Fraudulent Conveyances Part2 page3

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II. Procedural Background

On April 27, 2000, the United States filed a collection action against Anna Patej. The United States is seeking to collect the unpaid jeopardy federal income tax assessments against Salah Gouda by setting aside the purchase of the Haverford property and foreclosing upon the property. On August 24, 2000, this Court denied Salah Gouda's motion to intervene as a party. On July 8, 2002, the United States moved for summary judgment because (1) Salah Gouda's use of personal funds to create a tenancy by the entirety in the Haverford property was a fraudulent conveyance, (2) the United States' liens arose and attached to Gouda's 100% interest in the property prior to the divorce judgment, and therefore (3) the transfer was made subject to the United States' liens and the liens should be foreclosed thereon. After full briefing and oral arguments, the Court granted Plaintiff's motion on October 8, 2002.

On October 23, 2002, Defendant moved for reconsideration. Plaintiff, pursuant to a court order, filed a response brief.



III. Standard of Review

Pursuant to Rule 7.1(g) of the Local Rules for the Eastern District of Michigan, a motion for reconsideration may be filed within ten days after the order to which it objects is issued. It should be granted if (1) the movant demonstrates that the Court and the parties have been misled by a palpable defect and (2) that a different disposition of the case must result from a correction of such palpable defect. A motion that merely presents the same issues already ruled upon by the Court shall not be granted.



IV. Analysis

Defendant argues that she owns a dower interest in the Property which has priority over the federal lien, and that she owns a separate interest in the assets used to purchase the Haverford property (the "Property") due to her legitimate pre-conveyance interest in the marital assets by operation of law. She further argues that a trial is necessary to determine the amount of her separate property interest, and that ordering foreclosure through summary judgment amounts to a taking with due process of law. While this Court's order granting summary judgment could easily be interpreted as impliedly rejecting these arguments, in rejecting Defendant's motion for reconsideration the Court explains why these arguments are unavailing.

1. Dower

"The threshold question ... 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. Although state law creates legal interests and rights in property, federal law determines whether and to what extent those interests will be taxed." Blachy v. Butcher [ 2000-2 USTC ¶50,629], 221 F.3d 896, 905 (6th Cir. 2000) (internal quotations and citations omitted). Furthermore, federal law governs the priority of a federal tax lien against other claims. Id.

Only claims which are choate under the federal standard can take priority over a federal tax lien. Id. In Michigan , a widow is statutorily entitled to dower, or the use during her natural life, of one-third of all lands whereof her husband was seized of an inheritable estate at anytime during the marriage unless she is lawfully barred." Matter of Estate of Stroh, 392 N.W.2d 192, 194 (Mich. Ct. App. 1986) (defining dower rights under Michigan law). In Michigan , "the estate of dower involves three essentials: Marriage, seisin of the husband during coverture, and the death of the husband with the survivorship of the wife." In re Wheeler, 252 B.R. 420, 426 (W.D. Mich. 2000). Under Michigan law, the right of dower is inchoate until the death of the widow's husband. See id; Cummings v. Schreur, 214 N.W. 199, 200 ( Mich. 1927). Consequently, while Defendant and Gouda were married, and when the federal tax lien attached in 1998, Defendant's dower interest in the Property was inchoate under state law.

Likewise, Defendant's dower interest was inchoate under federal law when the federal tax lien attached. Under federal law, "a state-created lien is choate only when `there is nothing more to be done,' i.e., `when the identity of the lienor, the property subject to the lien, and the amount of the lien are established."' Id. . The "something more" required to make Defendant's dower interest choate was the death of her husband. Therefore, because her dower rights were inchoate when the federal lien attached in 1998, her dower does not defeat the federal lien. See United States v. Forrester [ 2001-1 USTC ¶50,163], No. C-1-98-839, 2001 WL 429811, *5 (S.D. Ohio 2001) (holding that spouse's dower interest was inchoate, and thus insufficient to defeat federal lien, when both spouses are alive).

The I.R.S. rules on which Plaintiff relies do not convince the Court otherwise. They address the issue of whether a federal tax lien has priority over a surviving spouse's dower rights. In order for those rules to apply, a spouse must be deceased. See, e.g., Rev. Rul. 79-399, 1979-2 C.B. 398 (holding that "a federal tax lien arising before the death of a taxpayer is not superior to a competing claim by a surviving spouse for a dower or curtesy interest or statutory right if the marriage occurred before the federal tax lien arose and if, under state law, such dower or curtesy interest cannot be defeated by the other spouse or by that spouse's creditors prior to death"); IRM 5.17.3.4.2.5 ("There is no property or right to property in the wife until the death of her husband"). Likewise, U.S. v. Ettleson [ 46-1 USTC ¶9283; 47-1 USTC ¶9158], 67 F.Supp. 257 (E.D. Wis. 1946), rev'd on other grounds [ 47-1 USTC ¶9137], 159 F.2d 193 (7th Cir. 1947), involved a surviving spouse's argument that her dower right could not be defeated by a federal tax lien: "[w]hen her husband died on May 9, 1938, she received a vested interest in the real estate owned by him."

Internal Revenue Manual §5.17.3.4.2.5 concludes "[a]lthough real property of the husband may be levied upon and sold to satisfy his delinquent tax liabilities, the wifes [sic] right to dower cannot be destroyed and the purchaser takes subject to the wife surviving her husband which entities her to an assignment of dower." However, Defendant relinquished her dower rights in her divorce judgment:

IT IS FURTHER ORDERED AND ADJUDGED that each party hereto shall forthwith exchange with the other party their respective dower rights in the lands of the other in mutual consideration and in full satisfaction of all dower claims which either party may have in any property which the other had, has, or may hereafter have any interest, and each party shall hereafter hold his or her remaining lands free, clear and discharged from any such dower right or claim.

(J. Divorce at 6.)

Therefore, even if Defendant possessed a dower right that at one time was superior to Plaintiff's lien, her dower rights were discharged June 22, 1999, the date of the divorce judgment.

2. Marital Assets

Similarly, Defendant's interest in "marital assets", including the assets Gouda used to purchase the home, was inchoate until her divorce. The Michigan case law on which Defendant relies addresses a spouse's entitlement to marital assets upon divorce. See Hanaway v. Hanaway, 527 N.W.2d 792 (Mich. Ct. App. 1995); Reeves v. Reeves, 575 N.W.2d 1 (Mich. Ct. App. 1997); Thames v. Thames , 477 N.W.2d 496 (Mich. Ct. App. 1991). Defendant cites no law, nor is this Court able to find, any Michigan authority holding that one spouse has an ownership interest while married in the other spouse's property such that a creditor or lienholder cannot reach the other spouse's property. In a case interpreting Kansas law, the United States attached a tax lien to a married debtor's property twenty months after his wife, the plaintiff in the case, filed for divorce but before the divorce decree was entered. Gardner v. United States [ 93-1 USTC ¶50,306], 814 F.Supp. 982, 983-4 (D. Kan. 1993). The court rejected the government's contention that the plaintiff had only an inchoate interest the marital property because Kansas law vests rights in the marital property upon filing a divorce action. Id. at 984. It is the filing of the divorce action that "creates a species of common or co-ownership in one spouse in the jointly acquired property held by the other, the extent of which is determined by the trial court..." Id. Impliedly, up until the divorce action is filed, co-ownership of marital property is not created. Even though Gardner interprets property rights under Kansas state law, it is the correct analysis.



V. Conclusion

Defendant has failed to show that a different disposition of the case must result from a correction of any palpable defect of the order granting Plaintiff summary judgment. Accordingly, Defendant's motion for reconsideration is DENIED.

 

 

United States of America , Plaintiff v. Anna Patej, Defendant

U.S. District Court, East. Dist. Mich. , So. Div., 00-71944, 10/17/2002

[Code Sec. 6321 ]

Tax liens: Property subject to tax liens: Real property: Fraudulent conveyances: Tenancy by the entirety.--The government was entitled to summary judgment with respect to its suit to enforce tax liens on real property that an individual fraudulently transferred, via land contract, to his wife, the taxpayer, to avoid the payment of his outstanding tax liabilities. The conveyance was fraudulent under state ( Michigan ) law; the husband's intent to defraud was demonstrated by his transfer of funds to his personal accounts into property held with his wife as tenants by the entirety, which possibly prohibited the IRS's ability to collect the funds. Moreover, the land contract method of purchase made it difficult for the IRS to detect the husband's interest in the property.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

EDMUNDS, District Judge:

This matter comes before the Court on the United States ' motion for summary judgment. The United States ' brought this collection action against Anna Patej, based on her ownership of property that once belonged to her and her husband, Salah Gouda, as tenants by the entirety. The United States maintains that Mr. Gouda fraudulently conveyed the property to Ms. Patej to evade significant outstanding tax liabilities; that the Court should disregard the conveyance; and that the Court should recognize and enforce the tax lien on the property. For the reasons stated below, the Court agrees with each of these propositions and GRANTS the United States ' motion for summary judgment.

I. Facts

On December 5, 1996, two significant events occurred. Salah Gouda wrote a letter to attorney David Walter seeking tax planning advice. Specifically, he wrote that he faced an "end of the year tax crisis," and that his objectives were to pay no taxes or pay minimum taxes, and to render himself as uncollectible as possible "especially to the IRS". Plaintiff's Ex. 4. At the time Gouda wrote the letter, he had already filed tax returns reporting a total of $118,082 in outstanding federal tax liabilities for the years 1993, 1994 and 1995.

Also on December 5, 1996, Salah Gouda and Anna Patej, his wife, signed a sales agreement for the purchase of property known as 2158 Haverford. The Goudas offered to pay $620,000 in cash for the Haverford property, by land contract. Mr. Gouda paid a $340,000 down payment on the property, and then made periodic payments, eventually paying off the balance on March 16, 1998. The down payment and all subsequent payments were paid out of his own accounts which he kept in his name only. On April 1, 1998, the sellers conveyed by warranty deed title to the Haverford property to Salah A. Gouda and Anna Patej-Gouda, his wife, as tenants by the entireties.

On June 22, 1998, the IRS made jeopardy tax assessments against Salah Gouda totaling $1,101,213.35 for the tax years 1993, 1994, 1995 and 1996. On August 5, 1998, the IRS recorded a Notice of Federal Tax Lien against Salah Gouda with the Oakland County Register of Deeds in that amount.

Mr. Gouda was a medical doctor licensed to practice medicine in Michigan . In December 1998, after an 18 month undercover investigation by the DEA, Mr. Gouda's medical license was suspended and he faced both federal and state criminal charges for improperly writing medical prescriptions. In April 1998, he fled the United States and is believed to be in Egypt .

On June 22, 1999, Anna Patej obtained a Default Judgment of Divorce from Salah Gouda. The judgment awarded her title to the Haverford property, and the next day she quit claimed the deed to herself in her maiden name.

II. Procedural Background

On April 27, 2000, The United States filed a collection action against Anna Patej. The United States is seeking to collect the unpaid jeopardy federal income tax assessments against Salah Gouda by setting aside the purchase of the Haverford property and foreclosing upon on the property. On August 24, 2000, this Court denied Salah Gouda's motion to intervene as a party. On July 8, 2002, the United States moved for summary judgment because (1) Salah Gouda's use of personal funds to create a tenancy by the entirety in the Haverford property was a fraudulent conveyance, (2) the United States' liens arose and attached to Gouda's 100% interest in the property prior to the divorce judgment, and therefore (3) the transfer was made subject to the United States' liens and the liens should be foreclosed thereon.

III. Standard for Summary Judgment

Summary judgment is appropriate only when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. See FED. R. CIV. P. 56(c). The central inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). After adequate time for discovery and upon motion, Rule 56(c) mandates summary judgment against a party who fails to establish the existence of an element essential to that party's case and on which that party bears the burden of proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

The movant has an initial burden of showing "the absence of a genuine issue of material fact." Id. at 323. Once the movant meets this burden, the non-movant must come forward with specific facts showing that there is a genuine issue for trial. See Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Summary judgment is appropriate even where state of mind is an issue. To demonstrate a genuine issue, the non-movant must present sufficient evidence upon which a jury could reasonably find for the non-movant; a "scintilla of evidence" is insufficient. See Liberty Lobby, 477 U.S. at 252.

The court must believe the non-movant's evidence and draw "all justifiable inferences" in the non-movant's favor. See id. at 255. Yet, respondent must satisfy "any heightened burden of proof required by the substantive law for an element of the respondent's case." Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir. 1989). The inquiry is whether the evidence presented is such that a jury applying the relevant evidentiary standard could "reasonably find for either the plaintiff or the defendant." See id.

IV. Analysis

A. Fraudulent Conveyance

The United States asserts that the conveyance of the Haverford property was fraudulent under the Michigan Fraudulent Conveyance Act ("MFCA"). M.C.L.A. §566.17, the controlling statute at all times pertinent to this action, provided that "Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, is fraudulent as to both present and future creditors."

The United States must show the following four elements to establish a fraudulent conveyance under the statute: (1) that Salah Gouda is a person under the MFCA; (2) that he made a conveyance; (3) that he did so with the actual intent to hinder, delay or defraud creditors; and (4) that the United States is a creditor under the MFCA. See Kelley v. Thomas Solvent Co., 725 F.Supp. 1446 (W.D. Mich. 1988). Only the third element, requiring actual intent to defraud, is contested by the parties.

The conveyance in question satisfies the "actual intent" element if Mr. Gouda wholly or only in part was motivated by fraudulent intentions. Kelley, 725 F.Supp. at 1455. The intent may be proven by inferences drawn from surrounding facts and circumstances. Direct evidence is not required. United States v. Campbell [91-1 USTC ¶50,106 ], No. 90-CV-71775-DT, 1991 WL 53243, *5 (E.D. Mich. 1991). Strong "badges of fraud" are when the conveyance leaves the defendant insolvent, the conveyance is to a family member, and the conveyance reserves a life use in the property to the grantor. Bentley v. Caille, 289 Mich. 74 (1939). In addition, "it is not necessary that the grantee be an actual party to the fraud in order that a conveyance may be set aside as fraudulent." Spencer v. Miller, 271 N.W. 731, 733 ( Mich. 1937). Finally, the intent to defraud must be shown by clear and convincing evidence. Lackawanna Pants Mfg. Co. v. Wiseman, 133 F.2d 482 (6th Cir. 1943).

In a motion for summary judgment, the "movant must meet the initial burden showing 'the absence of a genuine issue of material fact' as to an essential element of the non-movant's case." Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir. 1989). The question before the Court is whether the Government has met its initial burden of showing Mr. Gouda's actual intent to defraud.

Several factors, taken as a whole, show Mr. Gouda's intent to defraud. On December 5, 1996, Mr. Gouda sent a handwritten letter to attorney David Walters, in which Mr. Gouda seeks Mr. Walter's representation in tax planning. In the letter, Mr. Gouda lists as his objectives: "(1) Like anybody dreams of, pay no taxes!! (2) failing this paying minimal taxes . . . (4) hopefully rendering myself as uncollectible as possible (specifically from the I.R.S.) . . ."

On the same day Mr. Gouda sent the letter, he entered into a contract to purchase the Haverford property by land contract, and to have title pass to him and Ms. Patej as tenants by the entirety at the end of the contract period. By entering into the contract, Mr. Gouda transferred money in his personal accounts into property held as tenants by the entirety, which added layers of complexity, and possibly prohibited, the I.R.S.'s ability to collect those funds. Furthermore, the land contract method of purchase meant that title would not pass to his name until his final payment on April 1, 1998, making it difficult for the I.R.S. to detect his interest in the property. The United States also points to Mr. Gouda's transfer of almost one million dollars to a Swiss bank in April of 1997 as evidence of his intent to defraud the I.R.S.

Defendant maintains that the letter and the purchase of the Haverford property do not show fraudulent intent. She believes that Mr. Gouda's letter to David Walters simply requested advice on tax planning and does not demonstrate his intent to cheat the I.R.S. Defendant argues that the term "uncollectible," which Mr. Gouda wrote in his letter to attorney David Walters, does not, in layman's terms, refer to insolvency. Even so, at the time Mr. Gouda wrote the letter, he had an outstanding tax liability of $118,082 from the preceding three years. Therefore, when he used the term "uncollectible", he may not have meant "insolvent", but he was clearly seeking advice on how to shield his money from the I.R.S.

Additionally, Defendant declares in her affidavit that Mr. Gouda bought the house at her insistence (because the first house he bought in his own name only was too shabby). Her affidavit states that she asked Mr. Gouda to purchase the property. She further asserts that the conveyance was not fraudulent because Defendant was entitled to part of his income earned during the marriage. She did not work, at his insistence, and Mr. Gouda signed an affidavit swearing to support Defendant when he brought her to the United States . In essence, she contends that Mr. Gouda owed her the home, so the conveyance to her was not fraudulent. However, he could have had mixed-motives and the conveyance is still fraudulent. Fraudulent intent is shown even if fraud was only a part of the motivation. Thomas Solvent, 725 F.Supp. at 1455. Therefore, he could have been partly motivated to provide Defendant with a nice home, and still possessed the requisite fraudulent intent.

B. Admissibility of the Letter from Salah Gouda to David Walters

Defendant argues that the letter the government heavily relies on to show intent to defraud is "clearly inadmissible as evidence in this matter under the attorney client privilege." Resp. at 4. The United States contends that the letter is not privileged because it falls within the crime-fraud exception to the attorney-client privilege, and also that the issue of privilege can only be raised by Salah Gouda, the person holding the privilege.

The Court may consider only admissible evidence in ruling on a motion for summary judgment. Horta v. Sullivan, 4 F.3d 2, 8 (1st Cir. 1993). Mr. Gouda's letter is not inadmissible because Defendant lacks standing to assert an attorney-client privilege as to the letter. Only a party to the attorney-client relationship may assert the privilege. See United States v. Production Plated Plastics, Inc. [2001-1 USTC ¶50,114 ], 129 F.Supp.2d 1099, 1106 (W.D. Mich. 2000); Compulit v. Banctec, Inc., 177 F.R.D. 410 (W.D. Mich. 1997); People v. Lobaito, 351 N.W.2d 233 (Mich. Ct. App. 1984); United States v. Juarez, 573 F.2d 267, 276 (5th Cir. 1978). ¹ Accordingly, Defendant lacks standing to assert the attorney-client privilege as to the letter from Mr. Gouda to Mr. Walters.

C. Transfer of Property to Defendant Pursuant to Her Divorce Was Subject to the Tax Lien

Defendant argues that her separate property is not subject to levy by the United States . However, a creditor who shows that the debtor made a fraudulent conveyance can have a court "disregard the conveyance and attach or levy execution upon the property conveyed." M.C.L.A. §566.19(1)(b); Dpe v. Ewing , 517 N.W.2d 849, 850 (Mich. Ct. App. 1994). Under 26 U.S.C. §6321, a federal lien includes "all property and rights to property, whether real or personal" belonging to a delinquent taxpayer. Furthermore, the lien arises when the tax liability is assessed and does not end until the tax liability is satisfied or it is barred by the statute of limitations. 26 U.S.C. §6322.

Therefore, the tax lien arose against Mr. Gouda's property on June 22, 1998, when the I.R.S. made jeopardy tax assessments against him for $1,101,213.35. Since the Court finds that the conveyance of the Haverford property was fraudulent, Mr. Gouda had sole ownership of it and the I.R.S.' lien attached to it on June 22, 1998. Since Ms. Patej obtained the property after the federal lien attached, she took subject to that lien. 26 U.S.C. 6323.

V. Conclusion

Being fully advised in the premises, having read the pleadings, and for the reasons set forth above, the Court hereby orders that Plaintiff's motion for summary judgment is GRANTED. The government should move for any further proceeding necessary for the Court to grant the relief requested in the complaint against Ms. Patej.

¹ There is some case law suggesting that the court may, on its own motion, decide that privileged material should be protected. See State v. Macumber, 544 P.2d 1084 ( Ariz. 1976). A leading evidence hornbook argues against courts asserting privileges on their own motions. McCormick on Evidence §73.1(a).

 

 

 

United States of America , Plaintiff v. Detsel Parkinson, et al., Defendants

U.S. District Court, Dist. Ida., CIV. 98-0340-E-BLW, 2/12/2001, 2001 U.S. Dist. LEXIS 5983.

[Code Sec. 6321 ]

Tax liens: Fraudulent conveyances: Who is the taxpayer: Husband and wife, transfer of property: Default judgment.--The government was entitled to a default judgment against a trust/partnership in connection with a fraudulent conveyance of real property from pro se married taxpayers to their son. After the government satisfied a portion of the couple's tax debt by foreclosing and selling their home, it foreclosed on a tract of farmland acquired by the couple's trust/partnership. However, prior to the government's issuance of its notice of federal tax lien on the farmland, the taxpayers conveyed the property to their son for no consideration; the transferee son secured a mortgage to repurchase the personal residence that had been lost in the tax sale. Thus, the son lacked a valid security interest in the property.

[Code Secs. 6321 and 6323 ]

Tax liens: Fraudulent conveyances: Husband and wife, transfer of property: Default judgment.--The government was entitled to a default judgment against a trust/partnership in connection with a fraudulent conveyance from pro se married taxpayers to their son. The government was not required to provide notice of liens to third parties who also had an interest in the subject property. By operation of statute, a lien automatically arose against the taxpayer's property when the taxpayers failed to pay the tax after demand. Also, the creation of a federal tax lien did not require a filing of public notice and once created, was effective until the liability was satisfied.

[Code Sec. 7403 ]

Tax liens: Fraudulent conveyances: Husband and wife, transfer of property: Default judgment: Standing.--The government was entitled to a default judgment against a trust/partnership in connection with a fraudulent conveyance from pro se married taxpayers to their son. The taxpayers lacked standing to contest the entry of default judgment against the trust. Their contention that the trust assigned to the husband all rights and claims in the litigation, but did not assign him any rights of ownership to the trust's assets, did not demonstrate that he was actual beneficial owner of the trust. Thus, he was not entitled to represent the trust pro se.

[Code Sec. 7403 ]

Tax liens: Fraudulent conveyances: Husband and wife, transfer of property: Default judgment.--The government was entitled to a default judgment against a trust/partnership in connection with a fraudulent conveyance from pro se married taxpayers to their son. The taxpayers failed to secure an attorney to timely file an answer to the government's motion that its tax liens attached to the farmland.

William T Murphy, Department of Justice, Washington , D.C. 20530 , for plaintiff. Detsel James Parkinson, Earlene Parkinson, Rexburg, Ida., pro se. Dale P Thomson, Thomwson Law Offices, Rexburg, Ida., for defendants.

ORDER

WINMILL, Chief District Court: The Court has before it a Report and Recommendation filed by the Chief United States Magistrate Judge. Defendants Detsel J Parkinson and Earlene Parkinson filed objections to the Report and Recommendation. The Court has examined the Report and Recommendation, in light of the objections, pursuant to 28 U.S.C. §636(b)(1) and finds that the Report and Recommendation accurately sets forth the facts and correctly applies the governing legal standards. Accordingly,

NOW THEREFORE IT IS HEREBY ORDERED, that the [*2] Report and Recommendation (Docket No. 85) shall be, and the same is hereby, ADOPTED as the decision of the District Court and incorporated fully herein by reference.

IT IS FURTHER ORDERED, that (1) the defendants' motion for sanctions (docket no. 61) is DENIED; (2) plaintiff's renewed motion for default judgment against Diversified Investments and Revenue Trust (docket no. 63) is GRANTED; (3) plaintiff's motion for judgment on the pleadings or in the alternative for summary judgment against Diversified Investments and Revenue Trust (docket no. 65) is DENIED; (4) plaintiff's motion for judgment on the pleadings (docket no. 65 part 1) is DENIED; (5) plaintiff's alternative motion for summary judgment against defendants Detsel and Earlene Parkinson (docket no. 65 part 2) is GRANTED; (6) defendants' motion to dismiss (docket no. 71) is DENIED; (7) Defendants' motion to strike (docket no. 78) is DENIED; (8) defendants' motion to strike or quash and to dismiss (docket no. 80) is DENIED.

ORDER, REPORT AND RECOMMENDATION

BOYLE, Chief Magistrate Judge:

Currently pending before the Court are the following motions: Defendants' ¹ motion for sanctions against Plaintiff and Plaintiff's counsel (Docket No. 61); Plaintiff's renewed motion for default judgment against Diversified Investments (Docket No. 63); Defendants' motions to reconsider Order of October 25, 2000 (Docket No. 69 and 75); Plaintiff's motion for judgment on the pleadings or, in the altenative, for summary judgment against Defendants (Docket No. 65); Defendants' motion to dismiss complaint (Docket No. 71); Defendants' motion to strike Plaintiff's motion for summary judgment and related pleadings (Docket No. 78); Defendants' motion to strike or quash Plaintiff's renewed motion for entry of default judgment, and to dismiss D.I.R.T. for lack of jurisdiction (Docket No. 80).

On December 18, 2000, the Court heard oral argument on all pending motions. Plaintiff United States of America (USA) was represented by counsel William T. Murphy; Defendants Stephen and Donalyn Parkinson were represented by counsel Dale Thomson; Detsel Parkinson and Earlene Parkinson represented themselves; and no appearance was made on behalf of Diversified Investment and Revenues Trust (DIRT). Having reviewed the motions and the record in this matter, and having considered the arguments of the parties, the Court enters the following Order, Report and Recommendation pursuant to 28 U.S.C. §636(b).

I.

REPORT

A. Background

Plaintiff USA brings this suit against five defendants in an attempt to enforce its lien rights in certain property to facilitate collection of past federal income taxes assessed against Detsel Parkinson. The defendants are as follows: Detsel and Earlene Parkinson, husband and wife; Stephen and Donalyn Parkinson, son and daughter-in-law of Detsel and Earlene; and Diversified Investment and Revenues Trust (DIRT), which is either a trust or a partnership. The USA claims that DIRT is Detsel Parkinson's nominee.

On May 9, 1994, a delegate of the Secretary of Treasury made assessments against Defendant Detsel Parkinson for unpaid federal income taxes for the tax years 1988 through 1991, in the amount of $92,691.82, plus accrued interest and penalties from the dates of assessment. On May 31, 1994, the USA filed with the Madison County Recorder a Notice of Federal Tax Lien against all property and rights to property against Detsel Parkinson for the unpaid tax debt. On December 20, 1995, the USA filed with the Fremont County Recorder a Notice of Federal Tax Lien against all property and rights to property of defendant Detsel Parkinson for the unpaid tax debt.

This Court previously recommended, and the District Court granted, partial summary judgment in favor of the USA , declaring that the amount of delinquent taxes owed by Detsel Parkinson was $92,691.82. (Docket Nos. 49 and 51.) The USA , through the Internal Revenue Service (IRS) earlier satisfied a portion of this debt by seizing and selling a home in which Detsel and Earlene Parkinson had resided, located at 251 Ricks Avenue , Rexburg, Madison County, Idaho ( Madison County residence). The deed to the Madison County residence had been recorded in the name of DIRT in 1979 and remained in DIRT's name at the time of seizure and sale. The USA contends that DIRT is Detsel Parkinson's nominee, alleging that Detsel and Earlene Parkinson have exercised control over the Madison County residence, have had the use and enjoyment of the property and have treated the property as their own.

At the IRS sale, a corporation, Pro Indiviso, Inc., (an entity unrelated to the Parkinsons) bought the Madison County residence for $40,100.00. Stephen Parkinson, worried that his mother, Earlene, would not have a place to live (at that time his father, Detsel, was in jail) purchased the property back from Pro Indiviso, Inc., for $55,000.00. See Deposition Transcript of Stephen Parkinson, attached as an Exhibit to Docket No. 72, "Defendants Parkinsons' Notice of Motion." He obtained the purchase money by mortgaging his own house and obtaining additional funds from savings and his siblings. Detsel and Earlene Parkinson currently reside at the Madison County residence. After sale of the Madison County residence, the USA represents that the tax debt due and owing is $53,555, plus accrued interest and penalties.

The same year DIRT acquired the Madison County residence, in 1979, DIRT also acquired a tract of farm land in Fremont County ( Fremont County property). The USA contends that DIRT is the nominee of Detsel Parkinson, alleging that Detsel and Earlene Parkinson have exercised control over the property, have had the use and enjoyment of the property and have treated the property as their own. On December 15, 1995, five days before the USA filed its Notice of Federal Tax Lien against the Fremont County property, DIRT, through Earlene Parkinson its purported partner, conveyed an interest in the Fremont County property to Stephen and Donalyn Parkinson by recording a mortgage showing that Stephen and Donalyn paid $55,000 in consideration for the Fremont County property. In reality, Stephen and Donalyn had not paid $55,000 to DIRT for the Fremont County property. Rather, Stephen and Donalyn had paid $55,000 to Pro Indiviso, Inc., a corporation unrelated to the Parkinsons, for the Madison County residence. They retain title to the Madison County residence, allowing Detsel and Earlene Parkinson to live there rent-free. The mortgage purported to be security for a promissory noted executed by DIRT, through its partner Earlene Parkinson, for a $55,000.00 debt. The USA contends that Stephen and Donalyn Parkinson did not give value in exchange for the mortgage on the Fremont County property, and that, as a result, they do not have a valid security interest therein.

Consequently, in this suit, the USA seeks to have the District Court declare the following: (1) that the Fremont County property is held by Defendant DIRT as a nominee of Defendants Detsel and Earlene Parkinson; (2) that Stephen and Donalyn Parkinson do not have a valid security interest in the Fremont County property; (3) that the USA's federal tax liens against all property and rights to property of Defendant Detsel Parkinson attach to Detsel Parkinson's interest in the Fremont County property, including any community property interest Earlene Parkinson has in that property; and (4) that the liens have priority over all other parties' interests in the Fremont County property. Only issues (1) and (3) are pending before the Court in the parties' current motions.

B. Undisputed Material Facts

The USA has filed a statement of undisputed material facts in support of its motion for summary judgment. See Docket No. 67. Parkinsons dispute the USA 's statement of facts. See Docket No. 76. The Parkinsons also filed a cross-motion for summary judgment. In determining the undisputed material facts, the Court has considered the Parkinsons' objections in light of the standard set forth in Rule 56(g). Based upon the record before it, the Court finds that the following are undisputed facts material to the issues in the motions for summary judgment and the other pending motions.

1. Earlier in this action, the District Court granted partial summary judgment in favor of the USA , declaring that the amount of delinquent taxes owed by Detsel Parkinson for the years 1988-1991 was $92,691.82, plus accrued interest and penalties.

2. The original date of assessment of the tax debt was May 9, 1994.

3. On or about May 2, 1979, Grantor Steven Zundell, Dean Palmer and their spouses granted a warranty deed to the Fremont County property to "Diversified Investment and Revenues Trust of Grand Turk, Turks and Caicos Islands, British West Indies ."

4. On or about December 7, and December 15, 1995, Earlene Parkinson signed a promissory note and a mortgage deed, identifying herself as "Partner" of Diversified Investments and Revenue Trust, and identifying Diversified Investments and Revenue Trust as an Idaho general partnership. ² The promissory note and mortgage deed (both recorded at the Fremont County Recorder) documented a purported transaction between DIRT and Stephen J. and Donalyn Parkinson, in which DIRT borrowed $55,000.00 from Stephen and Donalyn, payable at 10.25% interest, with 180 months of payments of $494.00, which debt was secured by a mortgage on the Fremont County property. ³

5. On December 19, 1995, Notices of Federal Tax Lien were filed in Fremont County against Detsel Parkinson and Diversified Investments and. Revenues Trust, identifying the Fremont County property.

6. DIRT has not contested Earlene Parkinson's authority to enter into the promissory note and mortgage in its behalf.

7. In the course of this action, Detsel and Earlene Parkinson have represented that DIRT has assigned its rights and claims in this litigation to Detsel Parkinson. ⁴

8. In the course of this action, Detsel and Earlene Parkinson, on behalf of DIRT, requested an extension of time within which to file an answer.

9. The Parkinsons claim that they have "no interests, property holdings, etc., in said D.I.R.T. its corpus, rem or estate assets." Declaration of Detsel Parkinson, Docket No 77, at p. 2.

C. Plaintiff USA 's Renewed Motion for Default Judgment Against DIRT

At the start of this action, Detsel and Earlene Parkinson attempted to answer on behalf of DIRT. Thereafter, the USA contended that the Parkinsons, proceeding pro se, could not represent a trust or partnership, and requested default judgment against DIRT. The District Court denied the USA 's motion for entry of default against DIRT and granted DIRT thirty days to file an answer through counsel (Docket No. 51). The Parkinsons sought for DIRT an additional thirty days in which to file an answer, through July 7, 2000. To date, DIRT has not filed an answer through counsel.

To obtain default judgment, the USA must show that it effected proper service upon DIRT. The USA served Earlene Parkinson as DIRT's partner, and Detsel Parkinson as DIRT's manager. See Docket Nos. 2 and 3, Summons and Return of Service executed by Bradley A. Heath. At oral argument, Earlene Parkinson and Detsel Parkinson clarified that they did not dispute that they had been served as DIRT's partner and DIRT's manager, respectively, but that they disputed whether the USA had served the right parties. They argue that service upon DIRT, a trust, should have been executed upon a Mr. Tremaine, DIRT's purported trustee.

Federal Rule of Civil Procedure 55 provides "that when a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend," that party may be defaulted. Federal Rule of Civil Procedure 4(h)(1) provides that service upon corporations, partnerships or other unincorporated associations "shall be effected . . . by delivering a copy of the summons and of the complaint to an officer, a managing or general agent. . . ." Rule 4 "is a flexible rule that should be liberally construed so long as a party receives sufficient notice of the complaint." United Food & Commercial Workers Union v. Alpha Beta Co., 736 F.2d 1371, 1382 (9th Cir. 1984).

In the Ninth Circuit, service under Rule 4(h)(1) may be made upon any individual " 'so integrated with the organization that he will know what to do with the papers' " and " 'who stands in such a position as to render it fair, reasonable and just to imply the authority on his part to receive service.' " Direct Mail Specialists, Inc. v. Eclat Computerized Technologies, Inc., 840 F.2d 685, 688 (9th Cir. 1988) (quoting Top Form Mills, Inc. v. Sociedad Nationale Industria Applicazioni Viscosa, 428 F.Supp. 1237, 1251 (S.D.N.Y. 1977)). In Direct Mail, the Ninth Circuit explained that "a recipient of process need not even be an employee of a company to be its managing agent, as long as the person demonstrates apparent authority." 840 F.2d at 688-89 (citing 2 J. Moore, J. Lucas, H. Fink & C. Thompson, Moore's Federal Practice P 4.22[2], at 4-201-04-202 n. 11). ⁵ The Ninth Circuit has also held that " 'substantial compliance' with the service requirements of Rule 4 is sufficient so long as the opposing party receives sufficient notice of the complaint." Straub v. A. P. Green, Inc., 38 F.3d 448, 453 (9th Cir. 1994) (relying upon Direct Mail, 840 F.2d at 688, and Chan v. Society Expeditions, Inc., 39 F.3d 1398, 1404 (9th Cir. 1994)).

The Parkinsons argue that service upon a trust is ineffective unless service is made upon the trustee. The Parkinsons cite to no case which so holds. The Parkinsons' reliance upon Dennett v. Kuenzli, 130 Idaho 21, 30-31, 936 P.2d 219, 229 ( Idaho 1997) in favor of this proposition is misplaced. Dennett does not even mention the concept of "service of process." Rather, it stands for the proposition that a trustee may effectively enter into contracts for the trust without disclosing that he is acting on behalf of the trust and he may bring legal actions in his own name regarding property or contract interests of the trust estate. These principles do not govern the issue here. Counsel for the USA asserts that he is aware of no case law which specifically requires service upon a trust to be made only upon the trustee. Neither has the Court found any such case in its own research of the issue. Rather, it appears proper to deem a trust an "unincorporated association" for purposes of service, as a trust is not otherwise specifically listed in Rule 4.

The following facts show that the Parkinsons each stand "in such a position as to render it fair, reasonable and just to imply the authority on [their] part to receive service." Earlene Parkinson has sufficient authority to cause DIRT to become indebted to a third party for $55,000, and has sufficient authority to encumber DIRT's real property with a mortgage. Most importantly, nothing in the record suggests that, in the five years since Earlene Parkinson entered into these transactions in 1995, DIRT has ever come forward to contest her authority to transact business for it.

In addition, the Parkinsons' assertions that DIRT has assigned its rights and claims in this litigation to Detsel Parkinson and that the Parkinsons requested an extension of time for DIRT to answer demonstrate that the Parkinsons occupy a position of importance with DIRT, if, in fact, it is an entity separate and apart from the Parkinsons.

In addition, DIRT undoubtedly had actual notice of this lawsuit in time to file a proper answer. For example, DIRT could not have assigned its interest in this lawsuit to Detsel Parkinson without first having notice of the lawsuit. Further, there is nothing in the record to suggest that Detsel and Earlene Parkinson requested for, and then did not notify, DIRT of an extension of time to file an answer granted by Judge Winmill.

In summary, the record reflects sufficient factual bases upon which this Court can find and conclude that Detsel Parkinson and Earlene Parkinson have held themselves out to be persons "so integrated with [DIRT] that [they would] know what to do with the papers" and that they are persons " 'who stand[] in such a position as to render it fair, reasonable and just to imply the authority on [their] part to receive service' " for DIRT. Neither DIRT nor its purported trustee has come forward to assert that Detsel and Earlene Parkinson are not qualified to be served on behalf of DIRT. In addition, the Court finds, and therefore concludes, that DIRT's assignment of its interests in this lawsuit to Detsel Parkinson and the Parkinsons' request for an extension of time within which DIRT might answer are both indications that DIRT had actual notice of the lawsuit in time to file a proper answer through counsel. Accordingly, the USA 's service upon Detsel and Earlene Parkinson on behalf of DIRT was proper and effective. DIRT's failure to file an answer within the time allowed by Judge Winmill, or at all, renders it subject to default judgment.

The Parkinsons continue to argue that they should be permitted to appear on behalf of DIRT without attorney representation. The Parkinsons cite Fobbs v. Holy Cross Health System Corp., 29 F.3d 1439 (9th Cir. 1994), to support their position that they are entitled to assert the claims of DIRT. Their reliance on this case is misplaced. There, the Court held that, "[w]here a physician seeks declaratory or injunctive relief, [he] has standing to bring [an] action on behalf of patients who are members of a protected class for conspiracy to deprive the patients of equal protection of laws and equal privileges and immunities of national citizenship." 29 F.3d at 1450. However, nothing in the case suggests that Dr. Fobbs was acting pro se. Rather, the notes following the heading of the case show that at least two attorneys were representing Dr. Fobbs.

The USA argues that the Parkinsons have no standing to contest entry of default judgment against DIRT. Several cases support the USA 's position. In C.E. Pope Equity Trust v. United States, 818 F.2d 696 (9th Cir. 1987), a trustee attempted to bring suit, pro se, on behalf of two trusts. The court held that the trustee had no authority to appear as an attorney for anyone other than himself. The court also examined whether the trustee was the "actual beneficial owner of the claims being asserted by the Trusts," which would have made him the "real party in interest," and would have allowed him to proceed pro se with the Trusts' claims. 818 F.2d at 697-98. The court determined that the trustee's status was fiduciary, as the record did not identify the trust beneficiaries and, as a result, it determined that the trustee could not be viewed as a party conducting "his own case personally." Id.

Similarly, here, Detsel Parkinson claims that DIRT, the trust, has assigned him all of its "rights and claims in the litigation," but that DIRT has not assigned him any rights of ownership to the trust assets, res, or corpus. Such an "assignment" is a hollow gesture which does not satisfy the Pope standard that Parkinson be the actual beneficial owner of the trust in order to represent the trust. Rather, it is merely an attempt by Parkinson to subterfuge Pope's proscription against pro se representation of a trust.

The Parkinsons' lack of standing to represent the trust is further supported by Allied/Royal Parking v. United States [99-1 USTC ¶50,229], 166 F.3d 1000 (9th Cir. 1999). In Allied/Royal Parking, the court held that a party cannot bring a claim for wrongful levy if he does not own the property subject to the wrongful levy, because he has no standing under 26 U.S.C. §7433. The Allied court relied upon Maisano v. Welcher [91-2 USTC ¶50,478], 940 F.2d 499 (9th Cir. 1991). In Maisano, the IRS seized a truck that it believed belonged to the plaintiffs to satisfy the plaintiffs' tax debt. The plaintiffs sued the IRS for violating their constitutional rights by seizure of the truck. They claimed that the truck belonged to a trust, rather than to them. The court stated that it was unclear whether the plaintiffs or the trust actually owned the truck, but that it did not matter. In either case, the court determined, the plaintiffs would lose. "If the [truck] belongs to the trust, the [plaintiffs] have no standing to sue and their case must be dismissed. If the [truck] actually belongs to the [plaintiffs], they lose their argument that the IRS seized property belonging to the wrongful party." [91-2 USTC ¶50,478], 940 F.2d at 501. The Allied court noted that, while Maisano was not brought under §7433, the same reasoning regarding standing applied.

The Allied court also relied upon Warth v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197 (1975), wherein the Supreme Court held that a "plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties" and Northern Plains Resource Council v. Lujan, 874 F.2d 661, 667 (9th Cir. 1989), wherein the Ninth Circuit held that a plaintiff lacked standing to challenge the validity of a land patent unless the plaintiff asserted a legal property interest in the land. All of these cases stand for the general principle that standing to assert a property right requires that a person first show that he has an interest or right in the property at issue. This, the Parkinsons have not done. In fact, as set forth above, the Parkinsons specifically disclaim any concrete interest in the trust itself, and therefore they cannot represent it and cannot save it from default.

In this matter, a default judgment against DIRT is fair and just under the circumstances. If DIRT is simply the alter ego of the Parkinsons, then, obviously, no one else is going to come forward to assert the interests of DIRT, and default judgment rightly has the effect of allowing the USA to seize the Fremont County property as the Parkinsons' asset. ⁶ If DIRT is not simply the alter ego of the Parkinsons, then it obviously does not disagree with the allegations in, and relief requested by, the USA's complaint; otherwise, DIRT's trustee or other interested party would have come forward through counsel to assert its interests rather than simply attempting to assign its rights in the lawsuit to the Parkinsons, despite the Court's warnings that such representation is improper and would not be permitted.

Accordingly, the USA is entitled to entry of default judgment against DIRT for failure to respond to the summons and complaint in this matter. Because the Parkinsons continue to assert that they have no interest in the trust, they have no right to represent the trust, and any portion of the Parkinsons' answer which purports to answer on behalf of DIRT should be stricken. In addition, the Parkinsons have no standing to attempt to assert various claims on behalf of DIRT, including a motion to dismiss for lack of jurisdiction and a motion to strike or quash Plaintiff's renewed motion for entry of default judgment against DIRT.

D. Plaintiff's Motion for Judgment on the Pleadings and Alternative Motions for Summary Judgment

The USA requests that the District Court enter judgment on the pleadings against DIRT and Detsel and Earlene Parkinson. As to DIRT, the Court has concluded that default judgment is warranted. The USA has not provided any legal authority to show that, in such an instance, entry of judgment on the pleadings would also be proper under the circumstances. Rather, where a defendant in a civil proceeding fails to answer, a motion for default judgment, rather than motion for judgment on the pleadings, is proper. Coca-Cola Bottling Co. v. Local Union 1035, 973 F.Supp. 270 (D. Conn. 1997); Fed. R. Civ. P. 12(c) (a motion for judgment on the pleadings is to be filed "at the close of the pleadings"); Fed. R. Civ. P. 55 (a motion for default judgment is appropriate when a party "has failed to plead or otherwise defend"); Therefore, a judgment on the pleadings or summary judgment against DIRT is improper.

The USA also claims that it is entitled to summary judgment against the Parkinsons on the issue that the Parkinsons' nominee is DIRT. The Parkinsons deny that DIRT is their nominee. At oral argument the USA admitted that it relied only upon the promissory note and mortgage document to show that DIRT was the Parkinsons' nominee, and that it had not brought forward other evidence to develop its nominee theory because of the anticipated default judgment against DIRT, which holds the title to the Fremont County property.

Inasmuch as the USA relies upon documents beyond the pleadings (the promissory note and mortgage document attached to James Mason's declaration) for its nominee theory, it is not entitled to judgment on the pleadings against the Parkinsons. Further, as a result of the USA 's failure to provide any other evidence that DIRT is the Parkinsons' nominee, it is not entitled to summary judgment against the Parkinsons on the nominee theory.

The government may collect the tax debts of a taxpayer from assets of the taxpayer's nominee, instrumentality, or "alter ego." See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 429 U.S. 338, 350-51, 97 S.Ct. 619 (1977). In determining the economic reality of a transaction, courts must analyze the substance of a transaction and are not restricted by its form. See, e.g., Gregory v. Helvering [35-1 USTC ¶9043], 293 U.S. 465, 469-70, 55 S.Ct. 266, 79 L.Ed. 596 (1935). While taxpayers are permitted to reduce their tax burden by any lawful means available, they are not permitted "to construct paper entities to avoid taxation when those entities are without economic substance." United States v. Scherping [99-2 USTC ¶50,758], 187 F.3d 796 (8th Cir. 1999) (citing Chase v. Commissioner [CCH Dec. 46,495(M)], 59 T.C.M. (CCH) 261, 264, 1990 WL 33360 (U.S. Tax Ct. 1990), aff'd [91-1 USTC ¶50,090], 926 F.2d 737 (8th Cir. 1991)); see also United States v. Ladum [98-1 USTC ¶50,345], 141 F.3d 1328 (9th Cir. 1998). ⁷

Here, the USA has not provided the Court with sufficient factual information for the Court to perform an analysis to determine whether DIRT is the nominee or alter ego of the Parkinsons. For example, the Court does not know whether the Parkinsons have exclusively controlled and had exclusive use and enjoyment of the Fremont County property, whether they have personally paid for repairs and utilities, whether DIRT has its own bank accounts and records separate from the Parkinsons, whether the Parkinsons have siphoned funds from DIRT or treated its assets as their own, or other facts which might show that the existence of DIRT is merely a facade for the Parkinsons. See Scherping [99-2 USTC ¶50,758], 187 F.3d at 801-03. As a result, the USA 's motion for summary judgment cannot be granted upon the nominee theory for lack of admissible evidence in the record.

However, because the Parkinsons have disclaimed all concrete interest in DIRT and in its property, the USA is entitled to summary judgment on the theory (and the admission) that Detsel and Earlene Parkinson have no interest in the Fremont County property. Alternatively, any "assigned" interest held by the Parkinsons in the Fremont County property is subject to the lien under 25 U.S.C. §6321, and the USA is entitled to summary judgment as to such an interest.

E. Parkinsons' Motion for Sanctions Against The USA and its Counsel

Parkinsons argue that Plaintiff USA and its representatives and counsel have proffered false evidence and testimony. They cite United States v. LaPage, 231 F.3d 488, 2000 WL 1638956 (9th Cir. 2000), which held that a prosecutor's knowing use of false testimony in a criminal trial violated the defendant's right to due process. At oral argument, Detsel Parkinson clarified that he based this allegation, in part, on the fact that the USA has offered the promissory note and mortgage documents as evidence that Earlene Parkinson is a partner of DIRT. He also clarified that he did not believe that the copies of the documents submitted by the USA were false, but that the documents were "a fraud upon [him]," because he "never co-signed them." As Parkinson is not disputing the authenticity of the documents but only their legal effect, and as the USA has not improperly provided the documents to the Court, the motion for sanctions is groundless and should be denied.

Parkinson's further assert that the USA 's counsel is intentionally delaying mail to the Parkinsons. They cite a letter mailed from Washington , D.C. on November 7, 2000, which did not arrive in Rexburg , Idaho , until November 13, 2000. A mere glance at the calendar shows that November 7 was a Tuesday. Friday, November 10 was a legal holiday. November 12 was a Sunday. Considering the distance the correspondence had to travel, with two days of post office closure in between, delivery on November 13 does not in itself show any intentional delay.

F. Parkinsons' Motion to Reconsider Order of October 25, 2000, Denying their Request to Consolidate this Matter with CV00-211-S-EJL

Defendants have requested that the Court reconsider its Order of October 25, 2000, denying their request to consolidate this matter with CV00-211-S-EJL. In that matter, the Parkinsons have sued the USA , IRS, Judge Winmill, this Court, and all of the attorneys' involved in this case, among other defendants.

Parkinsons now newly assert that the claims in CV00-211-S-EJL are compulsory counterclaims in this action. However, they provide no specifics showing how or why they are compulsory counterclaims. Nor do they explain why they brought the claims separately in a different action rather than asserting the claims in this instant action. The main reason not to consolidate these two actions is that the CV00-211-S-EJL action is very complex, alleging conspiracies and other larger issues than the Court is presented with in this case, where the issues are very narrow. The second reason is that trial is already set in this matter, and any consolidation would severely delay completion of this case and, as a result, would unduly prejudice the other parties to this litigation.

The Parkinsons seek to further confuse matters by attempting to show that this Court is biased toward them because the Court is related by marriage to Ray W. Rigby, a Defendant in the CV00-211-S-EJL suit. This allegation appears to be nothing more than a disguised motion for recusal, which is unwarranted. See United States v. Studley [86-1 USTC ¶9390], 783 F.2d 934, 939-40 (9th Cir. 1986) ("A judge is not disqualified by a litigant's suit or threatened suit against him"). As Judge Winmill stated in his previous order, denying Defendants' request that the Court recuse itself from the matter, to "bow out of a case involving Detsel Parkinson because Parkinson has sued it," . . . "would be to sanction a method by which parties could essentially select their preferred judge by instituting frivolous suits against other available judges." Likewise, merely because these Defendants have sued a person to whom the Court is related by marriage is even further removed from the fray than the fact that Defendants have sued the Court. If removal is not required by a personal suit against the Court, then surely the fact that Defendants have sued the presiding judge's father-in-law is not a basis for removal. Accordingly, the allegation of bias on this basis is unfounded. Because the Parkinsons have provided no adequate reasons why consolidation would serve the interests of the parties or the Court in this matter, the Court declines to grant the motion to reconsider.

G. Parkinsons' Motion to Dismiss Complaint, Motion to Strike Plaintiff's Motion for Summary Judgment, Motion to Strike or Quash Motion for Default Judgment, and Motion to Dismiss DIRT for Lack of Jurisdiction

These motions are the responsive counterparts to the USA 's motions, addressed hereinabove. As set forth above, Defendants have no standing to assert claims or motions on behalf of DIRT, and therefore the motion to strike or quash the motion for default judgment and the motion to dismiss DIRT for lack of jurisdiction should be denied.

Defendants argue that the USA's liens are invalid because the USA has not complied with 26 U.S.C. §6323, ⁸ which requires the USA to give notice of liens to any third party who also has an interest in the debtors' property. However, by operation of statute, a lien automatically arises against the debtors' property when a "person liable to pay any tax neglects or refuses to pay the same after demand" and an assessment of the delinquent tax is made. 26 U.S.C. §§6321-22. Further, "[t]he creation of a tax lien does not require a filing of public notice, and, once created, the tax lien is effective as against the taxpayer until 'the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.' " TKB International, Inc. v. United States [93-1 USTC ¶50,346], 995 F.2d 1460 (9th Cir. 1993) (quoting 26 U.S.C. §6322). Therefore, section 6323 is inapplicable to the Parkinsons because they are the debtors; it is also inapplicable because they claim no interest in the Fremont County property. Not having any interest in the property, they would not be entitled to notice under §6323. Finally, as set forth herein above, the Parkinsons have no standing to assert that DIRT did not receive proper notice under §6323.

II.

RECOMMENDATION

Based on the foregoing, it is hereby recommended that the District Court enter an order as follows:

1. Defendants' motion for sanctions against Plaintiff and Plaintiff's counsel (Docket No. 61) should be DENIED.

2. Plaintiff's renewed motion for default judgment against Diversified Investments and Revenue Trust (Docket No. 63) should be GRANTED.

3. Plaintiff's motion for judgment on the pleadings, or in the alternative for summary judgment against Diversified Investments and Revenue Trust (Docket No. 65) should be DENIED.

4. Plaintiff's motion for judgment on the pleadings against Defendants Detsel and Earlene Parkinson (Docket No. 65) should be DENIED, but Plaintiff's alternative motion for summary judgment (Docket No. 65) should be GRANTED.

5. Defendants' motion to dismiss complaint (Docket No. 71) should be DENIED.

6. Defendants' motion to strike Plaintiff's motion for summary judgment and related pleadings (Docket No. 78) should be DENIED.

7. Defendants' motion to strike or quash Plaintiff's renewed motion for entry of default judgment, and to dismiss D.I.R.T. for lack of jurisdiction (Docket No. 80) should be DENIED.

Written objections to this Report and Recommendation must be filed within ten (10) days, pursuant to 28 U.S.C. §636(b)(1) and Local Rule 72.1, or as a result that party may waive the right to raise factual and/or legal objections in the Ninth Circuit Court of Appeals. The parties are advised that this report and recommendation is not a final, appealable order, and thus no appeal can be taken from this report and recommendation.

III.

ORDER

NOW THEREFORE IT IS HEREBY ORDERED that Defendants' motions to reconsider Order of October 25, 2000 (Docket Nos. 69 and 75) are DENIED.

¹ Hereinafter the term "Defendants" or "the Parkinsons" refers to Detsel Parkinson and Earlene Parkinson only, unless otherwise specified. The interests of Stephen and Donalyn Parkinson are not at issue in these motions.

² At oral argument, Detsel Parkinson stated that he did not dispute that the copies of the promissory note and mortgage deed in the Court's record (Exhibit 1 and 3 to Docket No. 68, First Declaration of James L. Mason) were copies of the documents actually recorded at the Fremont County Recorder, which renders his admissibility objection meritless. He clarified that he disputes the legal effect of the documents, arguing that "it was a fraud upon me," because "I never co-signed them." However, an argument that he had a right to co-sign a document which indebted DIRT to third parties and which encumbered DIRT's property must be based upon the premise that Detsel Parkinson either (1) actually owns an interest in DIRT, (2) owns an interest in the Fremont County property, or (3) has a management role in DIRT, any of which support the USA's position in these motions. Because DIRT has not come forward to dispute Earlene Parkinson's authority to make such a transaction, the Court deems these facts undisputed.

³ At oral argument, counsel for Stephen and Donalyn Parkinson clarified that it was their position that DIRT was not a valid trust but was "an Idaho general partnership by default under Idaho law." Nothing in the portion of Stephen's deposition, provided by Detsel Parkinson, contradicts the position asserted at oral argument. Whether DIRT is a partnership or trust, it is undisputed that Earlene Parkinson signed the promissory note and mortgage documents on behalf of DIRT, and that DIRT has not disputed her authority to do so.

⁴ The Parkinsons clarified in later briefs that the assignment of DIRT's "rights and claims" in the litigation does not include an assignment of the underlying assets, res or corpus of DIRT, either legally, equitably or otherwise. See Undisputed Material Fact No. 9.

⁵ In Direct Mail, service was made upon a secretary, who claimed that she was not even an employee of Defendant Eclat but of a sister company which shared an office with Eclat. The Ninth Circuit found that service upon Eclat was nevertheless effected by service upon this secretary based upon the following facts. "The company was a rather small one by Eclat's own admission. Presumably, the role played by the receptionist was commensurately large in the structure of the company. She appears to have been the only employee in the office when the process server arrived, demonstrating that more than minimal responsibility was assigned to her. . . . This evidence of actual receipt of process was bolstered by several statements of fact in the appellant's reply brief indicating that Eclat had actual knowledge no later than the day after service of process." 840 F.2d at 688-89.

⁶ As against the Parkinsons, the USA correctly alternatively argues that, as in Maisano, if Parkinsons show that they have a property interest in DIRT, then they lose their case not by default, but on the merits, as the USA 's lien attaches to all property in which they have an interest. 26 U.S.C. §6321.

⁷ In Ladum, Robert Ladum opened and operated seven second-hand stores in Portland , Oregon . However, the court found that he concealed his ownership interests in these stores so he could avoid paying taxes on their income by using nominees who held themselves out as owners of the stores. The nominees would pretend to be the store owners by placing the title documents, business paperwork, and federal firearms licenses in their names. Nonetheless, Ladum would retain control of the nominee and the business. [98-1 USTC ¶50,345], 141 F.3d at 1333.

⁸ 26 U.S.C. §6323 provides, in pertinent part, "The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary."

 

 

 

United States of America , Plaintiff v. Lee D. Wight, Marjorie A. Wight, Sky Island Group, Republique Trust Company Ltd., W.A.G./N.C.E. Company, American Securities Company, Wells Fargo Bank, Tahoe Title Guaranty Company, GMAC Mortgage Corporation, Defendants

U.S. District Court, East. Dist. Calif. , Civ. CIV-S-98-0442 FCD DAD, 1/4/2002, 2002 U.S. Dist. LEXIS 2269.

[Code Secs. 6203 and 7402 ]

District court: Jurisdiction: Default judgment: Tax assessments: Form 4340.--The government was entitled to default judgment with respect to taxes, penalties, and interest assessed against a nonfiling pro se married couple. The taxpayers refused to pay the assessments despite having received notice and demand. Forms 4340 established that the assessments were properly made, and the taxpayers made no attempt to rebut them.

[Code Secs. 6321 and 7403 ]

Tax liens: Property subject to liens: Real property: Fraudulent conveyance: Foreclosure.--Liens against a nonfiling pro se married couple were valid and could be foreclosed with respect to their residence and the husband's dental office. The taxpayers had notice of the liens and failed to appear to contest their validity. Moreover, transfers and conveyances by the taxpayers of the properties to sham entities that were the nominees and alter egos of the taxpayers were set aside.

Paul L Seave, United States Attorney, Sacramento, Calif., John K. Vincent, United States Attorney, G. Patrick Jennings, Department of Justice, Washington, D.C. 20530, for plaintiff. Marjorie A. Wight, Lee D. Wight, Rocklin, Calif., pro se. Herber C. Leney, Jr., Wells Fargo Bank, San Francisco, Calif., Dean A. Christopherson, Christopherson and Assocs., Walnut Creek, Calif., for American Securities Co., Wells Fargo Bank. Jennings H. Pewthers, Sacramento , Calif. , pro se.

ORDER

DAMRELL, District Judge:

The matter was referred to a United States Magistrate Judge pursuant to 28 U.S.C. 636, et seq., and Local Rule 72-302.

On December 14, 2001, the magistrate judge filed findings and recommendations herein which were served on all parties and which contained notice to all parties that any objections to the findings and recommendations were to be filed within ten days. Defendants have filed objections to the findings and recommendations.

In accordance with the provisions of 28 U.S.C. §636(b)(1)(C) and Local Rule 72-304, this court has conducted a de novo review of this case. Having carefully reviewed the entire file, the court finds the findings and recommendations to be supported by the record and by proper analysis.

Accordingly, IT IS HEREBY ORDERED that:

1. The findings and recommendations filed December 14, 2001, are adopted in full;

2. Plaintiff's motion for entry of default judgment is granted and hereby entered in accordance with the proposed judgment by default filed herewith.

JUDGMENT BY DEFAULT

The Court granted the United States ' Motion for Entry of Default Judgment against defendants Lee D. Wight, Marjorie A. Wight, Sky Island Group, Republique Trust Company, Ltd., and W.A.G./N.C.E. Company. The United States and GMAC Mortgage Corporation stipulated to its claim and, on May 8, 2000, the Court entered an order thereon. The United States, American Securities Company, and Wells Fargo Bank stipulated to its claim and, on June 5, 2001, the Court entered an order thereon. On September 30, 1998, First American Title Insurance Company, as successor in interest to defendant Tahoe Title Guaranty Company, filed a Declaration of Non-Monetary Status and Disclaimer of Interest in this case. This case is ripe for a final decision.

Judgment is hereby entered in favor of GMAC Mortgage Corporation, American Securities Corporation, and Wells Fargo Bank as set forth below. Judgment is hereby entered against First American Title Insurance Company, as successor in interest to defendant Tahoe Title Guaranty Company as set forth below. Judgment by default pursuant to Rule 55(b)(2) of the Federal Rules of Civil Procedure is hereby entered in favor of the United States and against Lee D. Wight, Marjorie A. Wight, Sky Island Group, Republique Trust Company, Ltd., and W.A.G./N.C.E. Company as follows:

1. It is Ordered and Adjudged that the United States shall recover against Lee D. Wight the unpaid assessed balances of individual federal income taxes and accrued interest and penalties set forth below:

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TAX YEAR                                   TAX DEFICIENCY BALANCE DUE  1 

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1983 .....................................  $ 164,067.00   $1,343,169.80

1984 .....................................  $ 159,653.00   $1,161,137.30

1985 .....................................  $ 143,452.00   $  923,688.77

1986 .....................................  $ 151,626.00   $  865,419.71

TOTALS: ..................................  $ 618,798.00   $4,293,415.58

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Including tax, accrued interest, and penalties on the above-referenced assessments, there is due and owing as of August 1, 2001 to the United States from Lee D. Wight the total amount of $4,293,415.58, plus additional interest from August 1, 2001 pursuant to 26 U.S.C. §6601, 6621, and 6622, and 28 U.S.C. §1961(c) until paid.

2. It is further Ordered and Adjudged that United States shall recover against Marjorie A. Wight the unpaid assessed balances of individual federal income taxes and accrued interest and penalties set forth below:

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TAX YEAR                                   TAX DEFICIENCY BALANCE DUE  2 

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1983 .....................................  $  76,115.00   $  623,576.48

1984 .....................................  $  72,791.00   $  603,517.60

1985 .....................................  $  64,290.00   $  413,967.79

1986 .....................................  $  67,942.00   $  394,486.08

TOTALS: ..................................  $ 281,138.00   $2,035,547.95

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Including tax, accrued interest, and penalties on the above-referenced assessments, there is due and owing as of August 1, 2001 to the United States from Marjorie A. Wight the total amount of $2,035,547.95, plus additional interest from August 1, 2001 pursuant to 26 U.S.C. §6601, 6621, and 6622, and 28 U.S.C. §1961(c) until paid.

3. The United States ' Third Claim for Relief in its Amended Complaint in this case seeks to enforce federal tax liens on two properties. The first property is located at 2685 Plumbago Court , Rocklin , California , (hereinafter referred to as the "Wight residence"). The Wight residence is situated in Placer County , California , and is more particularly described as follows:

Lot 108, Sunset Country Club Unit No. 6, as shown on the map thereof filed in Book H of Maps and page 22, Placer County Records.

The second property is located at 3015 Grass Valley Street , Colfax , California , (hereinafter referred to as the "dental office property"). The dental office property is situated in Placer County , California , and is more particularly described as follows:

Commencing at the quarter corner on the North line of Section 3, Township 14 North, Range 9 East, MDB&M., and running thence south 83[degree] 43' 30" East 884.66 feet thence South 77[degree] 51' 15" East 231.58 feet to a point on the North line of Grass Valley Street at the Southeast corner of the parcel to be described hereby, the point of beginning, from which point the Southeast corner of lot 12, block 3, of the original town of Colfax bears South 77[degree] 51' 15" East 499.45 feet; and running thence along the North line of Grass Valley Street North 77[degree] 51' 15" West 49.58 feet; thence North 12[degree] 08' 45" East 100.00 feet; thence South 77[degree] 51' 15" East 70.46 feet; thence South 12[degree] 08' 45" West 100.00 feet; thence North 77[degree] 51' 15" West 20.88 feet to the point of beginning.

4. It is further Ordered and Adjudged that, as of January 11, 1993, the date of the assessments set forth in paragraphs 1 and 2, above, Lee D. Wight and Marjorie A. Wight owned, and thereafter continued to own, the Wight residence and the dental office property. As of the date of this judgment, Lee D. Wight and Marjorie A. Wight own the Wight residence and the dental office property.

5. It is further Ordered and Adjudged that the United States has valid federal tax liens in the amounts set forth in paragraphs 1 and 2, above, against all property and rights to property of Lee D. Wight and Marjorie A. Wight, including but not limited to their interest in the Wight residence and the dental office property.

6. It is further Ordered and Adjudged that defendants Sky Island Group, Republique Trust Company, Ltd., W.A.G./N.C.E. Company, and Tahoe Title Guaranty Company have no interest in the subject property which is superior to that of the United States .

7. It is further Ordered and Adjudged that Sky Island Group, Republique Trust Company, Ltd., and W.A.G./N.C.E. Company are sham entities and the nominees and alter egos of Lee D. Wight and Marjorie A. Wight.

8. It is further Ordered and Adjudged that the transfers of the Wight residence and the dental office property to Sky Island Group, Republique Trust Company, Ltd., and W.A.G./N.C.E. Company are set aside as fraudulent.

9. It is further Ordered and Adjudged that the secured interests in the Wight residence of GMAC Mortgage Corporation and Wells Fargo Bank as set forth in the stipulations and orders dated May 8, 2000 and June 5, 2001, the terms of which are incorporated here by this reference, are senior to the federal tax liens described above.

10. It is further Ordered and Adjudged that the federal tax liens on the Wight residence and the dental office property be enforced and the property sold pursuant to 28 U.S.C. §2001. The sales shall be free and clear of the secured interests of GMAC Mortgage Corporation and Wells Fargo Bank as set forth in the stipulations and orders dated May 8, 2000 and June 5, 2001, with the liens to follow the sale proceeds. The sale proceeds shall be distributed to lienholders and applied to the tax liabilities as set forth in an Order of Judicial Sale and in accordance with the stipulations and orders dated May 8, 2000 and June 5, 2001.

The Court will issue a separate Order of Judicial Sale.

APPROVED

FINDINGS AND RECOMMENDATIONS

DROZD, Magistrate Judge: This action came before the court on plaintiff's motion for entry of default judgment. Having considered all written materials submitted with respect to the motion, and after hearing oral argument, the undersigned recommends that the motion be granted.

BACKGROUND

The United States initiated this action to reduce to judgment federal tax assessments against defendants Lee D. Wight and Marjorie A. Wight, ¹ set aside fraudulent conveyances and transfers of real property, and to foreclose federal tax liens upon real property The real property at issue is the Wight residence located at 2685 Plumbago Court in Rocklin, California and a dental office located at 3015 Grass Valley Street in Colfax, California. (Am. Compl. PP 5, 7.)

The United States filed its complaint on March 13, 1998 and served it upon Lee D. Wight and Marjorie A. Wight as individuals and as agents for defendants Sky Island Group, W.A.G./N.C.E. Company, and Republique Trust Company, Ltd. The Wights did not answer the complaint, but instead challenged the service upon them as agents for the above entities. Their motion was granted in part and denied in part, and the United States was afforded an opportunity to file an amended complaint which sufficiently alleged the relationship between the Wights and Republique Trust Company, Ltd. such that the Wights were properly served on behalf of Republique Trust Company, Ltd. (See Mem. and Order filed March 10, 1999).

The United States filed an amended complaint on March 22, 1999, which again was served upon the Wights both as individuals and as agents for the above entities. The Wights did not answer or otherwise challenge the amended complaint. On December 20, 1999, the Clerk entered default against defendants Lee D. Wight, Marjorie A. Wight, Sky Island Group, W.A.G./N.C.E. Company, and Republique Trust Company, Ltd. ²

The United States initially noticed its motion for entry of default judgment on May 8, 2000. However, the hearing on the motion was continued numerous times over the course of more than one year pending the resolution of the dispute between the United States and a senior lien holder on the property at issue. The motion ultimately came on for hearing on June 29, 2001. There was no appearance at that hearing on behalf of defendants Lee D. Wight, Marjorie A. Wight, Sky Island Group, W.A.G./N.C.E. Company, or Republique Trust Company, Ltd. G. Patrick Jennings , Trial Attorney in the Tax Division of the United States Department of Justice, appeared on behalf of the United States .

The Wights were served with the plaintiff's motion and supporting papers, as well as the orders continuing the hearing on the motion. The last order continuing the hearing on the motion expressly provided that "defendants Lee D. Wight, Marjorie A. Wight, Sky Island Group, W.A.G./N.C.E. Company, and Republique Trust Company, Ltd. shall file and serve written opposition to plaintiff's motion . . . if any, on or before June 4, 2001." (Order filed May 9, 2001.) On June 26, 2001 the Wights filed an untimely response entitled a "Judicial Notice By Visitation Notice of 'Counterclaim' Relative to 'Fraud' Respective of the Court Records of this Alleged 'Case'," which the undersigned has construed as their opposition to the motion. In addition to being untimely, the opposition sets ford no intelligible legal argument and the contentions raised therein are frivolous. For example, the Wights contend that the spelling of their names in all capital letters in the caption of this case (i.e. LEE D. WIGHT, MARJORIE A. WIGHT) is an improper use of a "trade name" for the purpose of fraudulently acquiring personal jurisdiction. They also contest the use of a zip code to identify their place of residence, arguing that they live in the " California Republic ," not in any "federal area." The court rejects the Wights' frivolous contentions. See In re Becraft, 885 F.2d 547, 548 (9th Cir. 1989).

LEGAL STANDARD

Federal Rule of Civil Procedure 55(b)(2) governs applications to the court for entry of default judgment. Upon entry of default, the complaint's factual allegations regarding liability are taken as true, while allegations regarding the amount of damages must be proven. Dundee Cement Co. v. Howard Pipe & Concrete Products, 722 F.2d 1319, 1323 (7th Cir. 1983) (citing Geddes v. United Fin. Group, 559 F.2d 557 (9th Cir. 1977)); see also TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917 (9th Cir. 1987). It is improper for the court to consider liability issues without first providing notice to plaintiff that the merits will be addressed. Black v. Lane, 22 F.3d 1395, 1398 (7th Cir. 1994). Where damages are liquidated (i.e., capable of ascertainment from definite figures contained in the documentary evidence or in detailed affidavits), judgment by default may be entered without a damages hearing. See Dundee , 722 F.2d at 1323. Unliquidated and punitive damages, however, require "proving up" at an evidentiary hearing or through other means. Dundee , 722 F.2d at 1323-24; see also James v. Frame, 6 F.3d 307, 310 (5th Cir. 1993). Granting or denying default judgment is within the court's sound discretion. See Draper v. Coombs, 792 F.2d 915, 924-25 (9th Cir. 1986) (citations omitted). The court is free to consider a variety of factors in exercising that discretion. See Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986). ³

APPLICATION

With the instant motion, the United States asks that the court enter money judgments against the Wights in favor of the United States for unpaid taxes; determine that the United States has valid liens against all property and rights to property of the Wights; set aside the fraudulent transfers and conveyances of the Wights' residence and dental office property; and order the Wights' real and personal property be foreclosed upon and the real property sold to satisfy the liens and taxes owed, making a determination as to the priority of legitimate liens on the property. The undersigned addresses each of these requests below.

A. Recovery of Unpaid Taxes

The first and second causes of action in plaintiff's amended complaint seek to reduce to judgment federal tax assessments against Lee D. Wight and Marjorie A. Wight, respectively. The amended complaint alleges that the Wights failed to file tax returns for the tax years ending December 31, 1983, 1984, 1985 and 1986. (Am. Compl. P 18.) It further alleges that despite receiving notice and demand for payment of assessments made by a delegate of the Secretary of the Treasury for unpaid federal income tax, the Wights have neglected, failed or refused to pay the assessments which therefore remain due and owing, plus interest, penalties, and fees and costs. (Id. PP 19-21, 23-25.)

The assessments made against the Wights are reflected on the Certificates of Assessments and Payments (Form 4340) submitted by the United States in support of its motion. (See Decl. of Patrick Jennings filed May 8, 2000, Exs. C (Mr. Wight) and E (Mrs. Wight).) A Certificate of Assessments and Payments is a proper means of establishing that assessments were properly made and that notices and demand for payment were sent. Koff v. United States [93-2 USTC ¶50,520], 3 F.3d 1297, 1298 (9th Cir. 1993); Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 535 (9th Cir. 1992). An assessment for unpaid federal taxes, when properly certified, is presumptively correct evidence of a taxpayer's liability, and the taxpayer has the burden to overcome this presumption by countervailing proof. United States v. Janis [76-2 USTC ¶16,229], 428 U.S. 433, 440-41, 49 L.Ed.2d 1046, 96 S.Ct. 3021 (1976); Koff [93-2 USTC ¶50,520], 3 F.3d at 1298; Hughes [92-1 USTC ¶50,086], 953 F.2d at 540; United States v. Voorhies [81-2 USTC ¶9710], 658 F.2d 710, 715 (9th Cir. 1981). Here, the Wights have made no attempt to rebut the tax assessments against them. Therefore, the Certificates of Assessments and Payments submitted by plaintiff establish that assessments were properly made, notice and demand for payment were sent, and that the Wights are presumptively liable for the unpaid taxes, penalties, and interest reflected on the Certificates.

Accordingly, the undersigned recommends that the court award judgment in favor of the United States and against Lee D. Wight for unpaid income tax assessments, plus penalties and interest, for the years 1983 through 1986 in the amount of $4,293,415.58 as of August 1, 2001, ⁴ plus penalties and interest thereafter until paid pursuant to 26 U.S.C. §§6601, 6621, and 6622, and 28 U.S.C. §1961(c).

The undersigned also recommends that the court award judgment in favor of the United States and against Marjorie A. Wight for unpaid income tax assessments, plus penalties and interest, for the years 1983 through 1986 in the amount of $2,035,547.95 as of August 1, 2001, ⁵ plus penalties and interest thereafter until paid pursuant to 26 U.S.C. §§6601, 6621, and 6622, and 28 U.S.C. §1961(c).

B. The United States ' Valid Liens

The amended complaint also alleges that the United States has valid tax liens against all property belonging to the Wights, and that the Wights have notice of those liens. (Am. Compl. PP 27-28.) Indeed, 26 U.S.C. §6321 provides that the amount of a delinquent taxpayer's liability shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to the taxpayer. Under 26 U.S.C. §6322, a lien imposed under §6321 arises at the time the assessment is made and continues until the liability is satisfied, or the lien is removed in accordance with federal law. A federal tax lien is perfected upon assessment and no further action need be taken. United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 452-55, 123 L.Ed.2d 128, 113 S.Ct. 1526 (1993); United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 355 (1964); Glass City Bank of Jeanette, Pa. v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267, 90 L.Ed. 56, 66 S.Ct. 108 (1945).

Accordingly, the undersigned recommends that the court order that the United States has valid federal tax liens in the amount of $4,293,415.58 and $2,035,547.95, as of August 1, 2001 plus penalties and interest thereafter, against all property and rights to property of Lee D. Wight and Marjorie A. Wight, respectively, including but not limited to the interest in the Wight residence in Rocklin and the dental office property in Colfax.

C. Setting Aside the Fraudulent Transfers and Conveyances

According to the amended complaint, the Wights purchased their residence ⁶ as joint tenants on or about September 20, 1965 and have occupied and resided there at all times pertinent hereto. (Am. Compl. P 6.) They purchased the Colfax property ⁷ as joint tenants on or about March 22, 1969 and Mr. Wight has used it as a dental office at all times pertinent hereto. (Id. P 8.)

The amended complaint identifies Sky Island Group as a sham entity and fraudulent transferee of the Wight residence and dental office property, and as a nominee and alter ego of the Wights. (Id. P 10.) It identifies W.A.G./N.C.E. Company as sham entity and beneficiary of trust deeds recorded against the Wight residence and dental office property, and as a nominee and alter ego of the Wights. ⁸ (Id. P 11.) Finally, it identifies Republique Trust Company, Ltd. as the trustee of the trust deeds mentioned above, and as a sham entity, nominee or transferee of the Wights. (Id. P 12.)

The amended complaint alleges that the Wights fraudulently recorded deeds of trust on September 12, 1984 against their residence and dental office property, making W.A.G./N.C.E. Company and Republique Trust Company, Ltd. beneficiary and trustee of the deeds, respectively. (Id. PP 12, 33, 37.) It also alleges that on December 2, 1987 the Wights fraudulently recorded quitclaim deeds to the residence and dental office property to Sky Island Group for no consideration. (Id. PP 34, 38, 43-45.) It alleges that these fraudulent acts failed to transfer the subject properties to legally cognizable entities and that the Wights continue to own their residence and the dental office property. (Id. P 40.)

Taking these allegations as true, the undersigned recommends that the purported transfers and conveyances described above be set aside as fraudulent, and that the Wights be declared the owners of their residence and the dental office property.

D. Foreclosure and Sale of Property, and the Priority of Legitimate Liens

When "there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof," the United States may bring an action in federal district court to enforce the lien created by 26 U.S.C. §6321 or to subject any property held by the taxpayer to the payment of the tax. 26 U.S.C. §7403(a). After adjudicating the merits of the United States ' claim to the subject property, the district court may decree a sale of the property and order distribution of the proceeds from that sale. 26 U.S.C. §7403(c). See also United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-720, 86 L.Ed.2d 565, 105 S.Ct. 2919 (1985); United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 693-94, 76 L.Ed.2d 236, 103 S.Ct. 2132 (1983).

Here, the Wights have refused to pay the tax deficiencies, interest and penalties assessed against them. They have failed to appear to contest the validity of those assessments, and default has been entered against them. Accordingly, the undersigned recommends that the district court enter judgment in favor of the United States and against the Wights foreclosing on the United States ' tax liens upon their residence and dental office property in order to satisfy the unpaid tax assessments made against them.

In addition, by stipulations and orders filed May 8, 2001 and June 5, 2001 the United States and senior lien holders GMAC Corporation and Wells Fargo bank have resolved the competing priority of their respective liens. Therefore the undersigned also recommend that the district court's order of judgment provide that the proceed from the sale of the Wights' property be distributed according to the terms of those stipulations after costs of sale have been paid.

CONCLUSION

For the reasons stated above, the court HEREBY RECOMMENDS that plaintiff's motion for entry of default judgment be granted, and that the district court enter default judgment as set forth above by signing the proposed judgment by default lodged by counsel for plaintiff on July 12, 2001.

These findings and recommendations are submitted to the United States District Judge assigned to the case pursuant to the provisions of 28 U.S.C. §636(b)(l). Within ten days after being served with these findings and recommendations, any party may file written objections with the court and serve a copy on all parties. Such a document should be captioned "Objections to Findings and Recommendations." Any reply to the objections shall be served and filed within ten days after service of the objections. The parties are advised that failure to file objections within the specified time may waive the right to appeal the District Court's order. Martinez v. Ylst, 951 F.2d 1153 (9th Cir. 1991).

¹ With accruals of penalties and interest calculated to August 1, 2001.

² With accruals of penalties and interest calculated to August 1, 2001.

¹ Lee D. Wight and Marjorie A. Wight are husband and wife.

² On February 10, 2000, plaintiff filed a Second Amended Complaint which raised no new claims against the defendants. (See Order filed February 10, 2000.) When such is the case, the pleading need not to be served on defendants in default as it does not affect them. See Fed. R. Civ. P. 5(a). Accordingly, plaintiff properly seeks default judgment against defendants on the Amended Complaint.

³ The factors the court may consider include:

(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action, (5) the possibility of a dispute concerning material facts, (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.

Eitel, 782 F.2d at 1471-72 (citing 6 Moore 's Federal Practice, P 55-05[2], at 55-24 to 55-26).

⁴ The tax assessments and calculations of penalties and interest are detailed in the Certificates of Assessments and Payment (see Decl. of Patrick Jennings filed May 8, 2000, Exs. C (Mr. Wight) and E (Mrs. Wight)), and further explained in the declaration of an Internal Revenue Service Revenue Officer submitted in support of the instant motion. (See Decl. of Richard Reynolds filed July 12, 2001). As of August 1, 2001, Lee D. Wight owed the following amounts, which represent the total individual income tax, interest and penalties unpaid to that date:

For the tax period ending December 31, 1983: $1,343,169.80

For the tax period ending December 31, 1984: $1,161,137.30

For the tax period ending December 31, 1985: $923,688.77

For the tax period ending December 31, 1986: $865,419.71

⁵ As of August 1, 2001, Marjorie A. Wight owed the following amounts, which represent the total individual income tax, interest and penalties unpaid to that date:

For the tax period ending December 31, 1983: $623,576.48

For the tax period ending December 31, 1984: $603,517.60

For the tax period ending December 31, 1985: $413,967.79

For the tax period ending December 31, 1986: $394,486.08

⁶ The legal description of the Rocklin residence is as follows:

Lot 108, Sunset Country Club Unit No. 6, as shown on the map thereof filed in Book H of Maps and page 22, Placer County Records.

(Am. Compl. P 6.)

⁷ The legal description of the Colfax dental office property is as follows:

Commencing at the quarter corner on the North line of Section 3, Township 14 North, Range 9 East, MDB&M., and running thence south 83 [degrees] 43' 30" East 884.66 feet thence South 77 [degrees] 51' 15" East 231.58 feet to a point on the North line of Grass Valley Street at the Southeast corner of the parcel to be described hereby, the point of beginning, from which point the Southeast corner of lot 12, block 3, of the original town of Colfax bears South 77 [degrees] 51' 15" East 499.45 feet; and running thence along the North line of Grass Valley Street North 77 [degrees] 51' 15" West 49.58 feet; thence North 12 [degrees] 08' 45" East 100.00 feet; thence South 77 [degrees] 51' 15" East 70.46 feet; thence South 12 [degrees] 08' 45" West 100.00 feet; thence North 77 [degrees] 51' 15" West 20.88 feet to the point of beginning.

(Am. Compl. P 7.)

⁸ The address of W.A.G./N.C.E. Company and Sky Island Group is a mailbox rented by the Wights. (Am. Compl. P 37-38.)

 

 

 

United States of America, Plaintiff v. Charles Dare Schaut, Pamela Nadene Schaut, a/k/a Pamela L. Schaut, Charles O'Koren, both individually and in his capacity as Trustee of the Dare Schaut Family Trust, Joseph Stepard, in his capacity as Trustee of the Dare Schaut Family Trust, and Citimortage, Inc. as servicing agent for Citibank, F.S.B., successor in interest to First Federal Savings & Loan of Crystal Lake, Defendants

U.S. District Court, No. Dist. Ill. , East. Div., 97 C 4114, 12/26/2001, 2001 U.S. Dist. LEXIS 21549.

[Code Secs. 6321 and 7403 ]

Action to enforce lien: Foreclosure: Trusts: Nominee theory: Evidence.--The government was entitled to foreclose its tax liens on a married couple's real property that they transferred to an alter ego and nominee trust. The trust paid inadequate consideration for the property at issue and the property was transferred just prior to the couple's decision to stop paying taxes. Moreover, at the time of the transfer, there was a close relationship between the trust and the husband, the transferor.

[Code Sec. 7401 ]

Tax assessments: Evidence: Summary judgment.--Tax assessments against a married couple were reduced to judgment. In support of its claim, the government provided a declaration from an IRS officer and copies of the couple's W-2 forms. The couple offered no evidence to demonstrate that the assessments were incorrect.

Joan Cagen Laser, United States Attorney's Office, Chicago, Ill., Gerald H. Parshall, Douglas W. Snoeyenbos, Department of Justice, Washington, D.C. 20530, for plaintiff. Pamela Schaut, Charles Dare Schaut, Glendale, Ariz., pro se. Steven R. Rappin, Rhoda Markovitz, Daniel Howard Olswang, Hauselman & Rappin, Ltd., Chicago, Ill., for Citicorp Savings.

MEMORANDUM OPINION AND ORDER

ASPEN , Chief Judge:

The essence of this controversy is a tax liability allegedly owed by the Defendants and the effect of a transfer of property owned by the Defendants to a trust, the Dare Schaut Family Trust ("Schaut Trust"). The United States contends that the transfer of property to the Schaut Trust is an invalid attempt to protect that property from federal tax assessments. Presently before us are motions for summary judgment from two parties: the United States and the Schaut Trust ¹.

BACKGROUND

The following facts are uncontroverted and taken from the United States ' Rule 56.1 Statement of Material Facts. No other party in this case--neither the Schauts, the Schaut Trust, nor Citimortgage, Inc.--has filed a statement of material facts as required by Local Rule 56.1. As such, all material facts provided in the United States ' 56.1 Statement of Material Facts are deemed admitted. See N.D. Ill. R. 56.1(b)(3)(B) ("All material facts set forth in the statement required of the moving party will be deemed to be admitted unless controverted by the statement of the opposing party."); United States v. Johnson, 2001 U.S. Dist. LEXIS 13957, No. 01 C 50125, 2001 WL 1018772, *1 (N.D. Ill., August 31, 2001).

The United States brought the present action in an effort to reduce unpaid federal income tax assessments against Charles Dare Schaut and Pamela Nadene Schaut and to foreclose the federal tax liens associated with those assessments against a parcel of real property, record title to which is held by the Schaut Trust, and on which Citimortgage, Inc. ("Citimortgage") asserts a mortgage lien.

The gravamen of the United States ' complaint is that Charles Dare Schaut and Pamela Schaut failed to pay income taxes for various years between 1979 and 1987. The United States asserts that the total tax assessments owed by the Schauts, including interest and other statutory accruals, are $3,661,382.18 and $210,440.66, respectively. In its motion for summary judgment, the United States has reduced those figures to $1,982,511.71 and $154,019.52, respectively. This reduction reflects the fact that the United States is not seeking summary judgment on amounts related to fraud penalties or the interest associated with them because such penalties may not be appropriate for disposition on summary judgment due to a greater burden of proof. Count I of the United States ' complaint requests this court to enter money judgments against Charles and Pamela for the amounts of the unpaid tax assessments.

Count II relates to the creation of the Schaut Trust and the subsequent transfer of property to that trust. By Quit Claim Deed dated July 16, 1979, Charles Dare Schaut transferred his interest in real property commonly known as 301 Hayes Road , Algonquin , Illinois (the "Hayes Road Property") to the Schaut Trust. The transfer was without consideration. On various dates between 1979 and 1981, however, Charles and Pamela, individually and not as trustees to the Schaut Trust, granted Algonquin Bank a security interest in the Hayes Road Property thereby holding themselves out as the record owners of the property. Moreover, the Schauts resided at the Hayes Road Property from 1974 until 1989.

In its motion for summary judgment, the United States argues that the Hayes Road Property is being held by the Schaut Trust as a nominee of the Schauts. As such, the United States argues that the Schauts should be considered the true equitable owners of the property and that the federal tax liens that have attached to all of their property pursuant to 26 U.S.C. §6321 et seq. should be foreclosed on the Hayes Road Property.

ANALYSIS

A. Standard for Summary Judgment

Summary judgment is proper only when the record shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). When ruling on a motion for summary judgment, we must evaluate the admissible evidence in the light most favorable to the nonmoving party. Popovits v. Circuit City Stores, Inc., 185 F.3d 726, 731 (7th Cir. 1999). The party opposing the motion for summary judgment must affirmatively demonstrate that there is a genuine issue of material fact that requires trial. Fed.R.Civ.P. 56(e); Waldridge v. American Hoechst Corp., 24 F.3d 918, 923 (7th Cir. 1994). A genuine issue for trial exists when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L.Ed.2d 202, 106 S.Ct. 2505 (1986). However, if the evidence is merely colorable, or is not sufficiently probative, the court may grant summary judgment. Id. at 249-50.

B. Count I--Tax Assessments

Summary judgment is appropriate for Count I of the United States ' complaint. As mentioned above, the Schauts have failed to answer the complaint and have failed to otherwise respond to the United States ' motion or file a Statement of Material Facts as required by Local Rule 56.1. As such, the United States ' allegations concerning the tax assessments must be deemed admitted. See N.D. Ill. R. 56.1(b)(3)(B).

In support of its motion, the United States has provided us with the Declaration of Robert Der Avedisian of the Internal Revenue Service who asserts that federal tax assessments were made against Mr. Schaut for the years 1979 through 1986, and against Ms. Schaut for the years 1980 through 1987, and that those assessments remain unsatisfied. The Schauts have made no attempt to dispute the validity of these assessments. The United States has also provided us with copies of Form W-2s that the Schauts' employer for the years in question, American Airlines, Inc., issued to the Schauts as demonstration of their income during that period.

Federal tax assessments, once demonstrated, are presumptively correct and the burden is on the taxpayer to show by a preponderance of the evidence that the determination is incorrect. United States v. Kim [97-1 USTC ¶50,370], 111 F.3d 1351 (7th Cir. 1997). The presumption of correctness applies unless the assessments are deemed "without rational foundation" or "arbitrary and erroneous." Pittman v. Comm'r [96-2 USTC ¶50,658], 100 F.3d 1308, 1313 (7th Cir. 1996). The Schauts, however, offer no argument that the assessments are invalid, arbitrary, or otherwise without rational foundation.

Because there is no genuine issue of material fact regarding the validity of the tax assessments, summary judgment is hereby ordered in favor of the United States and against the Schauts for $1,982,511.71 and $154,019.52, respectively, in unpaid taxes, plus interest and other statutory additions (excluding fraud penalties and interest thereon) accruing from and after September 4, 2001.

C. Count II--Foreclosure

When an assessment of unpaid taxes is made and payment is not received after due notice and demand are sent, a federal tax lien arises and attaches to all of the taxpayer's property and rights to property until the unpaid amount is satisfied. 26 U.S.C. §6321, 6322. The United States contends that, because the Schauts are the true equitable owners of the Hayes Road Property, a federal tax lien has attached to that property and should be foreclosed on that property to satisfy the debt.

The United States ' theory is that the Schaut Trust is merely the Schauts' "nominee." The legal principle is well established that property can be subjected to a federal tax lien under 26 U.S.C. §6321 if record title is held by one entity as merely an "alter ego" of the taxpayer. G.M. Leasing Corp. v. U.S. [77-1 USTC ¶9140], 429 U.S. 338, 350-351, 50 L.Ed.2d 530, 97 S.Ct. 619 (1977). In Re Richards [99-1 USTC ¶50,317], 231 B.R. 571, 578 (E.D. Pa. 1999) the court described the nominee theory:

Focusing on the relationship between the taxpayer and the property, the [nominee] theory attempts to discern whether a taxpayer has engaged in a sort of legal fiction, for federal tax purposes, by placing legal title to property in the hands of another while, in actuality, retaining all or some of the benefits of being the true owner. Said another way, the nominee theory is utilized to determine whether property should be construed as belonging to the taxpayer if he/she treated and viewed the property as his/her own, in spite of the legal machinations employed to distinguish legal title to the property.

See also, United States v. Olsen, 2001 U.S. Dist. LEXIS 10098, No. 98 C 2170, 2001 WL 817854, *2 (N.D. Ill., July 19, 2001).

To determine whether an individual is a nominee or alter ego of a taxpayer, courts have considered several factors suggesting that property held by one party actually belongs to another. These factors include: (1) little or no consideration was paid by the nominee; (2) property placed in the name of the nominee in anticipation of incurrence of large debts or collection activity and transferor continues to exercise dominion and control over property; (3) a close personal relationship exists between the nominee and the transferor; (4) the conveyance was not recorded; (5) transferor retains possession of the property; or (6) transferor continues to enjoy the benefits of the property. Frese v. Smith [99-2 USTC ¶50,993], No. 99-3128, 1999 WL 1251856, *3 (C.D. Ill., Nov. 5, 1999) (internal citations omitted).

The undisputed facts support a finding that the Schaut Trust is the nominee of the Charles Dare Schaut. First, the Schaut Trust paid, at best, inadequate consideration for the Hayes Road Property. Charles and Pamela Schaut obtained the Hayes Road property by Warranty Deed (Joint Tenancy) on May 3, 1974. On July 14, 1979, the very same year the Schauts stopped paying their income taxes, Charles Dare Schaut created the Schaut Trust. Also on July 14, 1979, Pamela Schaut conveyed her interest in the Hayes Road Property to Charles. Immediately thereafter, on July 16, 1979, Charles conveyed by Quit Claim Deed his interest in the Hayes Road Property to the Schaut Trust for $10. Such inadequate consideration is not dispositive. It is persuasive, however, when viewed in light of the other factors supporting nominee status.

Second, the fact that the property was transferred just prior to the Schauts' decision to stop paying taxes also supports a finding of nominee status, especially since the Schauts continued to exercise dominion and control over the property until 1989. They resided at the Hayes Road Property until 1989. Moreover, by a series of four collateral notes executed after the purported transfer of record title to the trust, the Schauts, individually and not as trustees of the Schaut Trust, granted Algonquin State Bank a security interest in the property in return for an aggregate $37,000 in loan proceeds. Thus, despite their purported transfer, the Schauts continued to hold themselves out as the owners of the property when they wished to borrow money against it. Such dominion and control is another factor supporting a finding of nominee status.

Finally, at the time of the transfer of the Hayes Road Property to the Schaut Trust, there was a close personal relationship between the Schaut Trust (as nominee) and the transferor (Charles Dare Schaut). This is evidenced by the fact that one of the trustees of the Schaut Trust was Charles' wife, Pamela Schaut.

The circumstances surrounding the transfer lead to only one reasonable conclusion--that Charles made the transfer of the Hayes Road Property to the Schaut Trust in anticipation of the Schauts' tax liabilities. As stated above, a party opposing a motion for summary judgment must affirmatively demonstrate that there is a genuine issue of material fact that requires trial. The Schaut's have made no such showing and have not met their burden. As such, we find that the Schaut Trust was a nominee of Charles Dare Schaut and that the Hayes Road Property, in accordance with 26 U.S.C. §§6321, 6322, is subject to a federal tax lien. ²

The United States next asks us to foreclose the federal tax liens on the Hayes Road Property. Citimortgage opposes summary judgment in favor of the United States and instead seeks a default judgment on its own cross-claim for foreclosure on the Hayes Road Property. ³ Citimortgage, however, has provided no argument as to why its rights would be prejudiced by summary judgment in favor of the United States . This omission is especially important given that the United States has freely conceded that Citimortgage's lien has priority over the United States ' lien. The United States does not dispute that, upon foreclosure of the Hayes Road Property, Citimortgage would receive the first portion of the net proceeds from the sale of the property. Given this concession, Citimortgage's rights would not be prejudiced by a ruling in favor of the United States .

There is some dispute among the parties as to the exact amount of Citimortgage's lien. This dispute need not be resolved in this action. In its response to Citimortgage's original (now withdrawn) motion for summary judgment, the United States has stipulated that it will be in a better position to agree as to the amount of Citimortgage's lien after a receiver is appointed pursuant to 26 U.S.C. §7403(d) to arrange for the sale of the Hayes Road Property. Citimortgage has provided no argument to rebut this claim.

As there are no genuine issues of any material facts regarding the foreclosure, summary judgment is hereby granted in favor of the United States and the federal tax liens on the Hayes Road Property are hereby foreclosed free and clear of any of the rights, title, claims, or interests of any other party in this action. ⁴ We order the Hayes Road Property to be sold in accordance with the controlling federal statutes with the proceeds of the sale directed to the lienholders (the United States and Citimortgage) as required by law.

CONCLUSION

Summary judgment is hereby granted in favor of the United States and against Charles Dare Schaut and Pamela Nadene Schaut in the amounts of $1,982,511.71 and $154,019.52, respectively, in unpaid taxes, plus interest and other statutory additions (excluding fraud penalties and interest thereon) accruing from and after September 4, 2001. Summary judgment is also granted in favor of the United States that the Dare Schaut Family Trust was a nominee of Charles Dare Schaut, and as such, federal tax liens have appropriately attached to the Hayes Road Property. Those liens are hereby ordered foreclosed free and clear of the rights, title, claims, or interests of any other party in this action (save the United States and Citimortgage) with the proceeds from the resulting sale distributed to the two lien holders in accordance with applicable law. For the reasons stated above, the Schaut Trust's motion for summary judgment is denied. Citimortgage's Motion for Default Judgment on its cross-claim is granted to the extent it does not conflict with summary judgment in favor of the United States . Finally, Citimortgage's uncontested motion to dismiss cross-defendants Michael Giambalvo and Carol Giambalvo is granted. Michael Giambalvo and Carol Giambalvo are hereby dismissed as cross-defendants.

It is so ordered.

¹ The Schaut Trust's motion for summary judgment, filed by Joseph Stepard as trustee, is based wholly on its contention that the United States did not respond to the Schaut Trust's motion of "Challenge to Jurisdiction." The Schaut Trust's jurisdictional challenge, however, was denied by minute order on November 5, 2001, as was its motion for default judgment. As such, the Schaut Trust's motion for summary judgment is denied as moot. A third party, Citimortgage, Inc., withdrew its motion for summary judgment immediately prior to the issuance of his ruling.

² Joseph Stepard, trustee of the Schaut Trust, has filed many motions in this case disputing the arguments of the United States . Mr. Stepard, however, is not counsel to the Schauts but to the Schaut Trust. Moreover, his motions have all been dealt with, and disposed of, by previous minute order. It is interesting to note that Mr. Stepard is no stranger to this sort of action. Like the Schaut's, he too was an employee of American Airlines in the 1980s and he too refused to pay income taxes. In an effort to avoid tax liability, he attempted to transfer his interest in certain real property to a trust. The alleged transfers were deemed invalid after the court found that the trust was merely an alter ego for Mr. Stepard. The court thereafter foreclosed the federal tax liens on the property. See United States v. Stepard [95-1 USTC ¶50,274], 1995 U.S. Dist. LEXIS 5868, No. Civ. 93-0919, 1995 WL 422507 (D. Ariz., Apr. 4, 1995); United States v. Int'l Tax Strategies [99-2 USTC ¶50,820], 1999 U.S. App. LEXIS 19604, No. 98-16682, 1999 WL 644173 (9th Cir., Aug. 13, 1999).

³ Citimortgage's 'counterclaim' is more properly identified as a cross-claim, and will be referred to as such.

⁴ The other trustee to the Schaut Trust, Charles O'Koren, filed a "Notice and Claim of Lien" against the Hayes Road Property on December 14, 1993, ostensibly to secure indebtedness in the amount of $250,000. See USA Mem., Ex. A. The United States notes that Mr. O'Koren is a federal fugitive and have attached a federal criminal complaint detailing his fugitive status. Mr. O'Koren was served via publication for this action but has not filed any responsive pleadings. As such, and pursuant to Fed. R. Civ. P. 55(a), Mr. O'Koren has defaulted.

 

 

 

United States of America , Plaintiff v. Paul LaMontagne, et al., Defendants

U.S. District Court, No. Dist. N.Y. , 98-CV-1636, 10/4/2000

[Code Secs. 446 and 6502 ]

Excise taxes: Wagering tax: Evidence: Assessment: Burden of proof: Collection.--A taxpayer involved in a football betting operation was liable for unpaid wagering excise taxes because he failed to refute the assessment against him. Since the taxpayer did not prepare, maintain, or produce daily records showing the gross amount of all wagers made, the IRS properly forecast the amount of the wagers based on the available information. Moreover, the assessment was timely since the IRS commenced the action within 10 years of the date of assessment.

[Code Secs. 6321 , 6323 and 7403 ]

Lien for taxes: Fraudulent conveyance: Real property: Foreclosure.--A conveyance of property from a delinquent taxpayer to his sister for "love and affection" was set aside as fraudulent because the transfer was made for inadequate consideration. Thus, the IRS was permitted to foreclose on its valid tax lien against the property.

DECISION & ORDER

MCAVOY, District Judge:

Plaintiff, the United States of America , commenced the instant action to foreclose federal tax liens against Paul LaMontagne's interest in certain real property. Presently before the Court is Plaintiff's motion for summary judgment pursuant to FED. R. CIV. P. 56 seeking on order: reducing to judgment LaMontagne's unpaid federal tax assessments of $595,669.25, plus statutory interest from the dates of assessment; declaring the transfer of certain real property from LaMontagne to Defendant Janine Leoni to be null and void; foreclosing the federal tax liens against real property in which LaMontagne has an interest; declaring Janine Leoni to be in default; and declaring that the United States has valid and subsisting liens on the property purportedly conveyed to Leoni by LaMontagne.

I. BACKGROUND

Briefly stated, in January 1992, LaMontagne was arrested by the New York State Police for his involvement in a football betting operation. Pursuant to a search of LaMontagne's residence, police uncovered wagering records from approximately 1985 to 1991.

In September 1994, as a result of information gained from the criminal investigation, a delegate of the United States Secretary of the Treasury made certain assessments against LaMontagne for unpaid wagering excise taxes, penalties, and interest pursuant to 26 U.S.C. §4401(a)(2). See Gov't Ex. A. Because LaMontagne either failed to prepare, maintain, or produce daily records showing the gross amounts of all wagers made, see 26 U.S.C. §4403, the IRS attempted to make forecasts of such wagers based on the available information. The IRS also calculated fraud penalties pursuant to 26 U.S.C. §6663. A delegate notified LaMontagne of the tax assessments and demanded payment. LaMontagne never paid the tax liabilities. In accordance with 26 U.S.C. §§6321 and 6322, the IRS filed Notices of Federal Tax Liens against LaMontagne.

In July 1991, LaMontagne acquired title to certain real property in Tupper Lake , New York in exchange for consideration in the amount of $30,000. In October 1992, LaMontagne transferred title to the real property to his sister, Janine Leoni, in consideration for her "love and affection." The deed including language entitling LaMontagne to "totally unrestricted life use in and to the aforesaid premises." Leoni, a named Defendant herein, has been served in accordance with court orders, but has failed to appear in this action. The Clerk of the Court entered default against Leoni on June 15, 2000. The two other named Defendants, Morris and Gail Weissbrot, claim to be the owners of a certain portion of the subject real property by virtue of adverse possession.

Presently before the Court is Plaintiff's motion for summary judgment seeking the relief described above. Neither LaMontagne nor the Weissbrots, who are represented by counsel, have opposed Plaintiff's motion for summary judgment. Accordingly, the Court deems all facts in Plaintiff's N.D.N.Y.L.R. 7.1(a)(3) statement to be true.

II. DISCUSSION

A. Liability for Tax Assessments

Plaintiff calculated and notified LaMontagne of certain assessments against him for unpaid wagering excise taxes. Because LaMontagne has failed to refute the assessments, the Court presumes them to be true. See United States v. Janis [76-2 USTC ¶16,229], 428 U.S. 433, 440 (1976); see also Winter v. U.S. [99-2 USTC ¶50,955], 196 F.3d 339, 344 (2d Cir. 1999); Apollo Fuel Oil v. U.S. [99-2 USTC ¶70,126], 195 F.3d 74, 75 (2d Cir. 1999) ("When the IRS has assessed a penalty, its assessment is presumptively correct."). Accordingly, Plaintiff is entitled to summary judgment on the tax assessments.

LaMontagne's statute of limitations defense raised in his Answer must fail because Plaintiff commenced the instant action within ten years of the date of the assessment. See 26 U.S.C. §6502(a)(1); see U.S. v. Hussein [99-1 USTC ¶50,565], 178 F.3d 125 (2d Cir. 1999); Kaggen v. I.R.S. [95-2 USTC ¶50,635], 57 F.3d 163 (2d Cir. 1995).

B. Fraudulent Transfer of Title

Under New York law,

[e]very 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.

N.Y. DEBT. & CRED. L. §273 (McKinney 2000). Generally speaking, the party challenging the conveyance has the burden of proving both insolvency and the lack of fair consideration. See American Inv. Bank, N.A. v. Marine Midland Bank, N.A., 191 A.D.2d 690, 595 N.Y.S.2d 537, 538 (2d Dep't 1993 ). In cases of intra-family transfers where facts concerning the nature of the consideration are within the exclusive control of the transferee, however, the defendant has the burden of proving the adequacy of consideration. See United States v. McCombs [94-2 USTC ¶50,363], 30 F.3d 310, 323 (2d Cir. 1994); Interpool Ltd. v. Patterson, 890 F.Supp. 259, 265 (S.D.N.Y. 1995); ACLI Gov't Sec., Inc. v. Rhoades, 653 F.Supp. 1388, 1391 (S.D.N.Y. 1987), aff'd, 842 F.2d 1287 (2d Cir. 1988); U.S. v. Scharfman [81-2 USTC ¶9630], 1981 WL 1855, at *6 (S.D.N.Y. 1981). Moreover, if the conveyance is found lacking in consideration, the defendant will have the burden of proving solvency. See United States v. Red Stripe, Inc. [92-1 USTC ¶50,277], 792 F.Supp. 1338, 1342 (E.D.N.Y. 1992); ACLI Gov't Sec., 653 F.Supp. at 1393.

Here, LaMontagne transferred the property to his sister. The deed indicates that the consideration was love and affection. A transaction for "love and affection" only, without evidence of other consideration, is inadequate. See Garden City Co., Inc. v. Kassover, 251 A.D.2d 9 (1^st Dep't 1998); Apple Bank for Savings v. Contaratos, 204 A.D.2d 375 (2d Dep't 1994) (holding that love and affection does not constitute fair consideration for transfer of property for purposes of determining whether conveyance was fraudulent); Duckstein v. Rosa, 118 A.D.2d 951, 952 (3d Dep't 1986) (same). Any other potential consideration for the transfer is within the exclusive knowledge of LaMontagne and Leoni. Absent proof of any other consideration, the Court finds that there was not adequate consideration.

Because the transfer was made without consideration, LaMontagne has the burden of proving solvency, which he has failed to do. See ACLI Gov't Sec., 653 F.Supp. at 1393. Accordingly, the Court finds that the transaction should be set aside as fraudulent.

C. Foreclosure

Because Plaintiff has a valid tax lien against LaMontagne and is entitled to judgment thereon, it may seek to satisfy payment of that obligation against LaMontagne's property, including the Tupper Lake real property. See 26 U.S.C. §7403. Accordingly, Plaintiff may foreclose upon their liens and, with the exception of that portion of the property claimed to be owned by the Weissbrots, the property shall be sold at a judicial sale free and clear of the claims of all parties to this action. The rights of the Weissbrots must be determined upon further proceedings.

III. CONCLUSION

For the foregoing reasons, it is hereby Ordered that judgment shall be entered in favor of the United States as follows:

1. Against Paul LaMontagne in the amount of $595,669.25, plus statutory interest from the dates of assessment;

2. Against Paul LaMontagne and Janine Leoni declaring the conveyance of the property at 45 South Little Wolf, Tupper Lake, New York 12986 and as described in Gov't Ex. H from Paul LaMontagne to Janine Leoni as fraudulent and null and void;

3. The United States has valid and subsisting liens for the unpaid federal wagering excise and income tax liabilities of Paul Montagne on the above-described property, which said liens shall be foreclosed and, except as to that portion of the property claimed to be owned by the Weissbrots, the property shall be sold at a judicial sale free and clear of the claims of all parties to this action.

4. The matter should expeditiously proceed to trial on the Weissbrots's claims of adverse possession.

IT IS SO ORDERED.

 

 

 

United States of America , Plaintiff v. Melville K. Turner, Letitia Y. Turner, Michael L. Kailing, Trustee/Agent of Executive Trust, Trustee of Ruth Realty Trust, Hawaii State Employees Federal Credit Union, and First Hawaiian Bank, Defendants

U.S. District Court, Dist. Hawaii, Civ. 99-00817SOM-FIY, 10/6/2000

[Code Sec. 6203 ]

Method of assessment: Certificates of Assessment and Payment: Presumption of correctness: Failure of taxpayer to rebut.--The government was entitled to judgment with respect to its adjusted assessments against a delinquent married couple for the tax years in issue, including penalties and interest. The Certificates of Assessments and Payments established a prima facie case that the assessments were made in accordance with statutory requirements and that they remained unpaid, and the taxpayers did not offer any evidence that the assessments were erroneous.

[Code Secs. 6321 and 7403 ]

Tax liens: Foreclosure: Real property: Transfer to nominee.--The government was entitled to foreclose its tax liens on a married couple's real property to satisfy their delinquent tax liabilities. The taxpayers were the true and beneficial owners of the property that they had previously transferred to a nominee in an attempt to avoid their tax liability.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER AND DECREE OF FORECLOSURE

MOLLWAY, District Judge:

This is an action by Plaintiff United States of America to reduce to judgment the outstanding federal income tax liabilities assessed against Melville Turner and Letitia Turner (the "Turners") and to foreclose tax liens against a parcel of real property, title to which the Turners transferred to the Ruth Realty Trust, Michael L. Kailing, trustee. On February 8, 2000, the Turners filed a motion to dismiss the Complaint arguing that they are not "persons" subject to the Internal Revenue Code, and consequently, should not be liable for the income tax assessments made against them. On March 10, 2000, the Court rejected this argument and denied the Turners' motion to dismiss.

On April 27, 2000, Magistrate Judge Yamashita issued Findings and Recommendation that the Court grant the United States ' Motion for Default Judgment Against Defendant against Michael L. Kailing, trustee/agent of Executive Trust, trustee of Ruth Realty Trust. The Findings and Recommendation specifically found "that the Ruth Realty Trust has no interest in the real property described in paragraph 10 of the Plaintiff's Complaint." On June 22, 2000, the Court filed an order adopting the Findings and Recommendation.

On July 7, 2000, the Turners filed an Answer and Verified Counterclaim. On August 4, 2000, the United States answered the Turner's Counterclaim and filed a motion for summary judgment against Melville Turner and Letitia Turner seeking: (1) a judgment against each of the Turners for the unpaid income tax assessments, plus penalties and interest, made against each of them for the years 1988 through 1993, as recalculated; (2) a judgment providing that the federal tax liens of the United States be foreclosed upon the parcel of real property described in paragraph 10 of the First Amended Complaint ("Complaint"), that the property be ordered sold by a court-appointed Commissioner at a judicial sale, that the proceeds thereof be first applied to the costs of such sale and that the balance of such proceeds of sale be distributed to the United States and the Hawaii State Employees Federal Credit Union according to their relative priorities; and (3) a judgment dismissing the Turner's counterclaim.

Because the United States showed a right to the relief sought in its motion and because the Turners presented neither law nor facts showing otherwise, the Court, by Order filed September 25, 2000, granted the United States summary judgment against the Turners on the First Amended Complaint and dismissed the Turners' Counterclaim. Each of the Turners' arguments in opposition to the motion are addressed in the September 25, 2000, Order. For the reasons set forth below, this Court also orders that the parcel of real property in issue be foreclosed upon.

FINDINGS OF FACT

1. A delegate of the Secretary of the Treasury made assessments against the taxpayer, Melville K. Turner, for unpaid federal income taxes (Form 1040 taxes) for the tax years 1988, 1989, 1990, 1991, 1992, and 1993 as set forth in paragraph 13 of the Complaint.

2. Notice and demand for payment of the assessments described in paragraph 1, above, was made upon the taxpayer, Melville K. Turner. Despite notice and demand for payment, the taxpayer, Melville K. Turner, neglected, failed and/or refused to fully pay the amounts set forth in paragraph 1, above.

3. A delegate of the Secretary of the Treasury made assessments against the taxpayer, Letitia Y. Turner, for unpaid federal income taxes (Form 1040 taxes) for the tax years 1988, 1989, 1990, 1991, 1992, and 1993 as set forth in paragraph 17 of the Complaint.

4. Notice and demand for payment of the assessments described in paragraph 3, above, was made upon the taxpayer, Letitia Y. Turner. Despite notice and demand for payment, the taxpayer, Letitia Y. Turner, neglected, failed and/or refused to fully pay the amounts set forth in paragraph 3, above.

5. For each of the years for which a judgment is sought against Melville K. Turner and Letitia Y. Turner as described in paragraphs 1 and 3 above, neither taxpayer filed a federal individual income tax return. Consequently, the Internal Revenue Service prepared substitute for returns for each of the taxpayers pursuant to 26 U.S.C. Section 6020(b).

6. During the years 1988-1993, the Turners jointly owned various business enterprises and failed to report on a filed income tax return the income generated by these business enterprises. The Turners also owned real property and received rental income during 1989 and 1990. To protect the federal revenues, the gross receipts from the businesses and the rental income were included in the gross income of both Letitia Turner and Melville Turner.

7. The amount of gross receipts from the various businesses described in paragraph 6, above, for each taxable year was arrived at by reviewing the deposits made in the Turners' various bank accounts for each year and subtracting therefrom income amounts which could be attributed specifically to either Melville Turner or Letitia Turner.

8. The amount of gross receipts determined to be attributed to the various business enterprises conducted by the Turners for the years 1988 through 1993 was $230,684.00 for 1988, $196,649.00 for 1989, $240,378.00 for 1990, $293,065.00 for 1991, $262,043.00 for 1992 and $305,167.00 for 1993.The amount of rental income received by the Turners was determined to be $6,300.00 for 1989 and $3,000.00 for 1990.

9. A review of the administrative file establishes that one-half of the income from the various business enterprises conducted by the Turners and one-half of the rental income should be attributed each to Melville Turner and Letitia Turner as they were both involved in the various business enterprises and rental activity.

10. The amount of income tax assessed Melville Turner and Letitia Turner for the years 1988 through 1993 has been recalculated to include in each Turner's taxable income only one-half of the gross receipts from the various business enterprises and one-half of the rental income. In addition, any amounts collected by the IRS through administrative levies have been credited one-half each to Letitia Turner and Melville Turner.

11. After the adjustments described in paragraph 10 above, the revised taxable income of Meville K. Turner for the years 1988 through 1993 is $171,727.00 for 1988, $122,766.00 for 1989, $112,992.00 for 1990, $141,686.00 for 1991, $122,279.00 for 1992 and $143,957.00 for 1993.

12. After the adjustments described in paragraph 10 above, the revised taxable income of Letitia Y. Turner for the years 1988 through 1993 is $129,584.00 for 1988, $107,781.00 for 1989, $133,520.00 for 1990, $161,063.00 for 1991, $128,957.00 for 1992 and $147,443.00 for 1993.

13. There is due and owing from the taxpayer, Melville K. Turner, on the revised taxable income amounts described in paragraph 11, above, the sum of $764,045.66 as of September 25, 2000, plus further accrued statutory interest thereon as provided by law.

14. There is due and owing from the taxpayer, Letitia Y. Turner, on the revised taxable income amounts described in paragraph 12, above, the sum of $719,271.24 as of September 25, 2000, plus further accrued statutory interest thereon as provided by law.

15. The parcel of real property upon which foreclosure is sought (described in Exhibit A, attached hereto and made a part hereof) was acquired by the Turners by "Warranty Deed" dated June 14, 1985 and recorded with the State of Hawaii Bureau of Conveyances on June 19, 1985.

16. Title to the real property upon which foreclosure is sought and described in Exhibit A is in the name the Ruth Realty Trust.

CONCLUSIONS OF LAW

1. At issue is whether the United States is entitled to a judgment against each of the Turners for their unpaid income tax liabilities and whether the United States can foreclose its tax liens against the parcel of real property described in Exhibit A to, at least in part, satisfy those unpaid tax liabilities.

2. The United States seeks to reduce to judgment its income tax assessments, plus penalties and statutory interest, made against each of the Turners for the years 1988 through 1993.

3. The assessments made against the Turners are reflected on the Certificates of Assessments and Payments. The Certificates of Assessments and payments submitted here are a proper means of establishing that assessments were properly made and that notices and demand for payment were sent. Koff v. United States [93-2 USTC ¶50,520], 3 F.3d 1297, 1298 (9th Cir. 1993); Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 535 (9th Cir. 1992); United States v. Zolla [84-1 USTC ¶9175], 724 F.2d 808, 810 (9th Cir. 1984).

4. An assessment for unpaid federal taxes, when properly certified, is presumptively correct evidence of a taxpayer's liability. United States v. Janis [76-2 USTC ¶16,229], 428 U.S. 433, 440-441 (1976). Thus, the Certificates of Assessments and Payments submitted here establish that assessments were properly made, that notice and demand for payment were sent, and that the Turners are presumptively liable for the unpaid taxes, penalties and interest shown on the Certificate as explained by the Declaration of Pat Young-Lau.

5. The burden is on the Turners to overcome the presumption. United States v. Strebler [63-1 USTC ¶9278], 313 F.2d 402, 403-04 (8th Cir. 1963).

6. The Turners failed to present any evidence showing the assessments to be incorrect.

7. The United States through the Certificates of Assessments and Payments, the Declaration of Revenue Agent Pat Young-Lau and the Declaration of John Margenau has established that it is entitled to a judgment for unpaid income tax assessments against Melville Turner in the amount of $764,045.66 as of September 25, 2000, and a judgment against Letitia Turner in the amount of $719,271.24 as of September 25, 2000.

8. Title 26, U.S.C. §6321 provides that the amount of a delinquent taxpayer's liability shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to the taxpayer. The lien arises at the time of assessment and attaches to all property of the taxpayer. United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 452-455 (1993); Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267-68 (1945). The tax liens of the United States are perfected upon assessment of the tax and no further action need be taken. United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351 (1964).

9. Thus, pursuant to 26 U.S.C. §6321, the United States has a lien upon the Turners' property through which to satisfy the Turners' unpaid tax obligations.

10. The Internal Revenue Code provides that the United States may foreclose its tax liens on property in which the taxpayer has any right, title or interest as the Turners have in the instant case. 26 U.S.C. §7403. When, in a case such as this where "there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof," the United States may bring an action in Federal District Court to enforce the lien created by section 6321 or to subject any property held by the taxpayer to the payment of the tax. 26 U.S.C. §7403(a). Pursuant to §7403(c), after adjudicating the merits of the United States' claim to the subject property, the District Court may decree a sale of the property and order distribution of the proceeds from that sale. 26 U.S.C. §7403(c); see also United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720 (1985).

11. The Court concludes that the Turners are the owners of the real property upon which foreclosure is sought. The parcel of real property was acquired by the Turners by "Warranty Deed" dated June 14, 1985 and recorded with the State of Hawaii Bureau of Conveyances on June 19, 1985. The Turners then transferred title to the property to the Ruth Realty Trust. Although title to the property is nominally held in the name of the Ruth Realty Trust, this Court has ordered the entry of a default judgment against Michael L. Kailing as the agent/trustee of Executive Trust as the trustee of the Ruth Realty Trust and specifically found "that the Ruth Realty Trust has no interest in the real property described in paragraph 10 of the Plaintiff's Complaint." Thus, the Court finds that the Turners are the joint owners of the real property and the United States is entitled to foreclose its tax liens upon the property to satisfy the unpaid income liabilities of the Turners.

ORDER AND DECREE OF FORECLOSURE

It is hereby ORDERED and ADJUDGED, for the reasons stated herein and in the Court's September 25, 2000 order granting summary judgment in favor of the United States and against the Turners, and dismissing the Turners' Counterclaim, that:

1. Judgment is awarded against defendant Melville K. Turner for the unpaid income tax assessments, plus penalties and interest, made against him for the years 1988 through 1993, in the amount of $764,045.66 and for statutory interest thereon as allowed by law from September 25, 2000;

2. Judgment is awarded against defendant Letitia Y. Turner for the unpaid income tax assessments, plus penalties and interest, made against her for the years 1988 through 1993, in the amount of $719,271.24 and for statutory interest thereon as allowed by law from September 25, 2000;

3. That the federal tax liens of the United States relating to the tax liabilities described above shall be and are hereby foreclosed upon the parcel of real property described in Exhibit A, that the property be ordered sold by a court-appointed Commissioner at public auction, without an upset price, as authorized by law. Such sale of the property shall not be final until approved and confirmed by the Court.

4. The Commissioner as appointed herein by the Court shall sell the property within four months after the Commissioner is notified of this Order and Decree of Foreclosure. The Commissioner shall hold all proceeds of the sale of the property to the credit of this cause subject to the directions of this Court. Upon payment according to such directions, the Commissioner shall file an accurate accounting of Commissioner's receipts and expenses.

5. Richard Ogasawara, whose address is 1660 Hoolana Place, Pearl City, Hawaii 96782, and whose telephone number is (808) 455-1106, is hereby appointed by this Court as Commissioner, and as Commissioner shall henceforth sell the property at foreclosure sale to the highest bidder at the Commissioner's sale by public auction, without an upset price, after first giving notice of such sale by publication in at least one newspaper regularly issued and of general circulation in the District of Hawaii. Said notice shall be published once a week for at least four (4) consecutive weeks, with the auction to take place no sooner than fourteen (14) days after the appearance of the fourth advertisement. Said notice shall give the date, time, and place of the sale and an intelligible description of the property, including any improvements. The Commissioner shall have further authority to continue sale from time to time at the Commissioner's discretion. No bond shall be required of the Commissioner. In the event that the Commissioner refuses, or becomes unable, to carry out his duties set forth herein, the Court shall appoint another without further notice of hearing.

6. The Commissioner and all persons occupying the subject property shall allow reasonable access to view the subject property, a minimum of two separate days prior to the sale of the subject property, by means of an open house or other reasonable means.

7. The fee of the Commissioner shall be such as the Court deems just and reasonable, together with actual and necessary expenses incurred with the sale of the subject property.

8. The Commissioner shall hold all proceeds from the sale of the property to the credit of this cause subject to the direction of this Court. Upon payment according to such direction, the Commissioner shall file an accurate accounting of all receipts and expenses.

9. The order of distribution of the sale proceeds to the parties claiming an interest in the property shall be made in accordance with their respective priorities to be determined by the Court.

10. The sale so made and confirmed shall perpetually bar defendants herein named and all persons and parties claiming by, through or under them, except governmental authorities enforcing liens for unpaid real property taxes, and except to the extent that the Court determines Defendant Hawaii State Employees Federal Credit Union's ("Hawaii State") mortgage lien to be a valid lien senior to that of the United States, from any and all right, title and interest in the property or any part thereof. At a hearing to consider confirmation of the foreclosure sale, the Court shall hear proof of claims of any other parties, and shall determine the priority among the parties, and the final payment of the proceeds of the foreclosure sale shall be directed.

11. Plaintiff United States and all other parties are hereby authorized to purchase the property at the foreclosure sale. The successful bidder at the foreclosure sale shall be required at the time of such sale to make a down payment to the Commissioner in an amount not less than ten (10%) percent of the highest successful price bid, such payment to be in cash, certified check or cashier's check, provided that Plaintiff United States and Defendant Hawaii State, should either party be the high bidder, may satisfy the down payment by way of offset up to the amount of their secured debts. The balance of the purchase price must be paid in full at the closing of the sale, which shall take place 35 days after entry of the order confirming the sale. If the bidder fails to fulfill this requirement, the deposit shall be forfeited and applied to cover the cost of sale, including the Commissioner's fee, with any amount remaining to be returned to the bidder. Such payment is to be in cash, certified check or cashier's check, provided that Plaintiff United States and Defendant Hawaii State , should either one of them be the high bidder at the confirmation of sale, may satisfy the balance of the purchase price by way of offset up to the amount of their secured liens, as discussed above, as appropriate. Costs of conveyancing, including preparation of the conveyance document, conveying tax, securing possession of such mortgage property, escrow services, and recording of such conveyance, shall be at the expense of such purchaser.

12. Pending the sale of the properties, the Turners shall take all reasonable steps necessary to preserve the real property (including all buildings, improvements, fixtures and appurtenances on the property) in its current condition. They shall not commit waste against the properties, nor shall they cause or permit anyone else to do so. The Turners shall not do anything that tends to reduce the value or marketability of the properties, nor shall they cause or permit anyone else to do so. The Turners shall not record any instruments, publish any notice, or take any other action (such as running newspaper advertisements or posting signs) that may directly or indirectly tend to adversely affect the value of the properties or that may tend to deter or discourage potential bidders from participating in the public auction, nor shall they cause or permit anyone else to do so.

13. All persons occupying the properties shall leave and vacate the properties permanently within sixty (60) days of the date of this Decree, each taking with them their personal property (but leaving all improvements, buildings, and appurtenances to the properties). If any person fails or refuses to leave and vacate the Property by the time specified in this Decree, the Commissioner is authorized and directed to take all actions that are reasonably necessary to bring about the ejectment of those persons, including obtaining a judgment for possession and a writ of possession. If any person fails or refuses to remove his or her personal property from the premises by the time specified herein, any personal property remaining on the properties thereafter is deemed forfeited and abandoned, and the Commissioner is authorized to remove it and dispose of it in any manner the Commissioner sees fit, including sale, in which case the proceeds of the sale are to be applied first to the expenses of sale and the balance to be paid into the Court for further distribution.

14. When the sale of the properties is confirmed by this Court, the State of Hawaii , Bureau of Conveyances shall permit the transfer of the properties to be reflected upon register of the title.

15. The sale can be supplemented with the practices and procedures in the State of Hawaii and Section 667 of the Hawaii Revised Statutes.

16. The Court reserves jurisdiction to determine the party or parties to whom any surplus shall be awarded herein.

17. At the hearing on confirmation herein above mentioned, if it appears that the proceeds of such sale shall be insufficient to pay all the amounts which are valid claims against the Turners and a deficiency exists, judgment shall be entered for such deficiencies against each of the Turners and in favor of Plaintiff United States and Defendant Hawaii State, as appropriate. As the property is owned jointly by the Turners, one-half of the proceeds of sale available for distribution shall be applied to pay claims against Melville Turner and one-half of such proceeds shall be distributed to pay claims of Letitia Turner.

IT IS SO ORDERED.