¶9807]United States of America v. Louis Kiefer, Administrator of the
Estate of Payne Dean; Elizabeth Dean; Richard E. Caserta; John W. Bahre;
William Woods, Jr., Trustee; Town of Barkhamsted Tax Collector; Town of
Barkhamsted Fire District; Oscar J. Riiska; Gerald J. Heffernan,
Commissioner, Connecticut Tax Department
S. District Court,
, Civil No. H-76-256,
[Code Sec. 6323]
Tax liens: Unpaid income and withholding taxes: Attachment of lien to
real property: Right of priority.--The District Court granted the
government's motion for summary judgment and ordered a foreclosure of
the taxpayer's real property upon which federal tax liens had attached.
Although the property had passed to the taxpayer's widow at his death,
and other parties claimed an interest in the real estate, the court held
that the tax liens had arisen because of unpaid taxes due from the
taxpayer before he died, and thus the recording of the federal liens
served to protect the government's right of priority against all others.
In so holding, the court ordered the sale of the residence with the
proceeds to be distributed to the parties as their interests appeared.
Wattley, Assistant United States Attorney, P. O. Box 1824, New Haven,
Conn. for plaintiff. Donald R. Holtman, Kleinman, Steinberg & Lapuk,
99 Pratt St., Hartford, Ct. 06103, for Louis Kiefer, Maurice R. Gersten,
Gersten, Butler & Gersten, 234 Pearl St., Hartford, Ct. 06103, for
E. Dean, Edward F. Scully, Canton Village, Canton, Ct. 06019, for R.
Caserta and J. Bahre, Austin Carey, Jr., Hoppin, Carey & Powell, 266
Pearl St., Hartford, Conn. 06103, for W. Woods, Jr., Patrick E. Power,
65 Elm St., Winsted, Conn. 06098, for Town of Barkhamsted, Thomas C.
White, 101 Whiting St., Winstead, Ct. 06098, for Town of Barkhamsted Tax
PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
United States of America
, has filed a Motion for Summary Judgment in its favor under Rule 56 of
the Federal Rules of Civil Procedure. Plaintiff's complaint is that
Payne Dean, deceased as of March 8, 1972, owes income and withholding
tax from certain years between 1961 and 1971. Plaintiff demands judgment
istrator of the estate and from all named parties with an interest in
the former residence of Payne Dean, as this property is encumbered by
federal tax liens for the taxes owed.
this action are: Louis Kiefer, present
istrator of the estate of Payne Dean; Elizabeth Dean, widow of Payne
Dean, former joint owner with right of survivorship of the residential
real estate in question at the time the delinquent taxes were due, and
the former executrix of the estate of Payne Dean; Richard E. Caserta and
John Bahre, present owners of the real estate by a quitclaim deed
executed by Elizabeth Dean on March 1, 1973; William Woods, Jr.,
assignee of a mortgage placed on the real estate on October 19, 1962;
Town of Barkhamsted tax collector, for any interest claimed in the real
estate; Town of Barkhamsted Fire District, for any interest claimed in
the real estate; Oscar J. Riiska, for any interest claimed in the real
estate; Gerald J. Heffernan, Commissioner, Connecticut Tax Department,
for any interest claimed in the real estate.
before the court is whether the Motion for Summary Judgment shall be
granted. Rule 56(c) provides that the judgment sought shall be rendered
if the pleadings, depositions, answers to interrogatories, and
admissions on file together with the affidavits, if any, show that there
is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law. ". . . [F]ormal denials
or general allegations which do not show the facts in detail and with
precision are insufficient to prevent the award of summary
judgment." Engl v. Aetna Life Ins. Co., 139 F. 2d 469, 473
(2d Cir. 1943). See also, Dressler v. MV Sandpiper, 331 F. 2d
130, 133 (2d Cir. 1964); and Applegate v. Top Associates, Inc.,
425 F. 2d 92, 96 (2d Cir. 1970). In addition, assessments for federal
taxes are prima facie evidence of the fact that taxes are due;
the assessments are presumptively correct, and the burden is upon the
taxpayer or his representative to prove that the assessments are
incorrect. United States v. Rindskopf, 105 U. S. 418 (1881); Helvering
v. Taylor [35-1 USTC ¶9044], 293 U. S. 507, 515 (1935); United
States v. Janis [76-2 USTC ¶16,229], 428 U. S. 433 (1976); United
States v. Lease [65-2 USTC ¶9478], 346 F. 2d 696 (2d Cir. 1965); Bernuth
v. Commissioner of Internal Revenue [73-1 USTC ¶9132], 470 F. 2d
710, 714 (2d Cir. 1972). Mere general denials and allegations do not
suffice to meet the taxpayer's burden of proof.
instance, the plaintiff's complaint was answered by Louis Kiefer stating
that the estate is insolvent, that the estate has not yet been probated,
and generally denying that the tax liabilities are due and owing from
him either personally or in his capacity as
istrator. The Town of Barkhamsted Fire District answered claiming an
interest in the proceeding and alleging a prior claim in right in the
real estate. William H. Woods, Jr. answered claiming an interest in the
proceeding and alleging a prior claim in right in the real estate in the
amount of the unpaid balance and interest on the note and mortgage.
Richard E. Caserta and John Bahre answered generally claiming prior
interest to all other parties.
The estate is
liable for taxes due,
Gen. Stat. §45-228, 229, but the
istrator is not personally liable. Eno v. Cornish, Kirby 296
(1787). In addition to the estate liability, §7043 of the Internal
Revenue Code of 1954 permits enforcement of tax liens by sale of the
taxpayer's property and distributions of the proceeds of the sale
depending on the interests of the United States and other parties. The
property interests of the taxpayer subject to such enforcement are
determined by state law. Aquilino v. United States [60-2 USTC ¶9538],
509, 513 (1960); Slodov v. United States [78-1 USTC ¶9447], 436
238, 257 (1978). Under
law, joint tenancy in real property, even with the right of survivorship
is subject to levy and execution. New Haven Trolley and Bus Employees Credit Union v. Hill, 145
332, 336 (1958); Conn. Gen. Stat. §52-495. "The transfer of
property subsequent to the attachment of the lien does not affect the
lien, for 'it is of the very nature and essence of a lien, that no
matter into whose hands the property goes, it passes cum onere . .
..'" United States v. Bess [58-2 USTC ¶9595], 357
51, 57 (1958), quoting, Burton v. Smith, 13 Pet. 464, 483. See
also, Michigan v. United States [43-1 USTC ¶9225], 317
338, 340 (1943).
tax assessments were made for the period between 1961 and 1967, and tax
liens recorded with the Town Clerk of Barkhamsted,
, against Payne Dean. At that time, Payne Dean and Elizabeth Dean were
joint owners with the right of survivorship of their residence in
March 8, 1972
, Payne Dean died, and Elizabeth Dean received full ownership along with
the lien which was attached to the undivided half interest of Payne
March 1, 1973
, Elizabeth Dean quitclaimed the property to Richard E. Caserta and John
Bahre. The lien, being attached to the property, passed also. Further
assessments against Payne Dean were made in 1974 and 1975 for taxes due
in 1970 and 1971, and notice of this tax lien was filed with the Town
Clerk of Barkhamsted,
, in 1975. The 1970 notice was refiled in January and March of 1976. The
liens arose upon assessment of taxes due, and the recording of the liens
served to protect the government's right of priority as against
subsequent mortgages, pledges, purchase or judgment liens. I. R. C. §6323(a).
Enforcement of a tax lien by levy or by proceeding in court may take
place for a period of six years from the date the assessment was made.
I. R. C. §6502. The original assessment having been made on
July 31, 1970
, and this action having begun on
June 28, 1976
, the statute of limitations has not expired.
In all of the
documents submitted to the court, no genuine issue as to any material
fact has emerged. The answering parties only made formal denials and
general allegations. Since there is no genuine issue as to any material
fact, and the moving party is entitled to a judgment as a matter of law,
this court grants the motion for summary judgment and orders foreclosure
by public sale of the former residence of Payne Dean in Barkhamsted,
Connecticut, with the proceeds of the sale being paid to the Clerk of
the Court pending a determination of the proper distribution of such
proceeds to the various parties as their interest may appear.
¶9493]United States of America, Plaintiff, v. John T. Woodside and Mrs.
Lou Woodside, his wife; City of Greenville, S.C., a corporation, and
B.F. Dillard, as its Clerk and Treasurer; Greenville County, S.C., a
ert N. Smith, as its Treasurer; Citizens Bank of Taylors, S.C., a
corporation, and W.A. Hopkins, as Receiver thereof; Peoples State Bank
of South Carolina, a corporation, and Wm. Elliott and
ert Gage, as Receivers thereof; Biltright Building Company, a
corporation; Easley Cotton Mills, a corporation, and F.W. Halsey,
Court of the
, Western District of
. Decree of Foreclosure and Sale., Eq. 538., Filed
May 10, 1940
Lien for taxes: Priority.--In a suit to enforce and foreclose a lien
in favor of the United States on account of taxes and interest for 1920,
1921, 1925, and 1926, the Court holds that the Government has a valid
and subsisting lien against the property described herein, that the same
be sold in the manner described, and that the proceeds be applied to the
payment of liens in the priority to be subsequently determined.
U.S. Attorney, and E.P. Riley and T.A. Wofford, Assistant U.S.
Attorneys, all of Greenville, S.C., for plaintiff. Wilton H. Earle and
A.C. Mann, both of
, for certain of the defendants.
This is a suit
in equity, commenced on the 6th day of December, 1937, by the filing of
a bill to enforce and foreclose a lien in favor of the United States of
America, on account of an assessment of income taxes and interest
against the defendant, John T. Woodside, for the years 1920, 1921, 1925,
and 1926, in the aggregate amount of $52,182.63, with interest thereon
at one per centum per month from May 20, 1930, to August 30, 1935, and
thereafter at six per centum per annum, to date of judgment. An amended
bill was filed on
July 22, 1939
, but the allegations are the same as those contained in the original
bill, with the exception that additional real estate is included in the
description of the property which the government seeks to sell and have
the proceeds of sale applied to its lien debt.
of E.P. Riley, Assistant United States Attorney, it appears that all
parties defendant are properly before this court, and that the main
parties in interest, John T. Woodside and Lou C. Woodside, failed to
file an answer and are therefore in default. It appears from the bill of
complaint that on June 25, 1932, while the lien of the United States was
in force and effect, and after filing notice thereof, the defendant,
John T. Woodside, by deed, conveyed the real estate described in the
bill of complaint to his wife, Mrs. Lou C. Woodside; that the real
estate described in the amended bill of complaint was the subject of
litigation, which was concluded subsequent to the date upon which the
original bill was filed, and the purpose of the amended bill was to
include this lot in the description of real estate to be sold; now,
therefore, on motion of O.H. Doyle, United States Attorney for the
Western District of South Carolina,
ORDERED, ADJUDGED AND DECREED:
(1) That the
United States of America has a valid and subsisting lien against all of
the real and personal property of the defendant John T. Woodside, and
has a right to foreclose said lien and have all of the property
hereinafter more particularly described sold and the proceeds of sale
applied to the payment of liens against the same in the order of their
Honorable Reuben Gosnell, United States Marshal for the Western District
of South Carolina, do sell, at public outcry, to the highest bidder, for
cash, in front of the Greenville County Court House, at Greenville,
South Carolina, on Monday, June 3, 1940, being salesday in June, 1940,
during the usual hours of public sales, commencing at 11 o'clock, a.m.,
on said date, the lots or tracts of land hereinafter described, in
separate parcels, and that the said United States Marshal do advertise
the said sale and the terms thereof by publication in the Greenville
News, a daily newspaper published at Greenville, South Carolina, once a
week for three weeks next preceding the date of said sale, a description
of the said lands to be so advertised and sold being as follows, to wit:
All that certain tract of land in State of South Carolina, County of
Greenville, Oaklawn Township, on the west side of Augusta Road,
containing 57 acres, more or less, being all of the following described
tract of land (less, however, a five acre tract of land heretofore
conveyed to the Board of Trustees for Ellen Woodside High School, viz.:
Beginning at an iron pin on the west side of Augusta Road, said pin
being at the southern corner of the Ellen B.C Woodside tract, and
running north along Augusta Road, 15 chains to a point on the west side
of Augusta Road; thence almost due west 17 chains to a point near a
spring, thence after a slight off-set to the southeast N 851/2 W 16.84
chains, thence northeast .95 chains; thence S 52 W 5 chains, thence S
541/2 W 10 chains; thence S 88 E 7.8 chains, thence S 60 E 34 chains,
thence N 69 E 12 chains to the beginning corner;
All that certain lot of land in the state of South Carolina, Greenville
County, in the city of Greenville, known and designated on a plat of
land of Poinsett Realty Co., as lot No. 79, said lot being described by
courses and distances as follows: Beginning at a point on Capers Street,
285.5 feet from Crescent Avenue, at corner of lot No. 78, thence S 84 19
W 175 feet to iron pin, thence S 5 41 E 70 feet to corner of lot No. 80;
thence along line of lot No. 80 N 84 19 E 175 feet to Capers Street,
thence N 5 41 W 70 feet to the beginning corner. This being the same lot
conveyed to John T. Woodside by Poinsett Realty Company, by deed dated
March 3, 1920, recorded in R.M.C. Office for Greenville County in book
64, page 323;
All those certain tracts of land in State of South Carolina, Greenville
County, on the Anderson Road, about four miles from the city of
Greenville, known and designated on plat of property of Mabel McB.
Charles, made by C.H. Millard, November, 1922, as Tracts Nos. 6, 7, 8,
9. 10, 11, 12, and 13, which tracts have such metes and bounds as are
sawn on the said plat; also, Tracts Nos. 4 and 5 on the above
mentioned plat; and also, a tract of 1.73 acres conveyed to John
T. Woodside by Harry Bates by deed dated April 21, 1923, recorded in
book 83, page 10, said tract having courses and distances as follows:
Beginning at a stake in the Anderson Road, at intersection of new cut
road leading from New Anderson Road to Old Anderson Road; thence with
center of New Anderson Road N 38 34 E 282.5 feet to stake in center of
road; thence N 33 53 W 168 feet to railroad spike in center of Old
Anderson Road; thence with center of Old Anderson Road S 44 50 W 433.2
feet to intersection of new cut road and Old Anderson Road; thence with
center of new cut road S 50 46 E 207.8 feet to the beginning corner. All
of the above tracts taken together from one tract of 55.49 acres, more
That certain lot of land in Greenville County, South Carolina, just
inside the city limits of Greenville, on Judges Alley, having the
following courses and distances: Beginning at an iron pin on east side
of Judges Alley, at corner of Griffin property, thence along line of
Griffin property S 47 10 E 335.6 feet to iron pin on line of Poinsett
Realty Company property; thence along said line N 5 14 W 100 feet to
iron pin, comer of Nesbitt property; thence along Nesbitt line N 47 16 W
271 feet to iron pin on east side of Judges Alley; thence along said
alley S 34 30 W 67.3 feet to beginning. This is the same lot conveyed to
John T. Woodside by C.Q. West, executor, by deed dated July, 1922,
recorded in R.M.C. Office for Greenville County, in book 74, page 552;
That certain lot of land in Greenville County, South Carolina, in the
city of Greenville, on Palmetto Avenue, known and designated as lot No.
49 on pint recorded in R.M.C. Office for Greenville County, South
Carolina; said lot having a frontage of 50 feet on southwest side of
Palmetto Avenue, and being 246 feet from intersection of McKay Street
and Palmetto Avenue. This is one of the lots conveyed to John T.
Woodside by West End Land and Improvement Co., by deed dated December
29, 1919, and recorded in R.M.C. Office for Greenville County, in book
15, page 393;
That certain lot of land in Oaklawn Township, Greenville County, South
Carolina, containing 6.75 acres, more or less, and known as the
"Hillory Shorter" tract, being triangular in shape, and
bounded by lands heretofore conveyed by John T. Woodside to Woodville
All that certain piece, parcel or lot of land, lying and being situate
on the west side of Capers Street, in the City of Greenville, S.C.,
County and State aforesaid, and being known and designated upon a pint
of Crescent Terrace as Lot No, 78, said plat being recorded in the
office of R.M.C. for Greenville County, in Plat Book E, page 137, being
one of the lots conveyed to me by Poinsett Realty Co,, by deed bearing
date of September 20, 1919, said lot beginning at a point upon Capers
Street, 210 feet from Crescent Avenue, and runs back along the rear
lines of lots Nos. 29, 28, 27, and 26, S 84.40 W 270.6 feet to a strip
of land belonging to the Poinsett Realty Co,; thence along said strip of
land S 5.16 E 76.8 feet to corner; thence N 85 E 96 feet to stone on
corner of lot No. 79; thence continuing N 84.19 E 175 feet to Capers
Street; thence along Capers Street N 5.41 W 75.5 feet to beginning
(3) That the
United States Marshal, conducting the sale, require the highest bidder
on each of said parcels or lots of land to immediately make a cash
deposit of five per cent of the bid, as earnest money or evidence of
good faith, such deposit to be applied on the bid should there be a
compliance of same, and in the event of noncompliance, to be forfeited
and paid over to the plaintiff and retained by it as liquidated damages;
and the premises as to which there is a failure of compliance with the
bid, within ten days from the date of sale, shall be re-advertised and
re-sold, upon the same terms, at such bidder's risk, on the next ensuing
salesday, or some convenient salesday thereafter, to be designated by
the plaintiff's attorney. If the person making the last highest bid on
any lot or parcel of said land fails to make the required deposit
immediately at the time of the acceptance of his bid, then the said
premises shall be immediately re-sold, at such bidder's risk, on the
same salesday or some subsequent salesday, at the option of plaintiff's
attorney. The provision for making deposit as evidence of good faith
shall not apply to the plaintiff or its agents. The purchaser will pay
for documentary stamps.
(4) That upon
the terms of the sale being fully complied with, the said United States
Marshall do execute and deliver to the purchasers deeds, fee simple in
form, to the lots or parcels so purchased, and that he thereupon pay
over the entire proceeds of said sale to W. D. White, Clerk of the
United States District for the Western District of South Carolina, to be
held in the Registry of this Court until the further order of the court
establishing the rank of the claims as between the City of Greenville,
the County of Greenville, the State of South Carolina, and the United
States of America.
(5) That said
action be and remain open on the calendar of the court for such other
and further orders as may be proper for the final disposition of all
issues involved in the suit, it being particularly understood that all
answering defendants will be heard with reference to their claims before
the proceeds are finally disbursed.
¶9526]Hochschwender, Plaintiff v. Dorlo Corp'n, Defendant
Y. Supreme Court,
, Part II. 144 N. Y. L. J., No. 8, 7/15/60
[1954 Code Sec. 6323]
Tax lien: Validity against third party: Mortgage of corporation
controlled by delinquent taxpayer.--The court refused to ignore the
corporate entity of a corporation controlled by the delinquent taxpayer
and to enforce the Government's tax lien against a mortgage executed by
the corporation on property formerly owned by the delinquent taxpayer
and deeded to the corporation. The mortgagees were held to have a valid
lien which had priority over the government's tax lien. There was no
showing of fraud, misrepresentation, or illegality which is necessary to
pierce the corporate veil and subject its property to the Government's
tax lien which is against the delinquent taxpayer.
& Schenck, 2 Broadway, New York 4, N. Y. (John W. Burke, 2 Broadway,
New York 4, N. Y., of counsel), for plaintiffs. Patrick J. Mahoney, 600
Old Country Road, Garden City, N. Y., for Dorlo Corp., Lawrence A.
Hochschwender, and Dorothy Hochschwender. Cornelius W. Wickersham, Jr.,
United States Attorney, 271 Washington St., Brooklyn, N. Y. (William A.
Dubrowski, Assistant United States Attorney, Brooklyn, N. Y., of
counsel), for United States. Zalkin & Cohen, 19 Rector St., New
York, N. Y. (Leonard Zalkin, 19 Rector St., New York, N. Y., of
counsel), for New York Trust Co. Cleary, Gottlieb, Steen & Hamilton,
52 Wall St., New York 5, N. Y. (Arthur Elfenbien, 52 Wall St., New York
5, N. Y., of counsel), for Colonial Trust Co.
In this action
to foreclose a mortgage made on
March 31, 1958
, the plaintiffs and the defendant Lawrence A. Hochschwender
(hereinafter referred to as "
") are brothers and sisters. On
January 2, 1952
, the plaintiffs, the defendant Lawrence and his mother, Helen
Hochschwender, owned interests in Flatbush Chevrolet Sales Corporation
(Flatbush) and four other corporations. On that day the said parties
entered into an agreement whereby the defendant acquired his mother's
and the plaintiffs' interests in Flatbush for $150,000, of which
$120,000 was to be paid in deferred installments. The remaining
corporations were to be dissolved and the properties held by them
conveyed to the individual parties to the agreement in accordance with
their respective interests.
the 18th of March, 1954, the plaintiffs and the defendant Lawrence, now
vested with title to three parcels of real estate in
, contracted to sell said parcels to the defendant Dorlo Corporation
(Dorlo), a domestic corporation organized in 1944 and whose sole
stockholder was and is the defendant Lawrence. The price was $300,225
payable as follows: $160,000 to the plaintiffs in cash, $60,000 by
waiver by Lawrence of his personal share of the purchase price, $50,000
by the purchaser (Dorlo) giving a second purchase money mortgage in that
amount to the plaintiffs and $30,225 by the said purchaser satisfying a
then existing mortgage held by Flatbush Saving Bank.
March 25, 1954
, the said individuals, by deed recorded on the following day, conveyed
the said parcels to Dorlo. On the same day Dorlo gave back to the
plaintiffs a mortgage covering said parcels, among others, which
mortgage was recorded on
March 30, 1954
, and which recited an indebtedness of $50,000. Installment payments
were provided for and the unpaid mortgage balance was stated to be due
March 25, 1964
. The good faith of the plaintiffs in this transaction is not subject to
Dorlo ran into
difficulties in 1957 and Lawrence advised his brothers and sisters (the
plaintiffs) that his corporation could obtain a mortgage loan on the
Brooklyn properties then in Dorlo's name, provided the 1954 mortgage
which they held were satisfied. He offered a Dorlo mortgage on property
at No. 185 Tanglewood Crossing in the
, in exchange for the satisfaction of the 1954 mortgage. The Tanglewood
Crossing property had been acquired by Dorlo and
December 4, 1953
, for a price of $100,000 in a transaction to which reference will be
made below. At the time of the proposal there was still due to the
plaintiffs on the 1954 mortgage the sum of $41,554.35.
delivered a certificate of satisfaction of the 1954 mortgage covering
the properties in
(which certificate bore the date
March 22, 1958
, and was recorded
April 1, 1958
) and received the mortgage note of Dorlo secured by its mortgage on the
Tanglewood Crossing property for $41,554.35. The original (1954)
mortgage called for quarterly installments of $937.50 applicable to
interest at 41/2 per cent, and reduction of principal; the new mortgage
called for like installments and like interest. The unpaid balance of
the original mortgage was due
March 25, 1964
; the unpaid balance of the new mortgage was to become due on
March 31, 1964
. There can be no question as to the adequacy of the consideration for
the mortgage; nor was it made with intent, actual or presumed, to
hinder, delay or defraud creditors of either Dorlo or Lawrence; nor, was
it a gratuitous conveyance in any sense.
transactions were taking place within the family circle, other events
were taking place without it to which reference will now be made.
revenue service on December 31, 1956, made assessments of taxes against
the defendant Lawrence as transferee of Flatbush Chevrolet for the years
1949, 1950, 1951 and 1953, the unpaid amounts of which, including
interest, aggregated $40,149.11 as of March 3, 1960. A federal tax lien
against him was duly filed on
August 9, 1957
(this was in a greater amount at the time of filing, but has been
reduced by payments and a partial abatement).
is that its lien attached to the Tanglewood Crossing property of
Lawrence A. Hochschwender when Dorlo deeded it to him on
April 1, 1958
, at which time the plaintiffs' substituted mortgage had not yet been
recorded. It also argues that if this is not true, its lien attached to
the property on
August 9, 1957
, in any event because Dorlo was in fact the alter ego of
and that the corporate entity should be accordingly disregarded.
contentions must be evaluated by a close scrutiny of the time factors
filed its lien against Lawrence Hochschwender on
August 9, 1957
. On and before this date the plaintiffs had a valid mortgage lien on
the Brooklyn properties of Dorlo, which would have had priority over any
government lien filed against Dorlo even if the corporate veil were
pierced at that time and Dorlo were held to be an alter ego of Lawrence
March 31, 1958
, plaintiffs accepted, as an accommodation to their brother Lawrence, a
substituted mortgage on the Tanglewood property in place of the mortgage
properties. Dorlo was then the record owner of both the Tanglewood and
properties, and the record revealed no liens by the government on any of
the Dorlo properties. Consequently, at that moment, plaintiffs held a
wholly valid mortgage lien against the Tanglewood property of Dorlo.
Their mortgage was not recorded until
April 7, 1958
, one week after execution, a normal interval for recording. It was not
until May 29, 1958, two months after this mortgage, that there was
recorded a deed purporting to transfer the Long Island property from
Dorlo to Lawrence Hochschwender individually, which deed was dated April
1, 1958, a convenient date indeed, one day following the mortgage, and
some six days before it was recorded. This late recording of the
purported deed would suggest the possibility that the deed was not
executed and delivered on April 1, but in fact back dated as an
afterthought of Lawrence Hochschwender. No factual determination of this
possibility need be made, however. Recording of the deed raises a
presumption of delivery, but the presumption is effective only as of the
date of recording, not the date of execution (Maryland Casualty Co.
v. Stern, 5 Misc. 2d 423). Moreover, the deed itself was ineffective
to convey an unqualified fee simple. It was a full covenant and warranty
deed which purported to transfer the property free and clear of mortgage
liens. Dorlo had notice of the plaintiffs' mortgage. Lawrence
Hochscwender had similar notice. Dorlo had no power to transfer the
property other than subject to that mortgage (People v. Douglass,
217 App. Div. 328). Therefore, even if the deed were executed and
delivered on April 1, it was nevertheless fraudulent as to the
plaintiffs and could not transfer title to
in any manner other than subject to plaintiffs' mortgage. The most that
received by this deed was the equity of redemption ("A greater
estate of interest does not pass by any grant or conveyance than the
grantor possessed or could lawfully convey at the time of the delivery
of the deed * * *"; Real Property Law, sec. 245).
tax lien was not then valid against the plaintiff mortgagees (Title 26,
U. S. C., 6323). It could only attach to the equity of redemption held
by Lawrence Hochschwender. The
contends, however, that the corporate entity of Dorlo should be
disregarded as a mere alter ego of Lawrence Hochschwender, and that the
Tanglewood property should be considered as being in Lawrence
Hochschwender even before
August 9, 1957
. While the evidence adduced at the trial indicates that
dominated the Dorlo corporation, this in itself does not require that
its separate status be disregarded. It can safely be assumed that the
plaintiffs would never have consented to the substitution of the
Tanglewood property for their valid mortgage on the
properties, if at that time Lawrence Hochschwender were the record owner
of Tanglewood. The government lien was already filed against
, and the substitution would have constituted an outright gift to the
tax gatherer, a somewhat unlikely eventuality. Plaintiff relied on the
record title, and they had every right to do so. They relied on the
distinction between the corporate and individual entities, a perfectly
proper course of conduct.
entity may be disregarded where it is used "as a cloak or cover for
fraud or illegality" (Jenkins v. Moyse, 254 N. Y. 319, 324).
But there is not even a whisper of fraud or illegality in this case. In Bartle
v. Home Owners Cooperative (309 N. Y. 103, 106), the court said:
"Generally speaking, the doctrine of 'piercing the corporate veil'
is invoked 'to prevent fraud or to achieve equity' (International
Aircraft Trading Co., Inc. v. Manufacturers Trust Co., 297 N. Y.
285, 292; see Halsted v. Globe Ind. Co., 258 N. Y. 176, 179; Jenkins
v. Moyse, 254 N. Y. 319, 324; Quaid v. Ratkowsky, 183 App.
Div. 428, aff'd 224 N. Y. 624). But in the instant case there has been
neither fraud, misrepresentation nor illegality."
In that case
specific findings were made that the defendant owned all the shares of
the corporation, controlled it; that the outward indicia of the two
separate corporations was maintained during the period when the
creditors extended credit; that the creditors were in no way misled: and
that there was no fraud. The identical findings are made here.
plaintiffs' mortgage is a valid lien which takes priority over the lien
York Trust Company is in the unenviable position of having given to
Lawrence Hochschwender and his wife an unsecured loan in the amount of
March 21, 1958
, ten days prior to the mortgage transaction it now challenges. It too
seeks to pierce the corporate veil, treat the Tanglewood property as
Lawrence Hochschwender's rather than Dorlo's and thereafter attack it as
a fraudulent conveyance. For reasons already noted, the corporate entity
will not be disregarded, but even if it were, the conveyance could not
be set aside as fraudulent, since, as has been noted, it was given for a
good and fair consideration (cf. County Federal Savings & Loan
Ass'n v. Walsh Rights Corp'n, 187 N. Y. S. 2d 722 n. o. r.).
are hereby awarded judgment foreclosing the mortgage. All motions upon
which decision was reserved at the trial are hereby resolved
accordingly. This constitutes the decision of the court required by
section 440 of the Civil Practice Act. Settle judgment on notice to all
parties who have appeared in the action.
¶9384]United States of America, Plaintiff v. Stanley Crews; Callie
Crews; Vergennes State Bank of Vergennes, Illinois; Du Quoin State Bank;
William Cochran, also known as William A. Cochran; Dorothy Cochran, also
known as Dorothy Kathleen Cochran, also known as Kathleen Cochran; State
of Illinois, Defendants
S. District Court, East. Dist. Ill., Civil No. 4430, 230 FSupp 268,
[1954 Code Secs. 6321-6323]
Tax liens: Priority of creditors and liens: Illinois tax lien:
Conveyance to third party: Foreclosure action.--Where the taxpayers
received notice of 100% penalty assessments against them as responsible
officers of a corporation, and notice of lien for the assessment was
thereafter filed, the lien of the United States attached to property
owned by the taxpayers which they subsequently conveyed. The United
States had priority over the defendants, who purchased the property
after the lien of the United States was perfected, over a bank which
obtained its interest subsequent to perfection of the lien of the United
States, and over the lien of the State of Illinois which was not
perfected until long after lien of the United States was perfected.
Feickert, United States Attorney, Room 327 Post Office Bldg., East St.
Louis, Ill., for plaintiff. Gordon Franklin, Aikaman Bldg., Marion,
Ill., for S. Crews; F. Mark Miller, Brookings Bldg., Du Quoin, Ill., for
Du Quoin State Bank; W. Troy Barrett, Assistant Attorney General, 518
South Illinois Ave., Carbondale, Ill., for State of Illinois,
United States of America
brings this action to foreclose its tax lien on certain real property
owned by defendants Stanley Crews and Callie Crews, husband and wife,
who reside in Jackson County, Illinois. Jurisdiction is founded on Title
28 United States Code, Sections 1340 and 1345, and Section 7402(a) of
the Internal Revenue Code of 1954. Vergennes State Bank maintains an
office in Vergennes, Jackson County, Illinois. Du Quoin State Bank
maintains an office in Du Quoin, Perry County, Illinois. William
Cochran, also known as William A. Cochran, and Dorothy Cochran, also
known as Dorothy Kathleen Cochran, also known as Kathleen Cochran,
husband and wife (hereinafter known as Cochrans), reside in Jackson
County, Illinois. All of the above defendants reside within the Eastern
District of Illinois.
is located in
year 1957 the Cochrans were responsible officers for the C. and M. Coal
On May 9,
1958, the District Director of Internal Revenue, pursuant to Section
6672 of the Internal Revenue Code of 1954, made 100 per cent penalty
assessments of taxes with penalties and interest against defendant
Cochrans as the responsible officers of the C. and M. Coal Company and
on May 20, 1958, duly gave notice of the assessment, stating the amount
and demanding payment. Notice of lien for the assessment was filed in
the Office of the Recorder of Deeds in Jackson County, Illinois on July
On May 9,
1958, the date of the assessment, the Cochrans were the owners of the
following described property:
plot of land commencing measurements 20 rods due West of the Northwest
corner of the Southwest Quarter (S. W. 1/4) of the Northwest Quarter (N.
W. 1/4) of Section 21, Township 7 South, Range 2 West of the 3rd
Principal Meridian, running thence due South 8 Rods 8 feet, thence due
West 17 rods 14 feet to the place of beginning, and containing 1 acre,
more or less, Except 60 feet off the East side thereof as shown by deed
dated November 22, 1946, and recorded in book 168 at page 165, also
Except 100 feet off the West side thereof as shown by deed dated
November 6, 1947, and recorded in book 175 at page 114, situated in
Jackson County, Illinois.
On or about
August 20, 1958, the Cochrans conveyed the above-described real estate
to defendants Stanley and Callie Crews.
Quoin State Bank filed its answer, asserting, inter alia, that it has no
interest or lien in the real estate described in the complaint. The
Cochrans failed to answer or otherwise plead in the case, and default
judgment was entered against them on March 15, 1963. In reply to request
for admissions, defendants Stanley Crews and Callie Crews asserted that
on or about July 9, 1958, the property in dispute was owned by the
Cochrans and on or about August 20, 1958, they purchased the real estate
from the Cochrans. The Vergennes State Bank filed its answer, denying,
inter alis, that the notice given by filing of the lien was effective as
to them for the reason that the withholding of tax by the Cochrans was
not willful. The Vergennes State Bank has not further pleaded, nor has
it answered request for admissions proffered to it concerning the
existence of a mortgage allegedly held by defendant Vergennes State
The State of
filed its answer and cross-complaint, asserting that there is due and
owing to the Department of Revenue of the State of
the sum of $202.12 for Retailers' Occupation Tax. In the answer, which
is verified, the State of Illinois asserts that the Retailers'
Occupation Tax due became a lien on January 13, 1959, upon the filing of
notices of the tax due in the office of the Circuit Clerk and ex-officio
Recorder of Deeds of Jackson County, Illinois.
States has filed its motion for summary judgment pursuant to Rule 56 of
the Federal Rules of Civil Procedure, Title 28 U. S. C., on the ground
that there is no genuine issue or question of fact and that the
pleadings, together with the affidavits attached, show that the
plaintiff is entitled to summary judgment and the relief prayed in the
amended complaint as a matter of law.
provisions of Section 6321 of the Internal Revenue Code of 1954, a lien
inures to the
upon all property and rights to property, whether real or personal,
belonging to the person liable to pay any tax who neglects or refuses to
pay the same after demand. Section 6322 provides that unless another
date is specifically fixed by law, the lien imposed by Section 6321
shall arise at the time the assessment is made and continue until the
liability for the amount assessed is satisfied or becomes unenforceable
by reason of lapse of time. Section 6323 provides in pertinent parts as
Invalidity of lien without notice.--Except as otherwise provided in
subsection (c), the lien imposed by section 6321 shall not be valid as
against any mortgagee, pledgee, purchaser, or judgment creditor until
notice thereof has been filed by the Secretary or his delegate--
Under state or territorial laws.--In the office designated by the law of
the State or Territory in which the property subject to the lien is
situated, whenever the State or Territory has by law designated an
office within the State or Territory for the filing of such notice; or
law recording or filing notice of lien on or conveyances of real estate
with the Circuit Clerk and Recorder of Deeds for the county in which the
property is located is sufficient notice. The filing of the tax lien by
in the Office of the Recorder of Deeds of Jackson County, Illinois, on
July 9, 1958
, was sufficient to perfect the lien as against all persons, including
purchasers and mortgagees for value.
The Court need
not consider whether the lien was valid prior to this date or not, since
on the date the notice of tax lien was recorded, the Cochrans were the
parties against whom the tax had been assessed and were also the owners
of the real estate involved and the answer of the Du Quoin State Bank is
in effect a disclaimer and shows that the mortgage to it has been
satisfied. Defendants Stanley and Callie Crews acquired the property by
purchase subsequent to the date the lien was perfected. The Vergennes
State Bank likewise obtained its interest (if any interest it has)
subsequent to perfection of the lien. The lien of the State of
for unpaid Retailers' Occupational Tax was not perfected until long
after the lien of the
was perfected. The persons against whom the tax was assessed have not
appeared or presented any defense, and default judgment has been entered
is entitled to judgment against the taxpayers and is entitled to a
priority over defendants Stanley Crews, Callie Crews, Vergennes State
Bank of Vergennes, Illinois, Du Quoin State Bank and State of
, since all of the claims of the purchasers and mortgagees and the State
are subordinate to the prior filed federal tax lien.
of the Court]
finds that defendants William Cochran, also known as William A. Cochran,
and Dorothy Cochran, also known as Dorothy Kathleen Cochran, also known
as Kathleen Cochran, are liable to the United States for unpaid taxes
with penalties and interest assessed against them in the amount of
$1,820.89 plus interest from May 9, 1958, and that the United States has
a valid and subsisting lien, for taxes with penalties and interest in
said amount plus interest, on the real property hereinabove described
and further finds that the lien of the United States is prior and
superior to any liens, claims and interests of the defendants herein,
and each of them, on said property and that the plaintiff's lien is
foreclosed and that the real property hereinabove described be sold by
the proper officer of this Court and that the distribution of the
proceeds of such sale be made to the United States in an amount
sufficient to satisfy the lien of the United States on said property and
liability of defendants William Cochran, also known as William A.
Cochran, and Dorothy Cochran, also known as Dorothy Kathleen Cochran,
also known as Kathleen Cochran, to the United States for unpaid taxes
with penalties and assessed interest, plus interest as provided by law,
and that plaintiff be granted its costs in this matter. The Court
further finds that the lien of the State of
is subordinate to the right of Stanley and Callie Crews and that
plaintiff's motion for summary judgment be and the same is hereby
The above and
foregoing shall be considered findings of fact and conclusions of law.
settle the order.
United States of America
, Appellant v. Fidelity & Deposit Company of Maryland et al.,
In the United States Court of Appeals for the Fifth Circuit, No. 14604,
214 F2d 565, July 6, 1954
Appeal from the United States District Court for the Southern District
Lien for taxes: Property conveyed in fraud of creditors.--In a
suit by a bonding company to set aside a conveyance from the taxpayer to
his wife as being in fraud of creditors, the United States intervened
and asserted priority for tax liens which arose and were recorded
subsequent to the conveyance. After the conveyance and before the suit,
the wife had mortgaged the property. The court held that the lien of the
bonding company, acquired under state law when it filed suit, was
superior to that of the
, because when the tax liens were filed taxpayer had already parted with
all his interest in the property and the
was therefore an unsecured creditor when the bonding company acquired
its lien. The bona fide mortgagee also took precedence over the
, since the mortgage was executed when the wife had title and before the
conveyance to her was set aside as fraudulent. Sec. 3466 of the Revised
Statutes cannot be applied to give an unsecured claim of the
priority over a claim secured by a lien.
Just and Ellis N. Slack, Special Assistants to Attorney General, and H.
Brian Holland, Assistant Attorney General, all of Washington, D. C., and
Jesse W. Shanks, Assistant United States Attorney, Jackson, Miss., for
appellant. William E. Suddath, Jr., James L. Spencer, W. H. Watkins,
Sr., and Forrest B. Jackson, all of Jackson, Miss., for appellee.
and RUSSELL, Circuit Judges, and DAWKINS, District Judge.
Deposit Company of Maryland, hereinafter called the bonding company,
brought this action in the United States District Court for the Southern
District of Mississippi against E. E. Lovell and Mrs. Lavinia B. Lovell,
his wife, seeking a judgment against Lovell, a contractor whom it had
bonded, and seeking to set aside a deed (for his one-half interest in
the homestead) from Lovell to his wife, dated November 19, 1948. Also
named as a defendant was H. V. Watkins, trustee for the Deposit Guaranty
Bank & Trust Company of
, to which on
February 10, 1950
, the Lovells had mortgaged the homestead under deed of trust. By
subsequent amendments to the complaint, first the Collector of Internal
Revenue, and then in his stead the
, was made a defendant. The complaint as amended broadened the original
demands of plaintiff, and in a corresponding prayer for relief the court
was additionally asked to set aside a transfer by Lovell to his wife of
certain shares of stock in the Flowood Corporation and to grant unto
plaintiff a personal judgment against Mrs. Lovell for the value of the
stock if she had disposed of the same as well as for all sums of money
transferred to, given to, or deposited by Lovell for the benefit of his
wife. Subsequently, and upon motion of the plaintiff, the
was dismissed as a party defendant without prejudice. Thereafter, the
was permitted to intervene and file an answer and cross-claim, wherein
it asserted that its tax liens against Lovell were prior and superior to
any lien asserted by plaintiff, the trustee and the bank. It also
alleged that the conveyance from Lovell to his wife of
November 19, 1948
, was made without consideration, was fraudulent as to creditors and
should be subjected to the payment of the claim for unpaid taxes owing
. The Deposit Guaranty Bank & Trust Company thereupon intervened to
protect its claim to certain shares of Flowood Corporation stock pledged
on the personal note of Mrs. Lovell.
joined and the cause came on for trial [52-2 USTC ¶9550]. At its end
and after considering the evidence, the District Court found and held in
substance the following: (1) that the conveyance by E. E. Lovell to his
wife of his undivided one-half interest in the homestead was
fraudulently made as to the Fidelity & Deposit Company of Maryland
and the United States of America as creditors of E. E. Lovell, and that
the same should be set aside and said property sold subject to the
payment of his debts; (2) that the Deposit Guaranty Bank & Trust
Company, as trustee for R. V. Powers Foundation, had a good and valid
deed of trust on the homestead of E. E. Lovell and his wife to secure an
indebtedness of $4,000 still owed to it; that, subject to such
indebtedness, the bonding company, as institutor of this suit, has
(exclusive of the homestead exemption) the right to priority of payment
from the proceeds of E. E. Lovell's one-half interest which had been
fraudulently conveyed; and that as to the homestead exemption, the first
three thousand dollars which was not subject to execution to satisfy the
bonding company's judgment, the United States was entitled to be first
paid; (3) that the conveyance by E. E. Lovell to his wife of one hundred
shares of Flowood stock was fraudulently made as to the creditors of E.
E. Lovell, and should be set aside, and said property should be
subjected to the payment of his debts; that there was owing to the
Deposit Guaranty Bank & Trust Company the sum of $1,150, secured by
a pledge of said stock, and that subject to such secured indebtedness
the bonding company, as institutor of this suit, has the right of
priority of payment from the proceeds of the stock; (4) that E. E.
Lovell fraudulently transferred to his wife various sums of money
aggregating $5,000, which transfers should be set aside in favor of the
bonding company, as creditor of E. E. Lovell; and (5) that E. E. Lovell
was indebted to the bonding company in the sum of $43,219.83, for which
amount it entered judgment in favor of the bonding company; and that E.
E. Lovell was indebted to the United States for unpaid taxes, as
claimed, in the amount of $8,955.12 together with interest and the court
entered judgment in favor of the United States for the full amount.
From that part
of the judgment awarding priority in payment out of the property
involved to the bonding company over the debts due the United States for
unpaid taxes, and from that part of the judgment holding the debt of
$4,000 due Deposit Guaranty Bank & Trust Company, secured by deed of
trust dated February 10, 1950, is entitled to priority in payment over
tax claims of the United States secured by liens which had arisen and
been duly recorded prior to execution of the deed of trust, the United
States has appealed.
Liens v. Lien of Bonding Co.]
The first of
three questions presented on this appeal is whether the District Court
erred in holding that the lien of the bonding company under the laws of
the State of Mississippi is superior to tax liens of the United States
which arose and were duly recorded prior to the institution of the suit
on which the lien of the bonding company was based. Insisting that this
question must be answered in the affirmative the Government argues that
the federal tax liens here involved arose and were duly recorded before
the bonding company acquired its lien under Mississippi law 1
as institutor of this suit. That while the tax liens of the United
States arose and were recorded after E. E. Lovell had fraudulently
conveyed to his wife the property here involved, the Government,
although it did not then have a statutory lien for its taxes, was as
much a creditor of E. E. Lovell as was the bonding company at the time
the conveyances were made and thus clearly is within the protection of
Section 265 of the Mississippi Code. Under that section the fraudulent
conveyances were "clearly and utterly void" as to creditors
and there is no authority either in the Mississippi Code or in the
decisions of the Mississippi Supreme Court to prevent the federal tax
liens from attaching to the property thus transferred at the time the
liens arose. In any event and regardless of whether the fraudulent
transfers here involved be considered "clearly and utterly
void" as declared by the statute, or merely voidable at the option
of creditors as held by the court below, any rights of the bonding
company were wholly derivative, and since the tax liens of the United
States attached also to any after acquired property they attached to any
property or rights to property derived through the taxpayer after the
liens arose. Finally it is argued that there is no provision of federal
law which would warrant recognizing the lien of the bonding company as
superior to the tax liens of the
The right of
priority of payment of debts due it does not stand on any sovereign
prerogative, but is exclusively founded upon the actual provisions of
its statutes. Appellant concedes that the bonding company upon the
filing of its bill on
September 20, 1950
, acquired a lien under Section 127 of the Mississippi Code against the
property fraudulently transferred by the taxpayer to his wife. However,
and by virtue of Section 3670 of the Internal Revenue Code, 2
it insists that the tax liens of the United States which arose and had
been duly recorded prior to the filing of the bill were superior in
right to the lien of the bonding company.
provides in pertinent part as follows: "If any person liable to pay
any tax neglects or refuses to pay the same on demand, the amount * * *
shall be a lien in favor of the United States upon all property and
rights of property, whether real or personal, belonging to such
person." (Italics supplied.) Section 3671 of the Internal
Revenue Code provides that the lien under Section 3670 "shall arise
at the time the assessment list was received by the collector and shall
continue until the liability for such amount is satisfied or becomes
unenforceable by reason of lapse of time."
It is plain
from the language of the statute that the tax liens of the
attached to all property and rights to property of the taxpayer at the
time the several assessment lists were received by the Collector of
Internal Revenue. It is equally plain, and the Government readily
concedes the fact, that the federal tax liens arose and were recorded
long after the taxpayer had conveyed to his wife the property here
involved. It thus affirmatively appears that the taxpayer had parted
with all right, title and interest to the property in question before
the tax liens of the
Under Mississippi law, Lovell not only had no interest in the land from
and after the execution of the deed to his wife but he had no
interest of any kind therein and he was estopped 5
to assert or acquire any such interest. Under Section 265 of the
Mississippi Code it has consistently been held that a fraudulent
conveyance is void "only" against creditors but valid as
between the grantor and grantee. Or, as the Supreme Court of Mississippi
in quoting approvingly from a Massachusetts case it "is good
between the parties and void against creditors only, or to speak
accurately, is voidable by creditors at their election."
When the tax
liens were filed Lovell had parted with all interest in the property
which he had conveyed to his wife and he never thereafter acquired any
interest therein. Indeed the statute prohibited him from doing so.
Consequently appellant did not then acquire a lien on property in which
the taxpayer had no interest but only acquired a right to set aside the
conveyance from Lovell to his wife as a fraudulent conveyance. Its
position was that of an ordinary creditor seeking to recover an
unsecured claim. It was an unsecured creditor just as appellee was when
it filed its original bill of complaint on
September 20, 1950
its bill to subject the property involved to the payment of its debt
more than a year before the court permitted appellant to intervene in
that proceeding and assert a lien upon the property and also the rights
of a creditor. And by virtue of Section 1327 of the Mississippi Code 7
appellee obtained a lien upon the property as of the date of the filing
of the bill which would antedate and take preference over the
counterclaim filed by the appellant. In Kline v. Sims, 149
154, 114 So. 871, 873, the Supreme Court of Mississippi in construing
Section 1327, supra, said:
think the creditor who proceeds under this statute is entitled to the
benefit of his diligence, and that, under the language of the statute,
he has a lien upon the property sold on this sequestration. He is not
required to bring suit on behalf of all the creditors, but may sue for
his own demand and get the benefit of his diligence. Creditors who will
not act, or who are not diligent in asserting their demands, are not
entitled to participate equally with the man who is diligent, and who
has incurred the risk and expense of proceeding to attack a fraudulent
conveyance. If other creditors intervene in the suit, they may, by so
doing, take their places in line with creditors according to the date of
their proceedings, but they are not entitled to share in the proceeds of
the first creditor's diligence and activities, and such creditor is
entitled to have his claim first paid. If other creditors desire, they
may attack, or sue out writs of sequestration, or take any other
appropriate action; but they must do so at their own risk, and they are
not entitled to participate in the activities and diligence of the
creditor who first takes action."
second point relates to the claimed error on the part of the District
Court in holding that the debt due the Deposit Guaranty Bank & Trust
Company, secured by a deed of trust on the real property here involved,
is entitled to a priority of payment out of proceeds from the sale of
the property over those taxes due the United States secured by tax liens
which arose and had been recorded prior to execution of the deed of
trust to the bank. 8
year 1947 E. E. Lovell and his wife acquired the property in question at
a cost of $14,525, of which $6,525 was paid in cash and the unpaid
balance of $8,000 was secured by a deed of trust on the property in
favor of the First (Capital) National Bank of
. After Lovell had encountered financial difficulties and after he had
conveyed his one-half interest in the property to his wife it became
necessary because of a threatened foreclosure of the deed of trust to
refinance this obligation which by that time had been reduced to
approximately $6,000. Accordingly, on
February 10, 1950
, Lovell and his wife executed a new deed of trust on the property in
favor of the Deposit Guaranty Bank & Trust Company in the amount of
$6,000 and this instrument was recorded on
February 13, 1950
. The proceeds of the new loan, at least in material part, were used to
pay off the previous deed of trust to First National Bank.
meantime, and prior to the execution of the deed of trust to Deposit
Guaranty Bank & Trust Company, the Collector had on March 28, 1949,
filed notice of lien convering assessments of withholding tax and
Federal Insurance Contributions Act taxes, together with penalties and
interest thereon, for the second, third, and fourth quarters of 1948 in
the aggregate amount of $5,823.67; and had, on April 28, 1949, filed
notice of lien covering the original assessment of Federal Employment
Tax Act, penalty and interest for 1948 in the amount of $235.95. At the
time this action was brought the Lovells were indebted to the Deposit
Guaranty Bank & Trust Company in the amount of $4,000 together with
interest thereon at the rate of 51/% per annum from the tenth day of
February 1952 until paid.
standing thus, the district judge, without passing upon or deciding the
relative rights of the Deposit Guaranty Bank & Trust Company under
its deed of trust and of the United States under its prior recorded tax
liens, held that "the Deposit Guaranty Bank, so far as the lien on
this property is concerned * * * was subrogated to the First National,
and succeeded to its rights; and the Deposit Guaranty Bank and Trust
Company (as Trustee for R. V. Powers Foundation) has against said
property a good and valid lien, which comes ahead of the claims of all
of the other parties litigant."
We think the
court erred in applying the doctrine of subrogation but nevertheless
reached the right conclusion in holding that the mortgage of Deposit
Guaranty Bank & Trust Company was superior to the liens for taxes.
The Deposit Guaranty Bank did not acquire nor did it in any manner
succeed to the rights of First National Bank under the 1947 deed of
trust to it. On the contrary, the Deposit Guaranty Bank entered into a
new and separate loan agreement with Lovell and his wife and it took a
new trust deed in its favor as security for repayment of its loan. The
lien of First National was paid off and discharged, it was not
transferred, and the Deposit Guaranty Bank did not thereby succeed to
the lien rights of First National. However, there is and can be no doubt
that the bank did acquire a good and valid mortgage lien of its own upon
property the title to which was vested in Mrs. Lovell at the time she
executed the deed of trust. Prior to the time of the institution of suit
by the Fidelity & Deposit Company of
there was no record or actual suggestion to the Deposit Guaranty Bank
and Trust Company that the conveyance from Lovell to his wife was
fraudulent. The Deposit Guaranty Bank was a bona fide mortgagee of Mr.
Lovell because it was without notice, either actual or constructive, of
the fraudulent nature of the conveyance by which she secured her title.
We conceive the Mississippi law 9
to be that a bona fide purchaser or mortgagee from a grantee who secures
title by a conveyance which is afterwards set aside because in fraud of
creditors is not charged with the fraud of an antecedent grantor in the
chain of title. Until the fraud is established and the instrument set
aside a lien recorded against such antecedent grantor in title is not
notice to the subsequent bona fide purchaser. Consequently, the mortgage
of the bank was superior to the liens for taxes.
Claims of U. S.]
third and final point that the District Court erred in holding that the
United States is not entitled under Section 3466 of the Revised Statutes
to priority in payment of its taxes out of the proceeds of the property
her involved is not well taken and hardly merits discussion. Our recent
opinion in U. S. v. Atlantic Municipal Corporation, 212 Fed. (2d)
May 11, 1954
[54-1 USTC ¶9392]) is dispositive of this issue. There, in speaking of
Section 3466 we said: "This statute applies only as against
unsecured debts, that is, debts not secured by a specific and perfected
lien. It has never been, we think it will never be, applied as it is
sought to be applied here, to accord payment to a debt due the United
States in preference to a claim secured by a lien which is prior in time
and superior in law to the lien of the United States securing the debt
for which preferential payment is sought."
reasons stated the judgment 11
of the District Court is
Code, Annotated (1942 ed.) Volume 1, Sec. 1327.
Code, Annotated (1942 ed.) Vol. 2, Sec. 1327 provides in part:
"Creditors may attack fraudulent conveyances, etc.--The said court
shall have jurisdiction of bills exhibited by creditors * * * to set
aside fraudulent conveyances of property, * * *. Upon such a bill a writ
of sequestration or injunction, or both, may be issued * * *. The
creditor in such case shall have a lien upon the property described
therein from the filing of his bill, except as against bona fide
purchasers before the service of process upon the defendant in such
The lien of Fidelity & Deposit Company of
September 20, 1950
, with the filing of its complaint in the state court action, which was
subsequent to the execution of the deed of trust to Deposit Guaranty
Bank & Trust Company on
February 10, 1950
The District Court's opinion is reported asFidelity & Deposit
v. Lovell, 108 Fed. Supp. 360 [52-2 USTC ¶9550].
United States of America
, Plaintiff v. Milton W. and Myrtle K. Baumann, and Anton F. and Mary S.
the United States District Court for the District of Minnesota, Third
Division, Civil No. 2399, December 28, 1954
[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323]
Lien for taxes: Validity against third parties: Transferees of
taxpayer.--The United States had a lien on the real property
transferred by the taxpayer to another individual and later by that
individual to a third party, both transfers being made after the notice
of the tax lien had been filed.
MacKinnon, United States Attorney, 221 Federal Courts Building, St.
Paul, Minn., Alex Dim, Assistant United States Attorney, for plaintiff.
Beaudoin, Thuet & Todd, 210 Schult Building,
South St. Paul
, for defendants Anton F and Mary S. Spraitz. No appearance as to Milton
W. and Myrtle K. Baumann.
of Fact, Conclusions of Law and Order for Judgment
entitled matter came duly on for trial before the Honorable Gunnar H.
Nordbye, one of the Judges of the United States District Court, in the
Tuesday, December 28, 1954
. George E. MacKinnon, United States Attorney, and Alex Dim, Assistant
United States Attorney, appeared for and on behalf of the plaintiff, and
there were no appearances on behalf of the defendants or any of them.
having heard the testimony of the witnesses produced by the plaintiff,
and upon all the files, records, proceedings and admissions herein, and
being duly advised in the premises, hereby makes his Findings of Fact,
Conclusions of Law and Order for Judgment.
plaintiff is a corporation sovereign and body politic.
action arises under the Internal Revenue Laws of the
, is authorized by the Commissioner of Internal Revenue of the United
States Treasury Department, and is brought at the direction of the
Attorney General of the
March 15, 1950
, Milton W. Baumann filed his income tax return for the calendar year
1949. The return acknowledged income tax due in the amount of $2,966.52.
April 14, 1950
, the Commissioner of Internal Revenue assessed the aforesaid 1949
income tax against Milton W. Baumann in the amount of $2,966.52. The
assessment list containing this assessment was received by the Collector
of Internal Revenue, who on
April 15, 1950
, issued notice of the assessment to Milton W. Baumann and demanded that
he pay the tax in full.
V. Of the
aforementioned assessment of $2,966.52, $1,000 has been paid and the
balance of $1,966.52 has not been paid.
VI. Milton W.
Baumann owes plaintiff $1,966.52 plus interest according to law.
August 29, 1950
, and again on
March 22, 1951
, the Collector of Internal Revenue caused a notice of tax lien to be
filed with the Register of Deeds of Dakota County, Minnesota. Such
notice recited the above mentioned assessment and stated that the
had a tax lien on all of the property of the defendant Milton W.
VIII. Prior to
April 14, 1950, and on and subsequent to August 29, 1950, and at all
times between those two dates, Milton W. Baumann and his wife, Myrtle K.
Baumann, were the owners of record of a parcel of real property
described as follows:
Lots 6 and 7,
Block 9 of M. D. Miller's Addition to
. Such premises are also known as
1322 North 4th Street
South St. Paul
Attached Before Transfers]
April 15, 1950
, a lien of the
for taxes attached to the above described property by reason of the
assessment of income taxes set out previously.
X. On or about
November 15, 1950
, Milton W. and Myrtle K. Baumann transferred their title to the parcel
of realty described above to one Joseph A. Godbout, and on or about
May 1, 1951
, the same parcel of realty was transferred to Anton F. and Mary S.
Spraitz, who now hold record title thereto.
XI. The title
to the parcel of realty, now held of record by Anton F. and Mary S.
Spraitz, is subordinate to the lien of the
to Title 28 U. S. C., Sec. 1655, service was duly obtained and made in
accordance with this Court's Order of
December 9, 1953
, upon defendants Milton W. Baumann and Myrtle K. Baumann.
pursuant to the Court's Order of December 9, 1953, the Order of said
Court was duly published in the St. Paul Legal Ledger in accordance with
the requirements of 28 U. S. C., Sec. 1655, as is more fully set forth
in the Printer's Affidavit, dated January 19, 1954, on file and of
XIV. That the
petition and order concerning 28 U. S. C., Sec. 1655, heretofore
referred to was mailed by registered mail to the last known address of
Milton W. Baumann and Myrtle K. Baumann, 3507 North Penn Ave.,
Indianapolis, Indiana, on December 29, 1953, as is more fully set forth
in the Affidavit of Dreda M. Harper, on file and of record herein; and
personal service as well was made on each of them by the U. S. Marshal
on January 4, 1954.
defendants Anton F. Spraitz and Mary S. Spraitz were duly served and
appeared by separate Answer through their attorneys, Paul A. Thuet, Jr.,
of the firm of Beaudoin, Thuet and Todd, which Answer was by stipulation
dated December 8, 1954, withdrawn and consent given to proceed to
judgment against said defendants Anton F. Spraitz and Mary S. Spraitz.
W. Baumann and Myrtle K. Baumann have not answered or otherwise
1. This Court
has jurisdiction herein by virtue of 26
C., Sec. 3678 of the 1939 Internal Revenue Code and 28
C., Sec. 1655.
United States of America
, is entitled to judgment adjudging it to have a tax lien upon the
following described real estate, to wit:
Lots 6 and 7,
Block 9, of M. D. Miller's Addition to
. Such premises are also known as
1322 North 4th Street
South St. Paul
to any right, title, or interest held or claimed by William W. Baumann,
Myrtle K. Baumann, Anton F. Spraitz, Mary S. Spraitz, and Joseph A.
3. That the
plaintiff, United States of America, is entitled to enforce said tax
lien against the above described real estate in accordance with law and
the provisions of Section 3678 of the 1939 Internal Revenue Code to
satisfy the balance due on said tax lien in the amount of $1,966.52,
plus interest in the sum of $564.50, plus court costs in the sum of
$86.90. If the above described real estate is sold for the purpose of
enforcing the tax lien, the proceeds of the sale shall be distributed
according to the respective interests of all parties.
BE ENTERED ACCORDINGLY.
¶9606] John S. Braxton III, Plaintiff v.
United States of America
District Court, Dist. Md., Civ. R-88-1879, 9/23/88
Property: Lien for taxes: Conveyance by taxpayer: Suits by
nontaxpayers.--Taxpayers' son was not entitled to an injunction
prohibiting enforcement of a tax levy on real property which his parents
had transferred to him, since the assessment of taxes against his
parents had become a valid lien in favor of the United States before the
property was transferred. Thus, the son never held a position or legal
claim in the property superior to the right of the
. In addition, the District Court did not have jurisdiction under Code Sec.
7426 to inquire into the validity of the underlying assessment. As a
result, proceeds from the son's sale of the property, which had been
held in escrow, were ordered to be paid over to the
MEMORANDUM AND ORDER
originated as a complaint for temporary restraining order and permanent
injunction filed on
June 28, 1988
by the plaintiff, John S. Braxton, III, a resident of
against the Commissioner of the Internal Revenue Service. On that date
the complaint was presented to the Honorable Herbert F. Maletz, serving
as Chambers Judge in this Court and Judge Maletz issued an Order
directing that ". . . the Internal Revenue Service refrain from
collecting any of the proceeds of sale owed to John S. Braxton, III by
virtue of his sale of
3600 Park Heights Avenue
. . . ." Judge Maletz further ordered the settlement officer to
close the sale and to place the proceeds of sale in escrow in an
interest bearing account until further order of the Court and set a
hearing for the matter on
July 28, 1988
. A motion to continue the hearing was filed by counsel for the
plaintiff and, without opposition from the Commissioner of the Internal
Revenue Service, an extension was granted until
August 31, 1988
An answer was
filed by the
United States of America
through its attorneys on
August 29, 1988
August 31, 1988
, this matter came on for hearing before the Court. Plaintiff was
permitted to present evidence as was the defendant and it was agreed
that the hearing would constitute a hearing on the injunction request as
well as a hearing on the temporary restraining order.
concluded late on the 31st and the Court permitted additional time
within which either party might note objections to documentary material
submitted to the Court or to request the opportunity for further
the authority granted the Court under Rule 65(a)(2) this Memorandum will
constitute the findings of fact and conclusions of law resulting from
the consolidation of the application for preliminary injunction and the
final hearing on the request for permanent injunction contained in the
makes the following findings of fact:
action was brought by the plaintiff, John S. Braxton, III alleging
jurisdiction based on Section
7426 of Title 26 of the United States Code Annotated.
plaintiff is the son of John S. Braxton and Joselyn L. Braxton and Mr.
and Mrs. Braxton have been assessed taxes in the amount of $134,154.27
by the Internal Revenue Service.
was designated by the Internal Revenue Service as "nominee" of
Mr. and Mrs. Braxton as to the taxes allegedly owed.
underlying tax assessment arises out of the tax years 1979, 1981, 1982,
1983, and 1984. The assessments made by the
were filed on March 2, 1984, October 28, 1985, April 27, 1987, May 18,
1987 and June 15, 1987.
earliest of these assessments, March 2, 1984, was in the amount of
(6) On June
21, 1984 Mr. and Mrs. Braxton purportedly transferred to John S.
Braxton, III three pieces of real estate in the City of
. This transfer was allegedly accomplished by a deed recorded in Liber
0242 at Folio 817 and bearing the date of March 16, 1984, but
acknowledged on April 1, 1984 and recorded on June 21, 1984.
(7) The date
hereinbefore referred to transferred the three pieces of property
"* * * as a gift to our son and for no further consideration."
(8) On or
June 9, 1988
, the Internal Revenue Service filed a notice of lien under the Internal
Revenue Service laws naming John S. Braxton, III as a
"nominee" of John S. and Joselyn L. Braxton.
(9) That lien
was filed in the Circuit Court for
and covered the claimed taxes in the amount of $130,154.27.
(10) John S.
Braxton, III, the plaintiff, had entered into a contract to sell one of
the properties deeded to him by his mother and father located at
3600 Park Heights Avenue
, with settlement scheduled for
June 28, 1988
. The levy and lien was served on the real estate agent.
(11) The sale
resulted in an escrowed sum of $29,708.11 being placed in an interest
bearing account by the settlement officer as a result of the settlement
June 28, 1988
plaintiff's mother, Joselyn Braxton, testified that she did not sign the
deed conveying the properties to her son although it appears to have
been signed with her name by some individual and the notarization
attests to her appearing before Patricia M. Cullison. She later ratified
the signature and expressly adopted the signature and the deed as her
Plaintiff's mother also denied execution of the various tax returns
filed on behalf of the Braxtons during the operative tax years. Although
the testimony was somewhat inconclusive, and in some instances she did
not deny her signature, for the purposes of this Memorandum the Court
finds that she in fact did execute some returns, but did not execute
assessment by the United States through the Internal Revenue Service on
the 4th day of March, 1984, in the amount of $62,111.24 became a lien in
favor of the United States upon the real property known as 3600 Park
Heights Avenue, Baltimore, Maryland, which was at that time the property
of John S. Braxton and Joselyn Braxton, his wife.
B. The lien of
the United States was perfected as to all persons except purchasers for
value, the holders of security interest, mechanical lien or judgment
lien creditors as of March 4, 1984, pursuant to the provisions of 26
U.S.C.A. §6323 .
C. Any attempt
to transfer the property from and after the effective date of the lien
was ineffective to defeat the interest of the
in the property.
purported transfer by the taxpayer, John S. Braxton, Jr. and Joselyn
Braxton to John S. Braxton, III as a gift and for no consideration did
not constitute John S. Braxton, III a purchaser of the property or one
whose interests were superior to the lien rights of the United States,
whether that transfer was effective on March 16, 1984 (the date of the
deed), April 1, 1984 (the date of the notarization), or June 21, 1984
(the date of recording).
E. That the
filing by the government of its lien in the Circuit Court for
June 9, 1988
, fully perfected the lien as against all real property and was properly
lodged with the settlement officer who was handling the real estate
F. Title 26, Section
7426 permitted one who claims an interest on a property levied upon
other than the person against whom the assessed tax is levied to sue the
in this Court as to property located within the District of Maryland.
G. A United
States District Court is authorized by Title 26, U.S.C.A. §7426(b)(1)
to issue an injunction if a levy or sale would irreparably injure
rights and property which the Court determines to be superior to
the rights of the United States in such property.
H. For the
purpose of an adjudication under Title 26, §7426
the assessment of the tax upon which the interest of the
is based is conclusively presumably to be valid.
Based upon the
foregoing findings of fact and conclusions of law the Court finds that
there was a valid lien in favor of the United States on the property
3600 Park Heights Avenue, Baltimore City, Maryland, from and after March
4, 1984, and that lien became perfected against all the world except
those specifically covered by Title 26 §6322
on June 9, 1988, on notice by filing of the same in the Circuit
Court for Baltimore City.
herein has never at any time held a position or legal claim superior to
the right of the
in the property
3600 Park Heights Avenue
. The course of events and the chronology of happenings might well
justify a finding of a deliberate fraud on creditors by the Braxtons,
and particularly upon the Internal Revenue Service, but the Court finds
that such a finding is not necessary for decision of this case.
upon which plaintiff here proceeds does not authorize an inquiry by the
Court into the validity of the underlying assessment and all the proof
offered by the plaintiff is solely intended to attack the validity of
the underlying assessment. Essentially, what is claimed, is that the
wife of the taxpayer did not sign the returns which covered the years
out of which the assessments arise. This is not the proper forum to
litigate that aspect of the case. All testimony having to do with Mrs.
Braxton's participation, non-participation, or knowledge as to the tax
returns is irrelevant to appropriate disposition of the present case.
There has been
no demonstration that the plaintiff John S. Braxton, III, is in any way
a person with a right superior to the
properly levied upon and the requested injunction will not issue since
there is no basis for such action by the Court. Accordingly, the Court
will, by separate Order, DENY the requested injunction; dismiss this
proceeding; dissolve the temporary restraining order heretofore issued
by the Honorable Herbert N. Maletz and direct the settlement officer to
pay over to the
the full sum in escrow from the sale of
3600 Park Heights Avenue
, together with all interest accrued thereon.
consideration of the plaintiff's request for a permanent injunction, it
is this 23rd day of September, 1988, by the United States District Court
for the District of Maryland,
plaintiff John S. Braxton, III's request for an injunction is DENIED;
2. That this
proceeding is DISMISSED;
3. That the
temporary restraining order heretofore issued by the Honorable Herbert
N. Maletz is DISSOLVED;
4. That the
settlement officer pay over to the United States the full sum in escrow
from the sale of 3600 Park Hieghts Avenue, Baltimore, Maryland, together
with all interest accrued thereon; and,
5. That the
Clerk of the Court shall mail copies of this Order to all counsel of
By agreement of the parties, the appropriate defendant was the
United States of America
and the Court, by its Order of
September 1, 1988
, changed the caption of the case and all internal references to the
United States of America
United States of America
, Plaintiff v. David W. Freeman and Barbara M. Freeman, Defendants
U.S. District Court, No. Dist. W.Va., Civ.
Tax liens: Validity of lien: Conveyances by taxpayer: Fraudulent
conveyance: Real property: Period of lien: Limitations.--The
taxpayer's conveyance of his interest in real property to his common-law
wife was set aside and the IRS's tax liens were enforced. The conveyance
at issue in the instant case had previously been set aside by a court of
competent jurisdiction and that action was not open to collateral attack
by the taxpayer and his wife. Moreover, even had there not been a
previous judgment on the issue, the conveyance to the wife could not be
permitted to stand because it was fraudulent. The conveyance was made at
a time when the taxpayer was facing litigation, it was made without any
consideration, and the taxpayer retained possession and control of the
property. Further, under state (
) law, a transfer of property without valuable consideration is void
with respect to creditors whose debts existed at the time of the
transfer. Thus, since the IRS's tax liens predated the transfer, the
transfer was void with respect to those claims. The IRS's claim was not
time-barred even though it was made after the expiration of the state
statute of limitations because that statute did not apply to the
. Accordingly, the property was ordered sold to satisfy the tax liens,
with the common-law wife to receive one-half of the proceeds.
instituted this action seeking to set aside as fraudulent and voluntary
a conveyance of real property made by David W. Freeman to Barbara M.
also seeks to foreclose its tax liens against the property. Defendant
Barbara M. Freeman answered on or about
October 14, 1982
. Defendant David W. Freeman did not answer, but appeared at the
reopened trial in this matter on
January 15, 1986
. Defendant Pendleton County Bank, joined earlier as a defendant, was
dismissed as it no longer had an interest in the property.
Internal Revenue Service made jeopardy assessments against David Freeman
as shown in the following table:
Tax(as of Date of
Year Date of Assessment AssessmentAssessment)
1971 October 17, 1978Income Tax$1,996.00
1972 October 17, 1978Income Tax21,202.80
1973 October 17, 1978Income Tax8,628.04
1974 October 17, 1978Income Tax3,793.52
1975 October 17, 1978Income Tax$634.76
Fees & Costs.25
August 7, 1978Income Tax
Fees & Costs.25
1977 October 16, 1978Income Tax318.00
Fees & Costs.25
February 15, 1986
, David Freeman's liability on these assessments amounted to
$138,691.07. Interest has accrued since that date at a rate of ten
percent, compounded daily. Internal Revenue Code Sections
6601 , 6621 .
Freeman met defendant Barbara Freeman in 1969, in
. During that year David and Barbara Freeman began living together and
formed a common law marriage. Defendants David Freeman and Barbara
Freeman moved to
, in 1970. For part of 1970 and 1971 they rented a house in
and paid rent of $75 per month.
Freeman has not had any paid employment, except for a few months while
in college. Barbara Freeman has never received income as would require
her to pay federal income taxes, has never paid such taxes or filed a
federal income tax return. Since Barbara Freeman and David Freeman began
living together, and continuing until at least September, 1978, David
Freeman handled the financial transactions of both persons and has
supported Barbara Freeman.
5. Mrs. Rolf
Mueller is Barbara Freeman's mother. Other than claimed gifts of $42,000
in currency from Mrs. Rolf Mueller, Barbara Freeman has not received any
gift or inheritance of more than $100, or gifts or inheritance of more
than $1000 in the aggregate. Since the mid-1970s, Mrs. Mueller has
suffered from a disease similar to Altzheimer's disease and is not
mentally competent. (June 7, 1985 trial transcript at 18.)
financed the purchase of the first parcel by paying $12,963 at the time
of purchase and by making a note for $37,737 to the sellers, T.J.
Bowman, III and John Harman. The note was to be paid by three equal
annual payments of $10,579. Shortly after the purchase, Mr. Bowman and
Mr. Harman discounted the note to Pendleton County Bank.
made at the time of purchase was made by five separate checks. One
check, for $268, was drawn on Barbara Freeman's checking account and was
signed by Barbara Freeman. The other four checks, for $9,237.50, were
cashier's checks payable to David Freeman. The 1973 loan payment on the
property was made by four separate checks, one on the Barbara Freeman
account, for $5,300.59, and three cashier's or official checks payable
to David Freeman, each for $2,500. The 1974 payment was made by a
$10,000 cashier's check, on which David Freeman is named as payer, and
$2,060.66 in cash.
7. In 1975 the
defendants paid off this note by making a new note for the balance,
payable to the bank. On
October 15, 1975
, David Freeman made a payment of $1,400 on the new note by a cashier's
check. The second parcel of 18.5 acres was paid by a check for $2,127 on
the Barbara Freeman account.
8. In 1971 the
Barbara Freeman account was opened at the Pendleton County Bank. During
that year $1,200 in cash, and a cashier's check payable to Barbara
Freeman and drawn on the Colfax National Bank in
, were deposited in the checking account. In 1972 a total of $16,583.80
was deposited in that account, of which $200 was in cash and $5,600 was
a cashier's check payable to David Freeman and drawn on a California
bank. Eighty-three dollars and eighty cents in deposits were accounted
for by two checks from Rolf Mueller or R. Mueller. The name of Barbara
Freeman's father is Rolf Mueller. The other $10,000 represents four
cashier checks payable to Barbara Freeman, drawn on banks in
In 1973 a
total of $23,623.45 was deposited into the Barbara Freeman account, of
which $11,088 was cash. A further $6,435.45 was from checks payable to
or endorsed to David Freeman, of which $2,312.50 was derived from
cashier's checks from
banks. Checks payable to Barbara Freeman were the source of the
remaining $6,100.00. All but one hundred dollars of this amount is
accounted for by two cashier's checks drawn on
$4,493.72 was deposited into the account, of which $4,219.00 was
currency. Two hundred dollars arose from a money order on a Colorado
bank payable to David Freeman. A further $74.72 arose from checks to
$5,373.08 was deposited into the account, $2,840.00 of which was cash.
Checks payable to David Freeman accounted for $2,377.78. Of the
remaining $755.30, $420 is from a check from R. Mueller to Barbara
controlled this account, making all the deposits. The Court finds that
substantially all of the funds in the account were funds of David
Freeman, and that this was his account.
9. In August
of 1973 T.J. Bowman and John Harman sold 101 acres in
to Barbara Freeman,
ert Wallace and George McKerrow for $20,000. David Freeman conducted the
transaction for the purchasers, and paid at least $1,956.45 of the down
September 6, 1972
Mirkwood, Inc. purchased 380 acres in
from Bowman and Harman. Barbara Freeman was and is one of three
shareholders in Mirkwood, Inc., and owns at least 25% of the
corporation. David Freeman arranged for her to have this interest. David
Freeman arranged the purchase of land, paid a down payment of $12,500
and three annual payments totaling $36,394.
10. Don Aaron
Freeman is the son of defendants Barbara and David Freeman. He was born
February 25, 1971
January 11, 1972
, a 1971 Mercedes Benz automobile was purchased in the name of Don Aaron
Freeman. The signature of Don Aaron Freemen on the registration form was
executed by David Freeman.
Freeman was arrested on
August 29, 1974
by the West Virginia State Police and was charged with the felonious
possession with intent to manufacture a controlled substance. He was
found guilty of this charge on
June 10, 1975
, and placed on probation.
September 16, 1974
, David W. Freeman executed a deed which purported to convey his one
half interest in the title to the property at issue to Barbara M.
Freeman for consideration of love and affection and $1.00. The deed also
claimed that Barbara Freeman and her parents had paid for the property
at issue. The deed was recorded on
September 18, 1974
September 25, 1974
Carleton D. Temple filed a civil action in the Circuit Court of
Pendleton County, West Virginia, alleging that David Freemen had shot
him, committing the tort of battery.
also alleged that the
September 16, 1974
conveyance, the conveyance here at issue, was fraudulent as to him.
August 9, 1976
, pursuant to
's action, the
adjudged and ordered that the
September 16, 1974
deed be set aside and held to be void and title was reinvested in David
Freeman pled guilty to a charge of failing to file an income tax return
for 1972 and was sentenced to serve one year for that offense. Freeman
was a fugitive from justice on that charge from 1978 until
October 25, 1985
, when he was arrested by agents of the Federal Bureau of Investigation
and the United States Marshal Service in
. David Freeman was arrested by FBI Special Agent Tom McClenaghan. At
trial in this matter, Special Agent McClenaghan was asked the charge on
which David Freeman was arrested. Special Agent McClenaghan testified
"I believe" Freeman was wanted for bond default and for a
warrant for conspiracy to distribute narcotics. Freeman was formally
charged solely on the fugitive charge.
Freeman was deposed by the
October 4, 1984
. Barbara Freeman was represented by experienced counsel, and consulted
counsel prior to the deposition. Barbara Freeman, in response to a
question from her attorney, testified under oath that the last time she
had contact with David Freeman was the Fall of 1978.
17. Trial in
this matter was held on
March 26, 1985
. After the
presented its case, Barbara Freeman's counsel moved to recess the case
until he could locate his client and have her testify. Trial recommenced
June 6, 1985
. Barbara Freeman discussed the case with her attorney after the
deposition and before the
June 6, 1985
hearing. At the June hearing Barbara Freeman testified, in response to a
question from her counsel, that she had no contact with David Freeman
since the Fall of 1978.
Freeman testified at deposition that she received three gifts of cash
from her mother, $30,000 in 1970 and two in 1972 and 1973. The
deposition transcript indicated that Barbara Freeman testified that when
her mother visited her, "she gave me approximately right around six
thousand dollars." Barbara Freeman reviewed that transcript and did
not correct that quotation. At trial Barbara Freeman indicated that she
meant that her mother gave her $6,000 in 1972 and a further $6,000 in
1973. She claimed that this was Mrs. Mueller's own money. Defendant
Barbara Freeman testified that Mrs. Mueller obtained these funds by
selling china after World War II. Barbara Freeman also testified that
the family emigrated to the
in 1954. Barbara Freeman testified that her father did not know of the
supposed gift until he read her deposition in 1984. Barbara Freeman has
testified that she gave this money to David Freeman to purchase land,
and that David Freeman handled the money after that. Barbara Freeman
testified that this money was used to purchase the property at issue, as
well as the Highland County, Virginia, property and the Mirkwood
19. After the
arrest of David Freeman in October of 1978, the
moved to reopen the record in this matter. At reopened trial the United
States adduced testimony from Mr. Jerry Morse that David and Barbara
Freeman, under the names David and Janet Canterbury, had rented a house
from him in Austin, Texas, in 1981 and occupied that house together
until October of 1985. Mr. Morse also testified that during the later
period of defendants' occupancy the rent was usually paid in cash or by
cashier's checks payable to David Canterbury from
banks. Mr. Morse identified defendants as the Canterburys. At the
hearing Special Agent Tom McClenaghan of the Federal Bureau of
Investigation testified that, after arresting David Freeman, he went to
the house and addressed the woman living there as "Mrs.
Freeman", and she responded to that name. Special Agent McClenaghan
also identified defendants.
Barbara Freeman and defendant David Freeman also testified at the
January 15, 1986
hearing. Defendant Barbara Freeman admitted that her testimony, at
deposition and trial, that she had no contact with David Freeman since
1978 to the time of trial, had been false.
David Freeman testified that the claimed gifts from Mrs. Mueller were
the source of the funds used to buy the property at issue. David Freeman
admitted that he had promised to appear to begin serving his sentence in
1978 but did not appear.
Defendants' testimony was not credible. David Freeman was the source for
the funds used to buy the property. The Court does not believe
defendants' testimony that Mrs. Mueller provided these funds.
Freeman gave false testimony in response to questions from her attorney
and after a full opportunity to tell her counsel not to ask those
questions. The Court must infer that Barbara Freeman intentionally
misled her counsel so that she could gain the Court's sympathy by her
false testimony. Further, David Freeman changed his testimony after
Barbara Freeman's counsel indicated to him that documentary evidence
contradicted his testimony. (January 15, 1986 transcript at 22-23,
observing the demeanor of the witnesses in this matter, the Court gives
credence to the testimony presented by the
and does not give credence to defendants' testimony. The Court is
satisfied that defendants, both in state court and in this Court, have
attempted to manipulate the judicial process. (January 15, 1986
transcript at 48-49.) The Court cannot allow this to be done. The Court
finds that funds used to purchase the property were derived from the
activities of David Freeman, and not from any gift from Mrs. Mueller to
has submitted a certified copy of a judgment of the Pendleton County
Circuit Court setting aside the conveyance at issue in this case. Temple v. Freeman (No. 783, (
Aug. 9, 1976
). The judgment was based upon a complaint alleging that the
September 16, 1974
conveyance was fraudulent as to
, a creditor of David W. Freeman.
setting aside a conveyance as fraudulent to one creditor voids that
conveyance as to all creditors. Lockhard v.
, 10 W.
courts give preclusive effect to consent judgments. State ex. rel.
Prince v. Dept. of Highways, 195 S.E. 2d 160, 162 (W.
1972); State v. Sawyers, 133 S.E. 2d 257, 261 (W.
1963); Ohio River R. Co. v. Johnson, 50 W.
499, 40 S.E. 407, 409 (1901). As the order in Temple
was by a court of competent jurisdiction, it must be given effect by
this Court, regardless of defendant's arguments that it was erroneous. Kremer
v. Chemical Construction Corp., 456
461, 466 (1982); University of Illinois Foundation v. Blonder-Tongue
Laboratories, Inc., 465 F.2d 380, 381 (7th Cir. 1972), cert. denied,
1061. See Federated Department Stores, Inc. v. Moitie, 452
394, 398 (1981); M.J. Former Adjudications, Section 10; M.J. Judgments,Section 146 .
Barbara Freeman has raised various objections to the
judgment. This is not the proper forum for defendant's objections. It is
the law in
that an order of a court acting within its subject matter jurisdiction
is not open to collateral attack, except for want of jurisdiction. State
ex rel. Massey v. Boles, 140 S.E. 2d 608, 610 (W. Va. 1965); Adkins,
supra; Stewart v. Senter, 106 S.E. 443, 444 (W. Va. 1921) ("The
law is so firmly settled that a judgment of a court of competent
jurisdiction, so long as it stands in full force and unreserved, cannot
be impeached in any collateral proceeding on account of errors not going
to the jurisdiction * * *"). A collateral attack is an attempt to
impeach a judgment in a proceeding not instituted for the express
purpose of annulling, correcting or modifying that judgment. Lough v.
Taylor, 124 S.E. 585 (W.
1924). An attack on a judgment is direct if it involves a review or
annulment of the judgment and is collateral if it involves a mere
avoidance of its effect. McKnight v. Pettigrew, 141 W.
506, 91 S.E. 2d 324, 328-329 (1956). Defendant is merely attempting to
evade the preclusive effect of Temple. Such a collateral attack on a state court order should not be
allowed. Silvious v. Helmick, 291 F. Supp. 716, 718 (N.D. W. Va.
have not acted to set aside the Circuit Court judgment, this Court must
give full faith and credit to the state court judgment, and not hear
collateral attacks on that judgment. However, even if this were not the
has shown, after a full trial of this matter, that it is entitled to
2. The burden
was on defendants to show that the conveyance should be allowed to
stand. As the conveyance at issue was from husband to wife,
law provides that the Court must presume the conveyance to be void as to
creditors and the burden of proof as to the validity of the transfer is
shifted to the party attempting to uphold the transaction. Hutchinson v. Walton, 119 W.
709 (1938). The "burden is upon [defendant], not only to produce
the evidence [to uphold the transaction], but to prove the facts clearly
and fully." Bradley v. Kenova Trading Co., 115 S.E. 866, 868
1923). See also Pickers v. Wood, 50 S.E. 818, 820-821 (
1905). This case is very similar to Pickers, supra. Barbara
Freeman's claim is essentially that her husband's interest in the land
was held in secret trust for her until the purported conveyance.
Defendants must carry a heavy burden to establish the bona fides of this
3. The fraud
necessary to set aside a conveyance may be inferred from the facts and
circumstances of the case. Patterson v. Patterson, 277 S.E. 2d
709, 719 (W.
1981). When the facts and circumstances of the case are such to make a prima
facie case, they are taken as conclusive evidence, unless rebutted.
To rebut this case, defendants must show by well established facts that
the conveyance is not fraudulent. Hutchinson v. Walton, supra.
suggesting fraud are sometimes designated "badges of fraud."
M.J. Fraudulent Conveyances,Sec.
15 . Among the more common of these badges of fraud are a close
relationship between the parties, want of consideration and the
retention of the property by the grantor. Patterson v. Patterson,
277 S.E. 2d 709, 718 (W.
has established the presence of several of these badges of fraud, and
defendants have not rebutted this case.
evidence is clear that David Freeman not only provided payment for his
half interest in the property, but most, if not all, of the funds for
the property as a whole. The statement in the 1974 deed that Barbara
Freeman and her family had provided all of the funds for the original
purchases of the property is not credible. It is thus clear that the
1974 conveyance of David Freeman's one-half interest in the property was
made without consideration, which is a badge of fraud.
badges of fraud are present in this case, the retention of possession
and control of the property by David Freeman, and was facing possible
litigation. In April of 1975, after the purported conveyance, David
Freeman signed a Deed of Trust Note secured by the property, which
rolled over the original indebtedness for the property. David Freeman
also continued to live on the property after the conveyance.
Freeman was facing litigation at the time of the purported conveyance.
David Freeman had shot
in June of 1974 and was facing a lawsuit from
. David Freeman had been arrested on felony charges on
August 29, 1974
and was facing the possibility of criminal fines. A transfer made with
the intent to avoid future criminal fines is fraudulent. State v.
Burkeholder, 30 W.
593, 598-599 (1888).
Freeman purchased several parcels of land and a Mercedes Benz
automobile, but kept this property in others' names. He operated a bank
account in another's name. David Freeman failed to file income tax
returns for the years 1971, 1972 and 1973 or pay tax for those years.
His practice of hiding his property interests gives rise to a compelling
inference that he was acting with a fraudulent motive.
7. As a
general rule, the title of a purchaser is not affected by the fraudulent
intent of a grantor, unless the purchaser had notice of that fraudulent
intent. However, this rule only protects a purchaser for valuable
consideration. W. Va.
Code Ann. Sec.
40 -1-1; Laidley
v. Reynolds, 58 W. Va. 418, 52 S.E. 405 (1905). The recipient
of a fraudulent gift, however free from fraudulent intent, becomes a
fraudulent grantee the moment he claims the benefit of the grant. His
acceptance amounts in law to an adoption of the fraudulent act of the
grantor. Donehoo v. King, 83 W.
485, 98 S.E. 520, 522 (1919). See also Graham Grocery Co. v. Chase,
775, 84 S.E. 785, 786 (1915). Here the deed shows on its face that the
transaction was voluntary and thus void irregardless of Barbara
conveyance made with the intent to defraud existing creditors vitiates
the conveyance as to subsequent creditors. Donehoo, supra, 98
S.E. 520, 522; Graham Grocery Co., supra 84 S.E. 785, 786.
did not need to show that David Freeman was insolvent at the time of the
transfer. "The right of a creditor to subject to the payment of his
debt the property of his debtor fraudulently conveyed does not depend on
the question of the insolvency of the debtor." Halfpenny v.
Tate, 65 W.
296, 64 S.E. 28 (1909). Insolvency is just an indicata of fraud, not a
prerequisite for a finding that a conveyance was fraudulent.
10. A transfer
of property made without valuable consideration is void as to creditors
whose debts existed at the time of the conveyance. W. Va. Code Ann. Sec.
40 -1-3. A voluntary transaction is void pursuant to this section
whether or not the parties had a fraudulent intent. Kell v. Cumby,
802, 26 S.E. 2d 233 (1943); Tetrick v. McIntire, 110 W.
529, 158 S.E. 788 (1931); McCaskey v. Potts, 65 W.
641, 64 S.E. 908 (1909). A voluntary transfer is void as to pre-existing
creditors even if the grantor was not insolvent at the time of the
transaction. Bank v.
, 25 W.
242, 254-255 (1884); M.J. Fraudulent and Voluntary Conveyance,Sec.
65 . A voluntary transfer is void as against existing creditors
because it is voluntary, regardless of the "amount of debts, the
extent of the property so conveyed, the motives which prompted the
settlement, or the conditions or circumstances of the party at the
time." McCaskey v. Potts, supra; M.J. Fraudulent and
Here the deed
on its face shows it was made without valuable consideration. Even if
Barbara Freeman's claim that she and her family had paid the full price
for the original purchase of the property was believed, that would not
save the transfer of David Freeman's interest to her, as the delivery of
the joint interest to the property to David should be presumed to be a
completed gift. Horner v. Huffman, 52 W.
40, 43 S.E. 132 (1903); McGinnis v. Curry, 13 W.
29, 64 (1878). See Patterson v. Patterson, 277 S.E. 2d 709,
1981). In any event, the circumstances of the family finances and the
purchases clearly makes Barbara Freeman's story incredible, and
indicates that the source of the funds for the property was David
11. The burden
of proving that the transfer was bona fide and for a valuable
consideration rests upon Barbara Freeman, not David Freeman's creditors.
Horner, supra; Herog v. Weiler, 24 W. Va. 199 (1884).
was a preexisting creditor of David Freeman. The tax claims for the
for 1971, 1972 and 1973 all predate the transfer. Hence the transaction
is void as to these tax claims of the
Ordinarily, a claim that a transfer was void as to creditors as it was a
voluntary conveyance could not be brought as more than five years passed
from the date of the conveyance to the date the complaint was filed.
law sets a five-year statute of limitations for such claims. W. Va. Code
Ann. Sec. 40 -1-4.
However, such state statutes of limitations do not apply to the
when it is acting in its sovereign capacity. United States v.
USTC ¶9633 ], 310 U.S. 414, 416 (1939); United States v. Morgan,
298 F.2d 255, 256 (4th Cir. 1962); United States v. Weintraub [80-1
USTC ¶9172 ], 613 F.2d 612 (6th Cir. 1979); United States v.
Polan Industries Inc. [61-2
USTC ¶9598 ], 196 F.Supp. 333, 335-339 (S.D. W. Va. 1961); United States v. West, 299 F.Supp. 661, 664 (Del. 1969) (fraudulent conveyance
case). See Block v.
273, 288-290 (1983). As the
made its claim that the conveyance was voluntary within six years after
the date of assessment, its claim was not time barred. 26 U.S.C. Section
has established that the conveyance at issue was both voluntary and
fraudulent. Defendants' attempt to rebut that case has failed. The
September, 1974 conveyance is thus void as to the
, a creditor.
to Internal Revenue Code Section
7403 (26 U.S.C.) and United States v. Rodgers [83-1
USTC ¶9374 ], 461 U.S. 677 (1983), the United States is entitled to
a sale of the property, with half of the sale proceeds, but not more
than the amount of David Freeman's tax liabilities, to be paid to the
United States. The rest of the funds shall be paid to Barbara Freeman.
submit an appropriate order of judgment and sale.
¶9296]Continental Oil Co., Plaintiff v. United States of America, The
Bank of Bermuda, Ltd., Henry Goldon et al., Defendants
S. District Court, So. Dist. N. Y., 69 Civ. 827 HRT, 326 FSupp 266,
[Code Sec. 6323--Result unchanged by '69 Tax Reform Act]
Validity of lien: Priority against third parties: Conveyance by
taxpayer.--The taxpayer's assignment to a bank of receivables was
not a complete transfer of his entire interest. He maintained a
contractual right to receive approximately 95% of payments exceeding
$100,000. The assignment was therefore illusory and the taxpayer did not
divest himself of substantial ownership. The bank was also required to
give adequate and full consideration for the taxpayer's 95% interest in
the payments which it acquired before a notice of the lien was filed.
The government was granted leave to amend its complaint in order to
advise to Court of its position in respect to the payments.
Jones, Dewey, Ballentine, Busby, Palmer & Wood, 140 Broadway,
, N. Y., for plaintiff. David M. Brodsky, Assistant United States
Attorney, William R. Burton, Valicenti, Leighton, Reid & Pine, 70
Pine St., New York, N. Y., for defendants.
In response to
a notice of levy served by the government on February 27, 1969, the
Continental Oil Co. (hereinafter "Continental") instituted
this interpleader action, pursuant to 28 U. S. C. §1335, in March,
1969, depositing in the Registry of the Court at that time and
thereafter such sums as accrue to the interest of Mr. Edgar Fain. 1
and the Bank of Bermuda, Ltd. (the "Bank") remain the sole
contenders for these funds. 2
' claim stems from a jeopardy assessment against the taxpayer Fain in
the amount of $1,107,207.14, plus statutory additions of $7,339.34; the
Bank lays claim to these funds as assignee and/or vendee of Fain's
rights to future payments from Continental.
1969, defendant Henry Gordon moved for summary judgment with respect to
his recently settled claim. 3
In March, 1970, the motion was denied without prejudice because the
lacked sufficient information upon which to oppose it. Counsel were
instructed to commence discovery and submit thereafter memoranda of law
setting forth their respective theories for lien priority, to be
On the basis
of the memoranda of law submitted by counsel, the following facts appear
consideration of a sale, consummated
September 18, 1964
, of certain property owned jointly by the taxpayer Fain and his two
brothers, Continental as purchaser promised to amortize slightly over
2/3 of the purchase price in seven (7) equal annual instalments payable
each September 18 with interest at 41/2%. Fain's proportionate interest
in the instalments was 16.3686396% or $498,887. The amount of the 1969
and 1970 annual instalments was subject to some fluctuation by reason of
the amount of insurance proceeds received by Continental in each year.
Additional consideration for the Fain property consisted of a contingent
March 1, 1969
, computed on the basis of the cash earnings of the purchased
properties, but not to exceed $6,000,000, plus 4% interest from
September 18, 1964
, which amount was to be shared in an unspecified proportion by the Fain
brothers. Continental further agreed to make the payments negotiable as
collateral security for borrowings by the Fains by giving its guarantee
to future lenders.
May 29, 1967
, Fain made the so-called "assignment" of his rights to the
contingent payment from Continental and to the contingent increases in
1969 and 1970 instalment payments to the Bank of Bermuda. In exchange
for the transfer of these rights, Fain received $100,000 cash, plus
951/2% of all payments received by the Bank in excess of $100,000. Thus,
the Bank was guaranteed return of the $100,000, plus 41/2% of any
excess. Given the expected size of the contingent payment, it is clear
that Fain retained the right to the bulk (approximately 95%) of payments
due him. In addition, to secure returns of the $100,000, Fain deposited
$100,000 in his Bank of Bermuda account (or, more precisely, the Bank
incurred by Henry Gordon on Fain's The Bank of Bermuda issued to
Continental two guarantees totalling $500,000 to cover liabilities to
First National City Bank incurred by Henry Golrdon on Fain's behalf and
for which Fain also promised to pay a .5% fee and to indemnify the Bank.
All these transactions were executed by August, 1967.
November, 1970, these additional transactions had occurred: (1) upon
receiving the insurance proceeds contemplated by the sales agreement in
February 1968, Continental relieved the Bank of Bermuda of $400,000 of
its guaranty; and (2) on February 3, 1969, the Bank apparently acquired
Fain's 95% interest in the March, 1969 contingent payment by paying to
Fain $1,040,000. According to the Bank, Fain's contingent interest was
then valued at $1,150,000. 4
September 6, 1966
, Fain renounced his
citizenship and became a citizen of
with a residence in
. Because of his expatriation, the Internal Revenue Service disallowed
instalment basis treatment for the Continental payments received in
1966. In December, 1968, the first jeopardy assessment for 1966, in the
amount of $1,120,680.30, was made against Fain and his wife jointly. A
revised assessment in the sum of $1,107,207.14 was made on
January 17, 1969
. Notice of the revised assessment was served upon Fain on January 20,
1969, but not recorded in accordance with 26 U. S. C. §6323(f) until
February 12, 1969, nine (9) days subsequent to the purported acquisition
by the Bank of Fain's interest in the allegedly assigned payments.
Apparently, notice of lien in accordance with 26
C. §6323(f) was never filed respecting the 1968 assessment, a fact
which, if controverted, would significantly alter the tentative
conclusions set forth below.
The purpose of
this interim memorandum is dual: to dispose of certain contentions of
the parties with respect to the legal effect of the so-called
"assignment" by Fain to the Bank; and to set forth those
aspects of this litigation which require clarification and, perhaps,
further evidentiary submissions, before the opposing motions for summary
judgment, either partial or total, can be decided.
for Lien Priorities]
judgment turns on which contender is, in fact and in law, the prior
lienor. The government presents three theories for its lien priority:
(1) that the May 29, 1967 "assignment" by Fain to the Bank of
his rights in the contingent payment and the contingent increases in the
1969 and 1970 instalments was illusory and void; (2) that the
"assignment" created merely a security interest in the Bank,
which interest remained imperfected prior to the perfection of the tax
lien; and (3) that even if the government is not entitled priority over
the Bank's security interest, the Bank should be required to marshall
other assets of the taxpayer before recourse to the Continental deposits
in this proceeding. The Bank urges its lien priority on the
diametrically opposed ground that the
May 29, 1967
assignment effected a full, absolute and valid transfer of Fain's
interest in the Continental payments. Consideration of the government's
fourth theory of recovery--that the assignment is void, being a
fraudulent transfer in violation of the New York Debtor and Creditor Law
§§ 276 and 278--is deferred until final disposition of those grounds
amenable to summary judgment.
government's lien for taxes, which arises at time of assessment, 26
C. §6322, attaches to "all property and rights to property,
whether real or personal," belonging to the delinquent taxpayer. 26
U. S. C. §6321. To decide what constitutes such "property or
rights to property," the court must look in the first instance to
state law, conceded here to be the law of
. Aquilino v. United States [60-2 USTC ¶9538], 363
509, 513 et seq. (1960), United States v. Bess [58-2 USTC
51, 55-56 (1958). Therefore, since the assignment, executed
May 29, 1967
, predated the December 1968 assessment and demand upon the taxpayer,
the Bank is the prior lienor to the extent that the assignment
effectuated a valid transfer of the Continental monies under
law. See City of New York v. United States [60-2 USTC ¶9767],
283 F. 2d 829 (2d Cir. 1960), United States v. Lester, 235 F.
Supp. 115 (S. D. N. Y. 1964). As previously indicated, however, the
question of the vulnerability of this assignment under the New York
Debtor and Creditor Law is reserved for future decision.
correctly argues that under
law, funds to become due, either definitely or contingently, are
assignable. See 3 N. Y. Jurisprudence, Assignments §9, Strathos v.
Murphy, 276 N. Y. S. 2d 727, 26 A. D. 2d 500 (1st
), aff'd 281 N. Y. S. 2d 81, 19 N. Y. 2d 883 (1967). Nor does the Bank
err in reading the state law to sanction enforcement of writeen
assignments regardless of consideration. N. Y. Gen. Oblig. Law §5-1107
1964), Davin v. Isman, 228 N. Y. 1, 126 N. E. 257 (1920). Thus,
if the agreement of
May 29, 1967
did indeed intend and effectuate a complete, irrevocable transfer by
Fain to the Bank, then under
law, Fain would have no interest in the Continental payments as of
December, 1968. But therein lies the rub. It is apparent from the face
of the assignment agreement that Fain thereby did not transfer dominion
and control in respect to at least 951/2% of the future payments in
excess of $100,000.
of Entire Interest]
enforceable against third parties under
law, an assignment must be "a complete transfer of the entire
interest of the assignor in the particular subject of assignment,
whereby the assignor is divested of all control over the thing
assigned." 3 N. Y. Juris., Assignments §28. Fain's right to
receive from the Bank approximately 95% of the funds purportedly
assigned is as much a contractual right to future proceeds as was the
original Continental promise to pay. The transfer of legal title is of
no consequence where the assignor retains an absolute right to the
proceeds. Awner v. Moscowitz, 176 N. Y. S. 737 (1st
), and see In re Walton's Estate, 247 N. Y. S. 2d 21, 20 A. D. 2d
). On remand, in Aquilino v. United States, 10 N. Y. 2d 271, 219
N. Y. S. 2d 254 (1961), the New York Court of Appeals, concerned with
the property rights of an assignee, held that bare legal title
unaccompanied by beneficial interest is not subject to the government's
tax lien. Conversely, I am compelled to conclude that here the Bank did
not acquire such interest in the bulk of the Continental monies as would
divest the assignor of substantial ownership. The assignment is,
therefore, illusory at least insofar as the Continental funds exceed
$100,000, plus 41/2% of the balance.
makes it unnecessary to consider the government's alternative
characterization of this transaction as creating a security interest in
the Bank. 5
Were it not for the apparent payment on February 3, 1969 by the Bank of
$1.04 million to Fain in exchange for some portion of his reversionary
interest in the Continental funds, the government would be entitled to
immediate entry of summary judgment respecting the priority of its lien
to the above-decribed extent. Curiously, however, neither the government
nor the Bank accord significance to this payment, which, if a valid
purchase under Sections 6323(a) and (h)(6) of the Federal Tax Lien Act
of 1966, 26
C., would entitle the Bank to lien priority.
February 3, 1969
contenders appear to acknowledge that some or all of Fain's reserved 95%
interest in the Continental payments was acquired by the Bank for the
sum of $1.04 million on
February 3, 1969
. This payment, which occurred after the jeopardy assessment was made
but before a notice of lien was filed, may have transformed the Bank
into a "purchaser" whose claim to the acquired property is
protected against an unfiled tax lien. 26 U. S. C. §6323(a). 6
and Full Consideration]
To be a
purchaser, the Bank must have given "adequate and full
consideration." 26 U. S. C. §6323(h)(6). 7
Prior to the 1966 Tax Lien Act, purchaser status was achieved by the
giving of "valuable consideration" even if not adequate. United
States v. Scovil [55-1 USTC ¶9137], 348
218, 221 (1955). Enochs v. Smith [66-1 USTC ¶9378], 359 F. 2d
924 (5th Cir. 1966). The intended effect of the 1966 language is
explained in the Report of the Senate Committee on Finance:
purchaser is defined as a person who, for adequate and full
consideration in money or money's worth, acquires an interest (other
than a lien or security interest) in property which is valued under
local law as against subsequent purchasers without actual notice. By
requiring 'adequate and full consideration,' the bill modifies the
results reached in court decisions under present law in that the amount
paid can no longer be so small as to have little relation to the
property acquired. However, this requirement is not intended to preclude
a bona fide bargain purchaser . . ." Senate Rep. No. 1708,
89th Cong., 2d Sess., reprinted in 1966 U. S. Code Cong. & Admin.
News, Vol. 3, at 3735.
the 1966 revision, the determination of purchaser status turned not upon
state law concepts but upon those of federal law. Enochs v. Smith,
supra. Similarly, the determination of the fullness and adequacy of
consideration is a question of federal law. See Creedon, "The
Federal Tax Lien Act of 1966: An Historic Breakthrough," 4 Harv. J.
Legis. 163, 177 (1966-67). Although this section of the revised Act has
not yet been applied in reported decisions, the courts have long
interpreted the requirement of adequate consideration in relation to
estate and gift tax liens. 26 U. S. C. §6324. See Commissioner v.
Wemyss [45-1 USTC ¶10,179], 324
303 (1945), Merrill v. Fahs [45-1 USTC ¶10,180], 324
308 (1945), Smith v. United States [67-2 USTC ¶12,496], 277 F.
Supp. 583 (M. D. Fla. 1967), Nourse v. Riddel [56-2 USTC ¶11,637],
143 F. Supp. 759 (S. D. Cal. 1956). Given the expressed intention of the
Congress to withdraw the constructive notice privilege accorded by
Section 6323(a), the requirement of adequate and full consideration must
be strictly construed. Thus, revised Section 6323(h)(6) modifies the
doctrine, oft-repeated in this circuit, that the government has no
greater right to property than that accorded the taxpayer. City of
, supra, Lester v.
, supra, at 119. Whereas Fain may be incapable of recovering the
Continental monies under state law, the government's rights are no
longer so limited.
With the legal
framework thus developed, the government is requested to advise the
court of its position in respect to the February 3 payment, to wit:
(1) does it
dispute that the contract was executed prior to filing of notice, that
payment was actually made, or that rights to some part of the
Continental proceeds were irrevocably transferred; or
(2) does it
challenge the exchange for inadequate consideration, e.g., what
part of Fain's interest in the "assigned" Continental payments
was acquired (if the contingent increases on the 1969 and 1970
instalments were not acquired, summary judgment may be entered forthwith
in that amount); 8
what was the expected value of the proceeds; what degree of risk of
nonpayment, if any, was assumed by the Bank, how does the Bank's
expected profit compare with discounted purchases in the normal course
of business; or
(3) does it
contend that the Bank had actual notice of the tax lien so as to make
the filing of notice by the government arguably irrelevant. Cf. United
States v. Hodes [66-1 USTC ¶9232], 355 F. 2d 746, 751 (2d Cir.
1966), United States v. Sirico [66-1 USTC ¶9209], 247 F. Supp.
421, 422 (S. D. N. Y. 1965); or
(4) does it
contest the legal characterization of the February 3 exchange as a
to Amend Pleadings Allowed]
government declines to challenge the February 3 payment on any of the
above-listed or other relevant grounds, then the ultimate determination
of the contest between the Bank and the
will have to abide an evidentiary hearing directed to whether this
transaction constituted a fraudulent transfer, under
law. The government is hereby granted leave to amend its complaint to
include such ground for relief, cognizable pursuant to this court's
pendant jurisdiction. The lateness of the request to amend is amply
explained by the lengthy course of pre-trial discovery an portends no
prejudice to the Bank's interests at this stage.
hereby requested to appear for a conference in Court Room 2704 on April
8, 1971, at 4:15 p. m. to discuss the questions raised in this interim
opinion and to determine the steps precedent to the conclusion of this
The funds were transferred by order of the court to a time account at
the Manufacturer's Hanover Bank & Trust Co. By stipulation, dated
January 22, 1971
, the parties agreed to a procedure for withdrawal by the Bank of
amounts in excess of the government's claim.
A claim for $52.46 interposed by Henry Gordon has been withdrawn. Thus,
this opinion will not concern itself with the Gordon-Fain transactions,
although related to those detailed herein.
Attention is directed to the above finding that only the contingent
payment was acquired by the
February 3, 1969
lump sum payment. Since it is possible that the term "contingent
payment" was intended to encompass as well the contingent increases
on the 1969 and 1970 instalments, counsel are requested to advise the
court if there is error in the above construction.
The treatment herein of the assignment as an outright transfer is not
intended to foreclose the government from further developing its theory
that the assignment was for security purposes only, if relevant to
future disposition. 26 U. S. C. §§ 6323(a) and (h)(1). Cf. Warren
v. Chemical Bank & Trust Co., 79 N. Y. S. 2d 776, 274 A. D. 785
), Sams v. Redevelopment Authority of City of
, 261 A. 2d 566, 436
1970) 4 Corbin, Contracts §881, p. 543 (1951), and see Creedon,
"Assignments for Security and Federal Tax Liens", 37 Fordham
L. Rev. 535 (1968-69).
§6323(a). Purchase(r)s, holders of security interests, mechanic's
lienors, and judgment lien creditors.--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 or his delegate.
§6323(h) Definitions.--For purposes of this section and section 6324--.
. . .
Purchaser.--The term "purchaser" means a person who, for
adequate and full consideration in money or money's worth, acquires an
interest (other than a lien or security interest) in property which is
valid under local law against subsequent purchasers without actual
notice. In applying the preceding sentence for the purposes of
subsection (a) of this section, and for purposes of section 6324--. . .
(B) A written
executory contract to purchase or lease property or any interest
therein, . . ..
(D) . . .
which is not a lien or security in interest shall be treated as an
interest in property.
United States of America
, Plaintiff-Appellee v. Sam Mitchell and Vera L. Mitchell,
Court of Appeals, 7th Circuit, No. 16727, 413 F2d 181,
, Aff'g District Court, 67-1 USTC ¶9468, 271 F. Supp. 858.)
[1939 Code Sec. 41--substantially similar to 1954 Code Sec. 446]
Reconstruction of income: Net worth method: Correctness.--The
government correctly established that the taxpayer had unreported income
by reconstructing his income through the net worth method. By including
personal expenditures made by the taxpayer during the taxable years in
question, the government showed that he had considerable unexplained
income and adequately showed a probable source of such income as
unreported sales from the taxpayer's cabaret businesses.
[1939 Code Sec. 3672--substantially similar to 1954 Code Sec. 6323]
Assessment: Validity against transferred property: Prior lien.--Even
if the transfer of property to taxpayer's wife was not voidable, the
subsequent transfer to the taxpayer's son was subject to the
government's tax lien since the deficiency was assessed prior to such
transfer. Consequently, the son took the property subject to the
Walters, Lee A. Jackson, Elmer J. Kelsey, Ann E. Belanger, Department of
Justice, Washington, D. C. 20530, Thomas A. Foran, United States
Attorney, Chicago, Ill., for plaintiff-appellee. Anna R. Lavin, 53 W.
, for defendants-appellants.
and CUMMINGS, Circuit Judges, and ESCHBACH, District Judge. 1
brought this action to reduce to judgment certain assessments of cabaret
excise taxes imposed by Section 1700 of the Internal Revenue Code of
1939 that were claimed to have arisen from taxpayer Sam Mitchell's
activities during the period 1947 through 1950. Additionally, federal
income tax liability for 1948 and 1949 against Sam Mitchell,
individually, and for 1950 against Sam and his wife, Vera Mitchell, was
averred. The complaint prayed that a certain transfer of real estate by
the taxpayers be set aside as fraudulent against the Government and the
property ordered sold in satisfaction of tax liens.
The case was
originally tried before Senior Judge Fred L. Wham, but, on account of
his illness, it was reassigned to Chief Judge William J. Campbell of the
Northern District of Illinois for his decision. Pursuant to a
stipulation of the parties, Judge Campbell decided the case without
further trial on the basis of counsel's briefs and the record. The
district court's judgment directed that the United States recover
$246,061.12 plus interest against Sam Mitchell; that the United States
recover $34,034.41 plus interest against Sam and Vera Mitchell, jointly
and severally; and that the conveyance of real property by Sam and Vera
Mitchell on February 24, 1959 was void as to the United States; and that
Vera Mitchell's assignment of her interest in that property was void as
to the United States. It is an appeal from that judgment which is before
record and the findings of the district court, it appears the following
facts occurred. Cabaret excise tax returns were filed each month during
the years in question by Sam Mitchell as owner of two night clubs, the
Riptide Club and the Little Club, located in
. Cabaret tax returns for the Riptide Club extended over a 48-month
period from January 1947, through December 1950. Tax returns for the
Little Club were filed during a 25-month period from December 1948,
through December 1950. The information and amounts of tax submitted with
each monthly return conformed with the records of the two clubs. The tax
due was computed by totaling the month's receipts but excluding those
receipts attributed to day sales and to evening sales when entertainment
was not provided. The records of the Riptide Club indicate entertainers
were contracted for, worked, and received wages covering many of the
evenings in which the ledgers for cabaret tax purposes indicated there
was no entertainment. Local newspapers continuously advertised
entertainment every night at the Riptide Club, but no cabaret taxes were
paid on receipts from many nights from
January 1, 1947
July 31, 1948
1948, through December 1950, the Riptide Club featured taxable
entertainment each evening in the form of exotic dancing. Though cabaret
income was reported and excise tax paid for each evening during this
period, over one-half of the Club's revenue was taken in during
non-taxable day sales periods according to Riptide records. The
defendant Sam Mitchell testified that the day sales period would run
, when the Riptide opened, until
when entertainment started. This testimony was directly contradicted by
the postman who delivered the mail to the Riptide. He claimed that
during the period in question, the Riptide was often closed when he made
the morning and afternoon mail deliveries.
revealed that a similar procedure was in operation at the Little Club.
From December 1948, to September 1949, taxable entertainment was
contracted for and appeared at the Little Club six days a week, Cabaret
taxes were paid only for the weekend evenings. As in the case of the
Riptide Club, during the years 1949 and 1950, the taxpayer reported that
about one-half of the total receipts of the Little Club were earned
during the non-taxable day sales hours. Again, the postman testified
that he made morning and afternoon deliveries to the Little Club each
weekday and that there were no customers in the club. Another witness
stated that there were few customers in the Little Club as late as
Revenue agent testified regarding his investigation into the clubs'
operations. On the basis of his three-year inquiry, the agent concluded
that the non-taxable day sales at the Riptide amounted to no more than
$30 per day and at the Little Club to no more than $20 per day.
court found that the excise tax returns filed each month contained false
information, either as to the number of evenings taxable entertainment
occurred or the percentage of daily receipts attributable to day sales,
that a clear case of tax fraud had been established and as a consequence
the Government was entitled to fraud penalties on the excise tax
liabilities. The court denied, however, the Government's claim to the
extent that it included cabaret tax penalties and interest on alleged
The income tax
deficiency asserted by the Government was based on a net worth analysis.
Revenue agents testified that they conducted an investigation into Sam
Mitchell's finances dating back to 1943 and that they had established
December 31, 1947
as the starting point from which subsequent increases in assets could be
measured. The agents' net worth computations were introduced as
evidence. After the defendants' counsel stated that three items in the
net worth statement were contested, two of the items were withdrawn and
the alleged income tax deficiency was accordingly readjusted. The
remaining disputed item concerned a $33,000 loan made to the taxpayer's
brother during the year 1950.
court found that the Government's net worth computation established that
the taxpayer and his wife had considerable taxable income in excess of
that reported and that a probable source of the unreported income was
his cabaret business. However, the court held that no fraud penalties
would attach to the income tax deficiencies.
In 1959 while
the taxpayers were
istratively contesting the tax liabilities assessed in this case, they
conveyed certain real estate to the Chicago Title and Trust Company, as
Trustee, and named Vera Mitchell as the beneficial owner. Subsequently,
she gratuitously transferred her beneficial interest to their son. The
district court determined that the purpose of these transfers was to
hinder, delay or defraud the
in its effort to collect taxes due, held the transfers to be void and
set them aside as to the
defendants' first contention is that the net worth theory was improperly
applied in that there was no starting point from which to make a net
worth computation and that in any case the Government failed to prove
the Mitchells' unreported income. The record does not support this
assertion. Harry Ansell, the Revenue agent who prepared the Government's
net worth summaries, testified that on the starting point,
December 31, 1943
, the taxpayer had a net worth figure of $20,977.71. The assets and
liabilities that were the basis of this determination were set forth in
his summary. Throughout the case the taxpayer never alleged that he had
any other assets or liabilities. Further, he disputed only one item in
the final computation, the $33,000 loan in 1950. The cases cited by the
taxpayer to support his position are distinguishable. In Phillips'
Estate v. Commissioner [57-2 USTC ¶9844], 246 F. 2d 209 (5th Cir.
1957), a net worth computation in which neither the Commissioner nor the
Tax Court made any finding relating to opening cash on hand was in
issue. In light of the fact that the taxpayer's business produced cash
profits and required large sums of cash to be kept on hand, the Fifth
Circuit found no basis for the Commissioner's inference that the
taxpayer's opening and closing cash positions were substantially the
same. In the instant case, a specific cash on hand figure was included
in the initial net worth computation. There is nothing inconsistent with
the technique employed here and the essential requirements for net worth
analysis set forth in Holland v. United States [54-2 USTC ¶9714],
348 U. S. 121 (1954).
argument that the Government failed to prove unreported income is not
supported by the record. He bases his argument on the net worth figures
contained in the Government's original schedule before they were
recomputed to reflect the withdrawal of the two disputed items. The
taxpayer has completely disregarded his personal expenditures for the
years in question which must be added to the increases in net worth to
reconstruct his income. Holland v. United States [54-2 USTC ¶9714],
121, 125 (1954). The Government is not required to show the precise
source of unreported taxable income, but only a source likely and
capable of producing the income. United States v. Mackey [65-1
USTC ¶9328], 345 F. 2d 499 (7th Cir. 1965). The Government not only
demonstrated that the clubs were a probable source of unreported taxable
income, but it also established that this income did not come from any
non-taxable source. Either of these forms of proof is sufficient to
support a net worth computed deficiency. United States v. Massei
[58-1 USTC ¶9326], 355
595 (1958). The taxpayer testified that his only source of income for
the years in issue, aside from an oil interest, was his profit from the
Riptide Club and Little Club operations. He also testified that he
received no substantial gifts, no inheritance, and did not receive any
insurance proceeds. Under these circumstances, our court has previously
found a taxpayer to be liable. "However, defendant in this case did
not furnish any explanation which would attribute his increased net
worth to other than taxable income. Defendant had the right to remain
silent but he did so 'at his peril.'" United States v. Mackey
[65-1 USTC ¶9328], 345 F. 2d 499, 506 (7th Cir. 1965).
next argue that the excise tax was wrongfully and arbitrarily assessed.
The record unequivocally demonstrates that prior to each club's
conversion to nightly entertainment, the taxpayer's records falsely
reflected that no taxable entertainment occurred on evenings when, in
fact, taxable entertainment did occur. The uncontradicted testimony of a
variety of performers as well as newspaper advertising evidence amply
supports the conclusion that the taxpayer's records were false. Since
book entries are merely evidentiary, Doyle v. Mitchell Bros. Co.
[1 USTC ¶17], 247
179, 187 (1918), having been shown to be false, the taxpayer's books are
incapable of rebutting the Government's proof of fraud. Likewise, the
testimony of former bartenders, the postman, and customers of the clubs
clearly shows that the amount of receipts attributed to day sales was
fraudulently overstated. The Government relied on more than the
correctness presumption to support its allocation of total sales to day
sales. The agent who investigated the clubs' operations testified to the
reasonableness of the allocation. The facts disclosed by affidavits of
many former employees and entertainers likewise corroborated the
contention raised by the taxpayers is that the presumption of
correctness should not have operated here to sustain the Government's
arbitrary assessment. We are of the view that the record supports the
Government's determination of opening net worth and that the taxpayer
has failed to show wherein the determination is arbitrary. The case
cited by the taxpayer, Thomas v. Commissioner [56-1 USTC ¶9449],
232 F. 2d 520 (1st Cir. 1956), dealt with the presumption to be accorded
a cash on hand figure that was without any support in the record. In
light of the ample support for the asserted deficiencies in the record
before us, the Thomas case has no application to this appeal.
argument advanced by the taxpayers is that the district court erred in
finding that the transfer of real estate by the taxpayers to their son
was void as being made for the purpose of defrauding and defeating the
collection of taxes. Ill. Rev. Stat. ch. 59 §4 (1967). The defendants
admit that there was no consideration for the transfer from Vera
Mitchell to their son on
November 19, 1959
. However, Sam Mitchell contends that the transfer of his interest to
his wife on
February 24, 1959
was not gratuitous. As consideration for this transfer of his interest,
Sam Mitchell claims that his wife gave him the right of mortgaging the
house and using the $8,000 proceeds to discharge existing tax liens
against the property. Assuming this arrangement to be true, there was no
valuable consideration to creditors. The result of the transaction was a
mere substitution of creditors; the underlying $8,000 obligation was not
Even if the
February 24, 1959
transfer is not voidable, the November transfer to the taxpayers' son is
subject to the Government's tax lien since the federal income tax
deficiency, which included a joint assessment against Sam and Vera
Mitchell for the year 1950 was assessed on
October 23, 1959
. Thus, at that time a federal tax lien attached to all of the
taxpayers' property pursuant to 26
C. §6321. Consequently, one month later, when Vera Mitchell transferred
the property to their son, he took subject to the Government's tax lien
to the extent of the $58,365.29 assessment for 1950.
of the district court is affirmed.
Judge Eschbach is sitting by designation from the Northern District of
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