newark , New Jersey , received an assessment list from the Commissioner of Internal Revenue, which list demonstrated that Leone owed the United States withholding taxes on its first quarter of 1951 in the amount of $5830.92. A Federal Tax Lien was thereafter filed against Leone on October 10, 1952 in the Hudson County Register's Office, Book 5, page 549.

[Unfinished Project]

On August 19, 1953 Leone entered into a contract with the plaintiffs Rocco Damato and Rosario Damato, trading under the name of Damato's Gas Station and Garage (hereinafter referred to as Damato), for the erection of a gas station for said plaintiffs on premises owned by them at Seventh Street and Newark Avenue, Jersey City, New Jersey, for the sum of $26,238.00. By reason of certain extras agreed upon between the parties, the total sum of the contract was increased to $27,961.10. Of this sum Damato paid $18,827.00, leaving a balance of $8134.10.

All of the defendants, with the exception of Star Roofing Co., Clark Door Company, Inc., and Union Glass Co., had, before undertaking any work on their sub-contracts with Leone, filed Mechanic's Notice of Intention. J. Turco Paving Contractor, Inc., was the sole contractor or materialman who filed a lien claim pursuant to N. J. S. A. 2A:44-91. The last work under the contract was performed on March 5, 1954 , after which date Leone apparently abandoned its contract. On March 10, 1955 plaintiff filed a complaint by way of interpleader, seeking to deposit the balance of $8134.10 above referred to into court. The appellant United States of America intervened in this action. On a motion for summary judgment, the Court granted judgment for the plaintiffs for interpleader. Act the plenary trial held thereafter, the Court concluded that the appellant's contention that it was entitled to prior payment by virtue of its Federal Tax Lien was without merit, and judgment was entered in behalf of the defendant subcontractors.

The Court found that on March 5, 1954 the work left unfinished would have required the expenditure of $4134.50. (Damato concedes error in this figure, and that it should be $3862.00), which included the completion of the outside procelain work, concrete driveways, repair to roofing (should have been for electrical work), installation of hearing, repairs to defective overhead doors, and to remove an encroachment in order to comply with the terms of the contract. Other damages also were claimed, but there was no proof of their amount.

During the progress of the construction the New Jersey Turnpike condemned the premises, and in order to give clear title, plaintiffs agreed, at the request of the Turnpike Authority, to hold certain monies in escrow to satisfy the claims of sub-contractors in return for the latter discharging their Mechanic's Notice of Intention, lien claim, and any rights under the Mechanic's Lien Law. In reliance upon this agreement the sub-contractors did execute the required discharges of their rights to effectuate the above purpose.

[The Law]

The statute under which the appellant claims its right to priority reads as follows:

"Section 3670: If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, 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."

"Section 3671: Unless another date is specificially fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

"Section 3672: Invalidity of lien without notice, Such lien shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector--Under State or Territorial Laws. In the office in which the filing of such notice is authorized by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law authorized the filing of such notice in an office within the State or Territory * * *."

[Rights of Contractor in the Property]

The sole question here involved is whether there were in the hands of the plaintiffs any "property and rights to property, whether real or personal, belonging" to Leone.

It is the contention of the respondents that Leone failed to substantially perform its contract and that there was, therefore, no property or rights to property vested in it.

At the outset it must be recognized that the rights of the United States do not extend beyond those of the taxpayer whose alleged right to property is sought to be levied on. The lien of the Government can rise no higher than the right of the contractor. Bankers Title and Abstract Co. v. Ferber Co., 15 N. J. 433 (1954).

The question of the legal efficacy of the liens of the sub-contractors is of no moment if, as respondents contend, Leone had no right to any of the monies here involved. The primary question is--are there any monies due Leone?--rather than--to whom are the monies due, if not to Leone, under the contract?

Partial performance of an entire and indivisible contract by one of the parties does not generally entitled him to performance of the contract by the other party nor warrant a partial recovery of the consideration unless there has been a substantial performance. If Leone substantially performed his contract, "even though he failed in some minor particulars, he is entitled to recover the contract price, less what will be a fair allowance to the owner to make good the defects in the performance of the contract." R. Krevolin & Co., Inc. v. Brown, 20 N. J. Super. 85 (App. Div. 1952).

3 Williston on Contracts (Rev. Ed.), Sec. 805, p. 2262, reads as follows:

"Where the rule of substantial performance prevails it is essential that the plaintiff's default should not have been willful; and the defects must not be so serious as to deprive the property of its value for the intended use nor so pervade the whole work that a deduction in damages will not be fair compensation."

Here the finding of the trial judge that there was no substantial performance was amply justified by the facts. Nor can the United States find any comfort in the operation of the gas station by Damato for a period of time in its incomplete state. In the light of the cricumstances, this cannot be deemed either an acceptance or a waiver. The judgment is affirmed.

 

 

 

Machinery Center, Inc., a Corporation, Plaintiff v. Alvin M. Kelly, Director of Internal Revenue for the District of Missouri, Defendant

U. S. District Court, East. Dist. Mo., Eastern Div., No. 61 C 317(2), 12/28/62

[1954 Code Sec. 6321]

Lien for tax: Notice of levy on bank: Depositor delinquent in payment of taxes: Inclusion in bank account balance of checks received in error.--The defendant Director of Internal Revenue served a notice of levy on a bank seizing "all property or rights to property" in its possession belonging to the Cashin Copper Corporation, which was delinquent in the payment of its taxes. The amount of delinquent taxpayer's bank balance, at the time of the notice of levy, was only $13.61 more than the proceeds of two checks which had been mailed to it in error by the plaintiff, on July 29, and August 27, 1958, under the mistaken belief that the delinquent taxpayer was entitled to such checks, whereas they should have been sent to another corporation. The bank paid the entire amount of the bank balance to the District Director, who resisted the demands of the plaintiff that the amount so seized was its property and should be returned to it. The court held that the money in this case was properly identifiable as that of the plaintiff and should have been returned to it, as the amount on deposit at the time was only $13.61 more than the total of the two checks received from the plaintiff in error. The fact that the District Director had already paid the money into the United States Treasury was no defense.