Stolen Property

---

Mervis Industries, Inc., Plaintiff and Clark Chevrolet Sales, Inc., Intervenor-Plaintiff v. David Sams, David Sams, d/b/a D&D Foods, and United States of America, Defendants

U.S. District Court, So. Dist. Ind., Terre Haute Div., TH 92-127-C, 4/21/94, 866 FSupp 1143

[Code Secs. 6321 and 6323 ]

Federal tax lien: Attached property: Priority.--Neither the government nor the employer of an embezzler was entitled to summary judgment where, although the government proved that its tax lien against the embezzler had priority over the employer's pre-judgment lien, the employer presented sufficient evidence indicating that it had a constructive trust over the property purchased by the employee with the proceeds of the embezzled funds. State ( Indiana ) law provided that an embezzler acquired no beneficial ownership in property purchased with stolen funds and that a constructive trust arose over property that could be traced to stolen funds. The employer raised a material question of fact regarding the ownership of the property, indicating that the federal tax lien might have no property to which it could attach. The matter was thus put over for trial in order to determine whether the employer could directly trace its stolen funds to the disputed property.

Joe E. Beardsley, Beardsley & Stengel, 320 S. Main St., Clinton, Ind. 47842, John R. Kenley, Kenley & Kenley, P.O. Box. 308, Rockville , Ind. 47872 , for plaintiffs. David Sams, Box 4002, Danville, Ill. 61834-4002, Jeffrey L. Hunter, 46 E. Ohio St., Indianapolis, Ind. 46204, Michael W. Davis, Peter Sklarew, Department of Justice, Washinton, D.C. 20530, for defendants.

MEMORANDUM DECISION

 

BROOKS, District Judge:

This matter is before the Court on cross-motions from plaintiff Mervis Industries, Inc. ("Mervis"), plaintiff-intervenor Clark Chevrolet, Inc. ("Clark") and defendant United States of America . The United States and Mervis filed cross-motions for summary judgment January 29, 1993. Clark filed its Motion for Summary Judgment March 9, 1993. Mervis filed answer briefs to the Clark and United States motions March 29, 1993. The United States filed a consolidated answer brief March 30, 1993. On April 26, 1993, the United States filed a Motion to Strike certain portions of Mervis' Answer Brief in Opposition. Mervis filed a response June 3, 1993.

I. FACTS

Defendant David Sams ("Sams") was an employee of Mervis. (Mervis Brief in Support, Ex. A at ¶5.) From December 12, 1985, to February 28, 1990, Sams was in charge of "scalehouse operations" for Mervis. (Mervis Brief in Support, Ex. A at ¶8.) As part of his duties, Sams purchased truckloads of scrap metal for Mervis, paying for the metal out of a cash fund supplied by Mervis. (Mervis Brief in Support, Ex. A at ¶9.) The cash was to be paid to drivers and customers who delivered loads of scrap to Mervis. Id. Sams was required to have the drivers or customers to whom he paid cash to sign a "scale ticket" to acknowledge the receipt of the cash. Id.

Unfortunately, Sams used his position to defraud Meivis by creating fraudulent scale tickets for "phantom" truckloads of scrap and pocketing the cash. (Mervis Brief in Support, Ex. A at ¶14.) Sams transferred the money to his business, D&D Foods. (Mervis Brief in Support, Ex. B at ¶8.) Sams embezzled at least $500,000 from Mervis in this manner. (Mervis Brief in Support, Ex. D at ¶2.) Sams was apprehended, convicted and sentenced to 13 years in an Illinois penitentiary. (Mervis Brief in Support, Ex. C.)

Mervis then began a civil action in the Indiana courts to recover the converted funds from Sams. (Mervis Brief in Support, Ex. D.) The Vermillion Circuit Court issued a prejudgment attachment directing the sheriff to seize Sams' assets on March 7, 1990. (Mervis Brief in Support, Ex. E.) The Vermillion County Sheriff seized the property of Sams, including several vehicles which were subsequently sold. The proceeds were delivered to the office of the Clerk of the Court of Vermillion County. (Mervis Brief in Support, Ex. F at ¶2, 3.)

On August 12, 1991, the Internal Revenue Service ("IRS") filed two notices of federal tax lien against Sams and his wife amounting to $671,180.33. (Mervis Brief in Support, Ex. J at 5; Notice of Removal.)

In December of 1993 the Vermillion Circuit Court granted a default judgment for Mervis and held a hearing on the issue of damages. The Court determined that Sams converted the property of Mervis to his own use and transferred the property to D&D Foods, which was fully aware that the money in fact belonged to Mervis. (Mervis Brief in Support, Ex. B at ¶4, 8.) The Court also found that Sams and D&D Foods were "the constructive trustee[s]" of the stolen money, with Mervis as the beneficiary. (Mervis Brief in Support, Ex. B at ¶5, 11.)

On July 2, 1992, the IRS filed a final demand for the property held by the Vermillion County Clerk of the Court. (Mervis Brief in Support, Ex. J at 5.) Mervis filed for a stay of compliance on July 7, 1992. The stay was granted. (Mervis Brief in Support, Exs. J, K.) Mervis also moved the Vermillion Circuit Court to join the United States as an additional defendant in the action. That motion was also granted. (Notice of Removal, Ex. A.) The United States then filed a Notice of Removal, alleging that removal was proper because Mervis was seeking to determine the priority of liens and a stay of compliance with the United States ' final demand.

II. Motion to Strike

The United States has moved this Court to strike a sentence from Mervis' Answer Brief in Opposition which states "Sams held no property or rights to property in the cash proceeds at issue before this Court because he purchased the motor vehicles with monies tortiously acquired from Mervis." (Mervis Answer Brief at 5.)

The United States contends that "[t]he allegation in Mervis [sic] latest submission is without evidentiary support." (Motion to Strike at 2.) The United States ' arguments in favor of striking the complained of lines in Mervis' Answer Brief are more properly considered as arguments against Mervis' position. The Court is well aware of the distinction between claims made in a brief and evidence supporting those claims. Therefore, the Motion to Strike is DENIED.

III. Summary Judgment

A motion for summary judgment is properly granted only when there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The record and all reasonable inferences therefrom must be viewed in the light most favorable to the non-moving party. Beard v. Whitley County REMC, 840 F.2d 405, 410 (7th Cir. 1988) (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)). The moving party bears the burden of demonstrating the absence of a triable issue. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden may be met by demonstrating "that there is an absence of evidence to support the non-moving party's case." Celotex Corp., 477 U.S. at 325. If the moving party meets its burden, the adverse party "may not rest upon the mere allegations or denials of the adverse party's pleading," but must present specific facts to show that there is a genuine issue of material fact. Fed.R.Civ.P. 56(e); see also, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986).

In this case, the Court is called upon to consider three competing Motions for Summary Judgment. The United States has moved the Court to grant summary judgment (and the cash proceeds from the sale of the disputed property) to it, Mervis has moved the Court to grant it summary judgment, and plaintiff-intervenor Clark has moved for summary judgment as to a portion of the cash proceeds. In evaluating these competing claims, two issues are pivotal: the priority of the liens filed upon Sams' property, and the property rights of Sams in the disputed cash proceeds.

A. Priority of Liens

A federal tax lien attaches to "all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. §6321 . The lien of the government, which arises as soon as taxes are assessed, prevails against all other unperfected liens with a few statutory exceptions. One exception is judgment lien creditors. Whenever the tax lien of the United States competes with that of the judgment lien creditor, it must be determined whether the United States filed notice of its lien in the proper place prior to the time the competing lienor established his status as a judgment lien creditor. 26 U.S.C. §6323 .

In this case, the United States filed notice of its lien with the Vermillion County Recorder. This notice would have been effective under the provisions of Ind. Code §36 -211-21, which provided that federal tax liens should be filed in the recorder's office of the county in which the property subject to the lien is located. Unfortunately, in 1987 the Indiana legislature enacted Ind. Code §36 -2-11-25 and repealed Section 21 . Section 25 provided for similar filing provisions, but referred to "real property" only. However, the United States argues extensively, and we do not understand Mervis to disagree, that the legislative history of Ind. Code §36 -2-11-25 indicates that Section 25 applies to personal property as well. Therefore, we find that the United States properly filed notice of the federal tax lien, as required by 26 U.S.C. §6323(f)(1) . ¹

However, Mervis asserts that, because it filed a pre-judgment lien prior to the filing of the tax lien, it has an interest superior to that of the government in the proceeds. We do not agree. Mervis fails to recognize that it is a matter of federal and not state law as to when a lien has acquired sufficient substance and has become so perfected as to defeat a federal tax lien. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84 (1963). For a lien to be sufficiently established to defeat a federal tax lien, the identity of the lienor, the property subject to the lien, and the amount of the lien must be established. In this case, it is clear that the amount of the pre-judgment lien was not established at the time of the filing of the federal tax lien. Mervis' interest as a creditor of Sams was contingent upon the outcome of its suit. Until Mervis received a judgment from the Vermillion County Circuit Court, its lien was "inchoate," and not perfected to the extent required by federal law so that it would defeat a valid federal tax lien. See, Atlas, Inc. v. United States [79-1 ustc ¶9118 ], 459 F.Supp. 1000, 1003 (D.C. N.D. 1978).

Since Mervis did not have a lien in a certain amount on Sams' property at the time the federal tax lien was perfected, its interest was inchoate and inferior to the federal tax lien. Therefore, the tax lien is effective upon "all property and rights to property, whether real or personal, belonging to" Sams. 26 U.S.C. §6321 . However, although federal law determines whether a state lien is sufficiently choate so as to defeat a federal tax lien, it must be determined whether the taxpayer had property or a right to property to which the federal tax lien could attach. This is a matter of state law. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509 (1960).

B. Sams' Property Interest

Mervis argues that because Sams was a constructive trustee of Mervis, he had no interest or rights to the property at issue to which the tax lien could attach. The United States raises two arguments to oppose this theory. First, the government argues that Sams acquired not a void title in property purchased with the stolen funds, but rather a voidable title and that the tax lien therefore attaches to that interest. Second, the United States argues that Mervis has failed to properly present sufficient evidence to sustain its Motion for Summary Judgment.

1. An Embezzler's Title to Property Purchased with Stolen Funds

The United States argues in its brief that "[o]nly if state law would hold that an embezzler, from the beginning, acquires no beneficial ownership in property purchased with stolen funds could Mervis prevail in this case." ( U.S. Answer Brief at 11-12.) We agree. Unfortunately for the government, Indiana law is clear, and has been clear for well over a century, that this is precisely the case. Riehl v. Evansville Foundry Ass'n, 3 N.E. 633 ( Ind. 1885). This rule is not simply Indiana law, it is " 'perhaps universally recognized that a constructive trust will arise when stolen or embezzled funds are used to purchase other property.' " Dennis v. United States [74-1 USTC ¶9391 ], 372 F.Supp. 563 (E.D. Va. 1974) (quoting Annotation, 38 A.L.R.3d 1354, 1359). See also, Atlas [79-1 USTC ¶9118 ], 459 F.Supp. at 1005; First Nat'l. Bank v. Hill [76-2 USTC ¶9623 ], 412 F.Supp. 422, 425 (N.D. Ga. 1976).

Indiana law describes a constructive trust as "a fiction of equity, devised for the purpose of making equitable remedies available against one who through fraud or other wrongful means acquires the property of another." Hunter v. Hunter, 283 N.E.2d 775, 779 (Ind.App. 1972) (citing Brown v. Brown, 135 N.E.2d 614 ( Ind. 1956); Koenig v. Leas, 165 N.E.2d 134 ( Ind. 1959)). Nor does the transformation of property from one form to another deprive a beneficiary of the right to the trust property. That rule has been unchanged for at least 99 years. It was set out in Winstanley v. Second Nat'l. Bank, 41 N.E. 956 (Ind.App. 1895); quoted verbatim in Ross v. Thompson, 146 N.E.2d 259 (Ind.App. 1957), and quoted verbatim again in Fall v. Miller, 462 N.E.2d 1059 (Ind.App. 1984):

The equity rule is that trust property may be followed by the beneficiary so long as its identity can be ascertained. If a trustee or other fiduciary wrongfully dispose of his principal's property, equity imposes a constructive trust upon the new forms or species into which it is converted, so long as it can be traced or followed and its identity ascertained. The principle upon which this rule rests is a very plain and just one. It is founded upon the right of property. The trust property rightfully belongs to the cestuis que trust and a change in its form does not change its ownership. So long as either the original or substituted property can be traced or followed equity will always attribute the ownership to the beneficiary and will not allow the right to be defeated by the wrongful act of the fiduciary, no matter what form it may assume. The true owner of property has the right to have his property restored to him, not as a debt due and owing, but because it is his property wrongfully withheld. As between cestuis que trust and the trustee and all parties claiming under the trustee, except purchasers for value and without notice, all the property belonging to the trust, however much it may have been changed in its form or its nature or character, and all the fruits of such property, whether in its original or altered state, continue to be subject to and affected by the trust.

Fall, 462 N.E.2d at 1062 (emphasis added, citations and original emphasis omitted).

The government is simply wrong in its assertion that Indiana cases "treat the wrongdoer as acquiring voidable rights to property." ( U.S. Answer Brief at 7.) There is no merit whatsoever to this argument. ²

2. The Evidence

The United States next argues that "it remains a fact that Mervis' motion for summary judgment fails to present any evidence of the embezzlement and . . . fails to present any evidence that Mervis [sic, presumably should be Sams] acquired the vehicles in question with the embezzled funds." (U.S. Answer Brief at 8, emphasis in original.)

Mervis has presented this Court with certified copies of a judgment filed in the Vermillion Circuit Court of the State of Indiana . (Mervis Brief in Support, Ex. B.) This decision recites that the Court granted a default judgment to Mervis on December 9, 1991, and heard evidence on December 13, 1991, regarding damages. The judgment further recites that Sams converted $1,785,000.00 of Mervis' money to his own use (Mervis Brief in Support, Ex. B at ¶1, 3), that Sams transferred the money to Sams D&D Foods which was aware of the embezzlement (Mervis Brief in Support, Ex. B at ¶8), and that Sams and Sams D&D Foods were the constructive trustees of the $1,785,000.00 (Mervis Brief in Support, Ex. B at ¶5, 11).

The United States attacks the state court determination on the ground that a default judgment is "insufficient to establish the facts alleged in Mervis' original complaint against Sams." ( U.S. Answer Brief at 8.) The United States argues that the judgment of the state court is not binding upon it as it did not default, and further, citing Commissioner v. Estate of Bosch [67-2 USTC ¶12,472 ], 387 U.S. 456, 457 (1967), makes the assertion that "even a litigated judgment between a taxpayer and another person will not bind the United States unless the judgment is affirmed on the merits by the state's highest court." ( U.S. Answer Brief at 9.)

Indiana Trial Rule 56 states:

If, in order to enable the court to enter judgment or to carry it into effect, it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence or to make an investigation of any other matter, the court may conduct such hearing or order such references as it deems necessary and proper . . . .

Ind. Tr. Rule 56 (emphasis added).

Mervis has presented an order following such a hearing. The United States has presented no reasons why this Court should reject the findings of the state court. Nor does this Court perceive any reason to ignore or revise the findings of the state court. To the contrary, to do so would be an egregious violation of the principles of comity.

Bosch does not carve out a special protection for the United States from being bound by state court decisions. Bosch merely recognizes that when application of a federal statute is involved, the decision of a state trial court as to an underlying issue of state law is not controlling. ³ Id. at 465. Thus, if the state court had determined that the federal tax lien did not apply, its determination would not be binding upon the United States . However, the state court did not make that determination.

Nor does Mervis need a ruling on the facts by the Indiana Supreme Court to establish its claim. The Vermillion County Circuit Court was merely applying well developed state law in this case. What the United States seems to be implying is that the government is not bound by the state court's application of the law to the facts. By no stretch of the imagination can Bosch be read as requiring parties to litigate their property rights in specific property to the highest court in their state before they may deem it their own and not the government's.

It is therefore clear that the United States ' Motion for Summary Judgment must be denied. Mervis has raised a material question of fact regarding the ownership of the disputed property. The findings of the Vermillion County Circuit Court show that Sams and D&D Foods were the constructive trustees of $1,785,000.00, benefitting Mervis. It is a reasonable inference that some, if not all, of the disputed property belonged therefore not to Sams but to Mervis, and that the federal tax lien therefore did not attach to it.

However, while Mervis has raised a material question of fact regarding Sams' ownership of the vehicles, Mervis has not presented this Court with evidence that traces the embezzled funds into the disputed property. This is an essential requirement of the constructive trust. Fall, 462 N.E.2d at 1062. The state court judgment does not clearly trace the embezzled funds into Sams' property. Rather, it orders an accounting and that the Sams' and D&D Foods' property be sold to pay the obligation to Mervis. (Mervis Brief in Support, Ex. B at ¶6, 12.) Therefore, the Court cannot grant plaintiff's Motion for Summary Judgment at this time. ⁴

C. Clark's Motion for Summary Judgment

Turning to the Motion for Summary Judgment brought by Clark, the Court finds that Clark has presented no admissible evidence which demonstrates why it has a lien prior to the federal tax lien. Nor has Clark presented admissible evidence to show that it, rather than Sams or Mervis, was the true owner of the disputed Blazer. The exhibits attached to Clark 's motion are uncertified and unsworn, and thus do not meet the requirements of Fed.R.Civ.P. 56(e).

IV. Conclusion

For the foregoing reasons, the Court DENIES defendant United States ' Motion to Strike; DENIES defendant United States ' Motion for Summary Judgment; DENIES plaintiff Mervis Industries Inc.'s Motion for Summary Judgment, and DENIES plaintiff-intervenor Clark Chevrolet, Inc.'s Motion for Summary Judgment. This case remains pending for further proceedings to determine the extent of the constructive trust held by Mervis Industries, Inc.

¹ The Court notes that the Indiana legislature has since amended Ind. Code §36 -2-11-25 to include all federal tax liens, further supporting the government's interpretation of the statute.

² We also reject the United States ' contention that "a constructive trust is merely an equitable prioritizing remedy." ( U.S. Answer Brief at 10-11.) While the theoretical underpinnings of the constructive trust doctrine may lend themselves to this interpretation, it is clear the legal effect of the doctrine is that the beneficiary of a constructive trust is the owner of the property. ("The true owner of property has the right to have his property restored to him, not as a debt due and owing, but because it is his property wrongfully withheld". Fall, 462 N.E.2d at 1062 (emphasis added).) Thus, there is no need to "prioritize" his interest as against other creditors of the constructive trustee.

³ Bosch dealt with estate tax liability. As such, it involved statutory considerations not at issue here. Bosch [67-2 USTC ¶12,472 ], 387 U.S. at 464.

⁴ The United States urges the Court to grant its Motion for Summary Judgment because Mervis has failed to bring forward evidence tracing the embezzled funds into the disputed property. The government is again overreaching. While the United States need not negate the plaintiff's case, Celotex, 477 U.S. at 325, it is inappropriate to grant summary judgment where the moving party merely makes a conclusory allegation that the opposing party has no evidence to support its case. Id. at 328 (White, J., concurring).

 

 

 

In re Toyson J. Burruss, Debtor. Steven J. Cole, Maryland Securities Commissioner, Turner MacKall, Joyce Edelin, Plaintiffs v. Roger Schlossberg, Trustee, United States of America, Internal Revenue Service, Defendants

U.S. Bankruptcy Court, Dist. Md., at Rockville, 83-A-1608, 1/12/88

[Code Secs. 6321 and 6323 --Result unchanged by the Tax Reform Act of 1986 ]

Bankrupt taxpayer: Tax claims: Property of estate: Constructive trust.--

Assets of the taxpayer that were originally seized by a state court-appointed receiver for the benefit of individuals that the debtor had defrauded were subject to the IRS tax claims. Although the Maryland Securities Commissioner opposed the payment of taxes from assets initially seized to compensate the taxpayer's victims, the adversarial proceeding was filed after the expiration of Maryland 's three-year statute of limitations. Thus, the Securities Commissioner's suit was dismissed.

MEMORANDUM OF DECISION

(Cross-motions for Summary Judgment)

MANNES, Chief Judge:

Before the court are two well conceived and executed motions for summary judgment filed on behalf of Steven J. Cole, Commissioner of Securities for the State of Maryland , and other plaintiffs, and by the United States of America on behalf of the interests of the Internal Revenue Service.

The debtor, Toyson J. Burruss, is a convicted criminal, pleading guilty on June 7, 1984, before the Honorable Austin W. Brizendine, Associate Judge of the Circuit Court for Baltimore County , Maryland . The debtor pleaded guilty to a violation of Section 11 -301 of the Corporations and Associations Article (Securities Fraud). Count II charged the debtor with the sale of an unregistered security in violation of 11-501 of the Corporations and Associations Article of the Maryland Code. As the statement of facts in support of the debtor's plea indicates, the debtor was associated with an entity called the Life Investors Group that preyed on people who were not particularly sophisticated or well-to-do obtaining over a $1,600,000 in the process.

By virtue of action taken by the Attorney General for the State of Maryland, a Receiver was appointed by the Circuit Court for Prince George's County, Maryland, to seize the assets of the debtor and hold them for the benefit of injured investors. In all, the Receiver turned over $351,642.27 to the Chapter 7 Trustee.

Both the Securities Commissioner and the Trustee now desire to return to the defrauded investors pro rata the funds obtained through the receivership. After the battle between the Securities Commissioner and the debtor, in the words of Associate Justice John McAuliffe of the Court of Appeals of Maryland, "the Internal Revenue Service swept down from the mountain and now wishes to massacre all the wounded." That is, it wishes to suck up the funds of the receivership on the claim that the debtor owes income taxes on the money that he "earned" through his criminal activity. The debtor earned money the old fashioned way, he stole it.

The position of the Trustee is one of complete selflessness. Rather than support the claim of the United States with the resultant substantial trustee's commission that would ensue, the Trustee takes the position that the funds in question are not property of the estate, and he joins in the request of the Securities Commissioner. As for Mr. Burruss, whose discharge has been denied, he deserves a special commendation for filing this useless bankruptcy case and abusing his investors one more time and subjecting them to the bankruptcy law and its priority scheme, particularly with the priority of §507(a)(7)(A) for allowed unsecured claims of governmental units for income taxes.

The motion for summary judgment filed on behalf of the United States is splendid in its manipulation of settled legal principles. The Internal Revenue Service relies on three discreet bases in support of its motion. Unlike a three-legged stool, any one of the three arguments is sufficient to save the day. These three points going to the very extremities of the matter, as opposed to the heart, are as follows:

1. The Commissioner filed the complaint too late and is barred by the three-year limitation period of MD. CTS. & JUD. PROC. CODE ANN. §5 -101 (1984).

2. The Commissioner has no standing to seek a declaration of a constructive trust on behalf of any investors who have not joined in the suit.

3. There could be no tracing, either on behalf of individuals or the groups of the victims of Burruss of a constructive trust on a pooled tracing theory.

After review of the memoranda submitted and the authorities cited on behalf of the disputants, the court concludes that common sense and reason must give way to the legal argument espoused on behalf of the United States of America .

In reaching this conclusion, the court assumes without deciding that the Securities Commissioner has standing to bring this action on behalf of the aggrieved parties to litigate the return of the money stolen from them with the second entity that picked their pockets. See In re DeFelice, 77 BR 376 (BC Conn. 1987); In re Klein, 39 BR 927 (BC E.D. Pa. 1984). In DeFelice, Judge Schiff noted that, apart from public policy considerations, in his opinion the state, in the form of the Attorney General, had the standing to maintain the action in question against the debtor under the doctrine of parens patriae. DeFelice, 77 BR at 380.

The court will also assume without deciding that the Commissioner's position is correct with respect to tracing. In re Teltronics, Ltd., 649 F.2d 1236 (7th Cir. 1981); County Commissioners of Frederick County v. Page, 163 Md. 619, 164 A. 182 (1932). In the instant case, the source of the funds obtained by the Receiver were from two investment accounts made up almost entirely of funds of victims of Burruss. That is, some 97% of the money was obtained from these individuals. Assuming that the debtor used the converted funds for his own benefit and that the first funds out were his own funds, it follows that the remaining funds were those of the individuals for whom the Receiver litigated. See the remarks of Mr. Chief Justice Taft in the original Ponzi case, Cunningham v. Brown, 265 U.S. 1, 13 (1924) (The rule is useful to work out equity between a wrongdoer and a victim; but, when the fund with which the wrongdoer is dealing is wholly made up of the fruits of the frauds perpetrated against a myriad of victims, the case is different).

Reluctantly, as is apparent from the court's earlier remarks, the court believes that the complaint was not timely filed and is therefore subject to a legislatively mandated repose under the Maryland statute of limitations. The court will adopt by reference as the basis for its opinion the argument of the United States of America found at pages 4-7 of its memorandum in support of its motion for summary judgment filed August 20, 1987, and its reply memorandum filed October 26, 1987. While the Securities Commissioner has stated that in his mind this is a quiet title action calling for the 6-year statute of limitation pursuant to 28 U.S.C. §2410 as an action affecting property on which the United States has a lien, however, the fact is that the United States has never asserted a secured claim in this case. The ordinary three-year statute of limitation applies and, for that reason, the filing of the instant complaint on July 24, 1986, was untimely as it was more than three years after the last possible date upon which the Commissioner would have become aware of the debtor's fraud. The record is not clear as to the two individual plaintiffs.

An order will be entered dismissing this adversary proceeding as to all parties but the individual plaintiffs. Counsel for the United States of America shall file an appropriate order.

 

 

 

Vincent Zito, Plaintiff and United States of America, as Intervening Plaintiff v. Anthony J. Tesoriero, Property Clerk of the Suffolk County Police Department, John L. Barry, Commissioner of Police of the Suffolk County Police Department, Marie Leone, Richard Leone, Frederick Marangio, Joseph Chiofalo and Helen Zito, Defendants

U. S. District Court, East. Dist. N. Y., 64 C 1166, 6/14/65

Tax liens: Property in custody of police.--District Court granted the delinquent taxpayer's motion for summary judgment declaring him the rightful owner of stolen property in the custody of the police and granted the government's claim of tax lien against the taxpayer's property in police custody.

Bennett E. Aron, 575 Hempstead Turnpike, West Hempstead , N. Y., for plaintiff. Joseph P. Hoey, U. S. Attorney, 225 Washington St., Brooklyn, N. Y., George W. Percy, Jr., Suffolk County Center, Riverhead, L. I. N. Y., for defendant.

Memorandum and Order

DOOLING, District Judge:

Plaintiff moves pursuant to Rule 56(a), Federal Rules of Civil Procedure for summary judgment.

1. This action was commenced in the Supreme Court, County of Suffolk, by service of summons and complaint on the defendants County of Suffolk, John L. Barry, Anthony J. Tesoriero, and Richard Leone on November 13, 1964, on the then defendant and now intervening plaintiff United States on November 16, 1964, and on defendants Frederick Marangio and Joseph Chiofalo on November 17, 1964. All the defendants have answered except Marangio and Chiofalo.

The United States filed a petition for removal on December 3, 1964. On February 24, 1965 [65-1 USTC ¶9319], Judge Mishler granted the motions of the United States pursuant to Rule 12(b) dismissing the complaint against the United States and pursuant to Rule 24 permitting the United States to intervene as a plaintiff. The United States filed its Intervener's Complaint on March 15, 1965.

Plaintiff Zito in his complaint asks for a judgment declaring him to be the rightful owner of all the property taken from the defendants Leone, Marangio and Chiofalo when they were arrested by the Suffolk County Police and now held by the Police (listed in Exhibit D accompanying the Motion papers) except for the sum of $26,455.06 with accrued interest from June 4, 1964 to date of payment which plaintiff Vincent Zito and his wife defendant Helen Zito agree they owe to the United States for income taxes and except for a sum equal to the expenses, commissions, or charges for the placing of the Exhibit D property in a local bank for safekeeping.

[Police Custody]

2. There is no genuine issue as to the following facts: On September 9, 1962, defendants Leone, Marangio and Chiofalo removed from plaintiff Zito's home a substantial amount of United States currency and other personal property most of which was later found in their possession or control along with other property purchased with some of the stolen money. (Exhibit D). Members of the Suffolk County Police Department turned the property so found over to defendant Tesoriero, Property Clerk of the Suffolk County Police Department for safekeeping pending its use in evidence and eventual return to its rightful owners. Defendant Tesoriero placed the property in question in two safe deposit boxes in the Bank of Smithtown, Main Street , Smithtown , New York .

[Tax Lien]

Intervening Plaintiff United States served upon defendant Tesoriero, among others, notices of tax lien filed January 28, 1963, based upon jeopardy assessments against defendants Leone, Chiofalo, and Marangio for non-payment of income taxes.

On April 10, 1964, based on a burglary report of Plaintiff Zito that property valuing $107,000 had been stolen from him, the United States made a jeopardy assessment for 1962 income taxes against plaintiff Zito and defendant Helen Zito, his wife, and filed notice of it with the Property Clerk of the Suffolk County Police Department on or about April 13, 1964.

A subsequent audit by Internal Revenue Service Agents resulted in an agreement that $26,455.06 in taxes were due to the United States for 1959, 1960, and 1961. A notice of tax lien based on this agreement was filed with the Property Clerk Tesoriero on June 4, 1964, against all the property of Zito in his possession.

Defendants Tesoriero, Barry and County of Suffolk have answered the complaints of Zito and the United States but make no claim of title or ownership to the property in question. They have shown that $68.36 is due to be paid to them out of the Exhibit D property for charges for safe deposit boxes to date for the two boxes in the Bank of Smithtown in which the Exhibit D property has been placed.

The Exhibit D property includes about $51,000 in United States currency and approximately $12,000 worth of articles allegedly purchased by the defendants Leone, Marangio, and Chiofalo with some of the stolen money.

Defendant Leone answered the complaint of Zito on November 23, 1964, and may have been contending, although this is not a contention of record, that he won $15,000 gambling with some of the stolen money in Las Vages which is rightfully his. He has not in any way opposed the present motion, although he was on May 12, 1965, given an additional two weeks until May 26, 1965, in which to submit papers in opposition, and was thereafter allowed a further week.

It appears that plaintiff is entitled to summary judgment substantially as prayed and that the intervening plaintiff and the County authorities are entitled to summary relief substantially as outlined above. Since details of draftmanship will require consultation among the parties entitled to relief, it is

[Judgment of Court]

ORDERED that the motion for summary judgment is granted and plaintiff is directed to settle on notice before the Court a form of judgment, pursuant to Rule 58, for entry by the Clerk after its approval by the Court.

 

 

 

United States of America , Plaintiff v. Nicholas Briglia, et al., Defendants

U. S. District Court, So. Dist. N. Y., Civ. 101-317, 182 FSupp 271, 1/29/60

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

Lien for taxes: Property in police custody: Ownership.--For the purpose of foreclosing a tax lien, the fact that the taxpayer made an immediate complaint of the theft of precious stones to the New York City police and subsequently, after their recovery, filed the only claim as owner, was sufficient to establish a prima facie case of ownership. Testimony by the taxpayer that the gems belonged not to him but to his corporation was not believed. The government was entitled to foreclose its lien against the Police Department Property Clerk (with a direction that the taxpayer pay any deficiency resulting from such sale), and for judgment in the amount of the lien.

Margret deSmet, U. S. Court House , New York , N. Y., for plaintiff. Nicholas Briglia, 427 West St., New York, N. Y., pro se. Charles H. Denney and Stanley Katz, Municipal Bldg., Manhattan, N. Y., for Thomas E. Rosetti.

MURPHY, District Judge:

This is an action by the government to foreclose a tax lien and for a judgment in the amount of such lien. Only two defendants have been served with process, Nicholas Briglia, the taxpayer, also known as Dante Brigliante, and Thomas E. Rosetti. Briglia is alleged to be the owner of certain precious stones now in the possession of the other defendant, Rosetti, who is the New York City Police Department Property Clerk.

The proof and admissions in the pleadings establish that the Commissioner of Internal Revenue made assessment of taxes upon the income of defendant Briglia for the calendar years 1947, 1948 and 1949 which, including penalties and interest, amounts to $384,653.54; that the commissioner certified the list of each assessment to the then Collector of Internal Revenue for the Third District of New York by whom it was received on August 4, 1952, and within ten days thereof the said collector gave notice to, and demanded payment of the amount thereof from, defendant Briglia.

[Ownership of Gems in Police Custody]

On February 3, 1953, the collector filed a Notice of Tax Lien with the Register of the City of New York , County of New York , with the Clerk of the United States District Court, Southern District of New York, and the Property Clerk of the New York City Police Department, for payment of the assessments heretofore described.

The court refused to permit defendant Briglia to contest the assessments by offering to prove the non-receipt of income during the years in question, on the ground that such assessments were immune from collateral attack in this court.

The principal issue litigated relates to the ownership and identity of the property admittedly being held by defendant Rosetti.

There was no dispute that on January 31, 1953, a locker in the subway arcade on West 42nd Street was broken into and that a complaint of grand larceny was made to the New York City Police Department on the same day describing the loss of $100,000 in precious stones from said locker. In support of this the government introduced the original Police Department Complaint Form which records the name "Dante Brigilante of 121 Primrose Ave. , Fleetwood, N. Y." as complainant. This report states that the complainant said that he had placed the property in such locker on January 29, 1953, and on January 31, 1953, he discovered that the locker had been broken into and the property taken therefrom.

A New York City detective testified that he was in charge of the investigation of the alleged grand larceny complaint and that on February 1, 1953, another detective recovered some stones in another locker in the Port Authority Bus Terminal building at Eighth Avenue and 40th Street, New York City, and that the stones were turned over to him; he in turn delivered them to the Property Clerk of the Police Department who retains possession of them.

[Taxpayer Claimed Gems as Owner and Later as Agent]

The Police Department records also indicate that Dante Brigliante made a claim as owner of the property and no other person has come forward in the intervening six years claiming the same although there are numerous liens in the form of judgments and third-party orders filed against it.

The Property Clerk offered no evidence, rested on the government's proof and moved for dismissal.

Defendant Briglia testified that he never owned the property and never made a claim for it. On cross-examination he admitted possession of the property, but as agent of a corporation of which he was an officer, and that the corporation had bought the property from various dealers during the years 1948 and 1949 and paid for it with corporation checks. He further testified that he had an attorney file a claim with the Police Department but that the claim was supposed to have been in the name of the corporation.

While the government's proof is not overwhelming we feel that a fair inference exists that the property now held by the Police Department Property Clerk is part of the same property that was stolen from the locker in the 42nd Street subway arcade and recovered the following day in another locker in the Port Authority Building . Of course the government would be entitled to a lien on the property only if it was the property of defendant Briglia. The only proof of ownership by defendant Briglia in the government's case is the fact that Briglia made a complaint of the loss of the property and, according to the Police Department records, is the only one over the years who has claimed it as owner.

Query: Is this enough proof to establish that defendant Briglia is in fact the lawful owner? In other words, does one who makes an immediate complaint of the theft of property to the police and subsequently files the only claim as owner sufficient to establish a prima facie case of ownership for the purpose of foreclosing a lien?

We find under all the circumstances that the proof was sufficient and since there was no contrary evidence submitted by Rosetti his motion to dismiss is denied.

A subsidiary question remains--whether defendant Briglia's testimony that the property was not his but another's, viz., his corporation, changes the result. Admittedly it would, if believed. We listened to his testimony and observed him on the stand and find his testimony incredible, and find as a fact that he was the owner and not his corporation and that the checks he proffered to prove the purchase of the merchandise were less persuasive than his oral testimony.

Accordingly, the government is entitled to judgment in the sum of $384,653.54 plus a decree foreclosing its lien against the Police Department Property Clerk, with a direction that defendant Briglia pay any deficiency resulting from such sale. Settle decree.

This memorandum is filed in lieu of findings of fact and conclusions of law.

 

 

 

The State of Washington, Plaintiff v. Robert James Byrne, William Barry and Lee Fisco, Defendants, and United States of America, Intervenors, and Robert D. Bell, Property Claimant, and H. Sylvester Garvin, Claimant, as assignee of Robert James Byrne

In the Superior Court of the State of Washington for King County, No. 27506, March 17, 1954

Lien for taxes: Property belonging to another: Levy on stolen property.--Byrne and others were convicted of grand larceny for obtaining $20,000 in currency from the property claimant Bell by fraudulently representing to Bell that they were policemen and would arrest Bell if Bell did not give them $20,000 to put up as a bond. Seven $500 bills were recovered by the police and were used as an exhibit in the prosecution. The United States levied on the $3,500 for delinquent income taxes due from Byrne. It was held that the Government did not acquire a lien on the money which was not the property of Byrne.

Kelleher & Curran , Kent , Wash. , for Robert D. Bell, property claimant. H. Sylvester Garvin as assignee of Robert James Byrne.

Findings of Fact and Conclusions of Law and Judgment

SHORETT, Superior Court Judge:

This matter having come on duly and regularly for hearing upon the motion of Kelleher & Curran, attorneys for Robert D. Bell, property claimant herein, for return of stolen property to owner, and upon the complaint in intervention filed herein of the United States of America, and on the claim of H. Sylvester Garvin as assignee of Robert James Byrne, and the court having examined the files and records herein, heard the representations of counsel and deeming itself fully advised, now makes and enters the following

Findings of Fact

I. That due and proper service of the time and place of this hearing has been given all necessary parties in accordance with law and order of court.

II. That the parties hereto have stipulated in open court that the court consider the evidence entered in the trial of the criminal action in considering the issues of fact in this proceeding.

III. That on the 29th day of September, 1952, the defendant, Robert James Byrne and Frank Seigel obtained $20,000.00 in United States currency of denominations of $1,000 and $500 from the property claimant, Robert D. Bell, by the successful perpetration of a fraudulent bunco game, by representing to said Robert D. Bell that they were Seattle policemen, that they would be required to arrest and book Robert D. Bell and hold him in jail if the said Robert D. Bell did not give them the $20,000.00 to put up as a bond; that said representations were false and the procurement of possession of said money by said fraudulent misrepresentations, trick and devise amounted to grand larceny and therefore said defendants did not acquire any right, title or interest in said money or any part thereof.

[$3,500 Recovered]

IV. That part of said loot, to-wit: seven of said $500 bills were recovered by the police on October 27, 1952, in the defendant, Robert James Byrne's safe deposit box pursuant to search warrant and said property has been at all times since said date and is now in the custody of this court marked State's Exhibit No. 3.

V. That all of the defendants above named were tried and convicted of said larceny, the defendant Byrne having pleaded guilty to said charge, and the appeal of the defendant, William Barry, from the judgment and sentence imposed therein has been affirmed on appeal as well as the identity of said State's Exhibit No. 3, and it is no longer necessary that said property be held as evidenced or for any other purpose in this cause.

VI. That the United States of America claims some right, title or interest in said fund by virtue of a levy thereon for delinquent income tax due from said Robert James Byrne, that the claim of the United States of America is based upon a claim that said fund is the property of said Robert James Byrne but in truth and in fact, said property is the property of Robert D. Bell and said Robert James Byrne has not nor has ever had any right, title or interest therein at all.

VII. That H. Sylvester Garvin claims some right, title or interest in said sum by virtue of an assignment thereof obtained from the defendant, Robert James Byrne; that said defendant had no right, title or interest in said property to assign.

VIII. That Robert D. Bell is the owner of said property and said property should be restored to him; that Kelleher & Curran, Attorneys at Law, have been authorized by said owner to receive said property on his behalf.

From the foregoing Findings of Fact, the court now makes and enters the following.

Conclusions of Law

I. That Robert James Byrne is not the owner of seven $500 bills of United States currency held in evidence in this case as State's Exhibit No. 3 and has not nor has ever had any right, title or interest therein.

II. That the levy of the United States of America should be declared to be not an encumbrance upon said fund and the complaint in intervention of the United States of America should be dismissed.

III. That the assignment of funds filed herein of Robert James Byrne to H. Sylvester Garvin is void and of no effect and said H. Sylvester Garvin acquired no right, title or interest in said property by virtue thereof.

IV. That said fund, to-wit: State's Exhibit No. 3, the same being seven $500 United States currency bills, should be restored to Robert D. Bell, the owner thereof through his attorneys, Kelleher & Curran, and the Clerk of this Court should be authorized and directed to deliver said property to said owners.

V. That execution of the judgment herein should be stayed, without supersedeas bond for a period of thirty days from the date of entry thereof and if an appeal is commenced within such time, execution of such judgment should be further stayed without supersedeas bond pending the outcome of such appeal.