¶9325]In the Matter of Jack R. Montgomery, doing business as M R
Enterprises, a co-partnership, Delores I. Montgomery, Bankrupts Curtis
B. Danning, Trustee, Appellant v.
United States of America
U. S. Court of Appeals, 9th Circuit, Nos. 75-2442, 75-2443, 532 F2d 725,
3/18/76, Reversing and remanding District Court, 75-2 USTC ¶9527
[Code Sec. 6323]
Liens: Validity of: Bankruptcy: Priority of tax lien.--The Court
of Appeals reversed the District Court's finding that the government was
an individual creditor of the taxpayer whose claims were entitled to
priority over those of his other creditors. The taxpayer, who had been
doing business in a partnership, had filed an individual petition in
bankruptcy. His debt to the governemnt, however, consisted of amounts
due for employees' withholding, unemployment and insurance contribution
taxes. These obligations were incurred by the partnership, rather than
by the individual taxpayer. Since the court construed individual debts
to mean those debts personally incurred by a partner, rather than those
incurred as a result of general partnership obligations, the
government's lien did not have priority over other claims.
15233 Ventura Blvd.
, for appellant. Karl Schmeidler, Department of Justice,
, D. C. 20530, for claimant-appellee.
CHAMBERS and CHOY, Circuit Judges, and EAST, *
Senior District Judge.
Judge held that the tax claim of the
(Government) against the members of a bankrupt partnership was
subordinated by 11
C. §23(g) to the claims of individual creditors of the individual
Bankrupts. The District Court reversed, deciding that the Government was
an individual creditor and its tax claim held priority under 11 U. S. C.
§104(a)(4). The Trustee appeals and we reverse.
Montgomery and one Carlos Rivera were general co-partners operating
under the name of "M R Enterprises." The co-partnership was
indebted to, among other creditors, the Government for unpaid employees'
withholding, unemployment and insurance contribution taxes in an amount
of some $17,000. The co-partners ultimately became irretrievably
insolvent. However, no petitions for bankruptcy were ever filed. The
Government never qualified as a tax lien creditor.
above-named Bankrupts filed individual petitions in bankruptcy. The
Government made claim for the unpaid copartnership taxes. The Trustee's
rejection of the tax claim was supported by the Bankruptcy Judge.
Court on review relied in part upon the decision in Rochelle v.
United States [74-2 USTC ¶9776], 371 F. Supp. 224 (N. D. Tex.
1973), and did not have the advantage of the subsequent clarifying
decision in Rochelle v. United States [75-2 USTC ¶9792], 521 F.
2d 844 (5th Cir. 1975).
In the broad
sense, the general partners are individually liable on the tax
obligation. Young v. Riddell, 283 F. 2d 909, 910 (9th Cir. 1960).
However, we agree with the rationale of Rochelle, at 850, to the
effect that the "individual debts" under §23(g) referred to
personally incurred indebtedness of a partner and not to those
derivatively imposed as a result of general partnership obligations.
Otherwise, the thrust of §23(g) would be rendered meaningless because
the personal liability of the general partner for the debts of the
partnership would be indistinguishable from the personal liability
arising from the partner's individual debts. Indeed, if a distinction as
to the nature of the indebtedness is not made, then §23(g) would be
totally without meaning because partnership creditors such as the
Government in the present case could always invoke the general rule that
a general partner is personally liable for the debts of the partnership
and ipso facto claim that they, too, were individual creditors of
the Bankrupt and as such, were entitled to share in the distribution of
the Bankrupt's individual assets. Such a nullification of §23(g) of the
end result of the District Court's order which is the subject of the
instant appeal. See Schall v. Camors, 251
239, 254-55 (1920), wherein the court stated that "Section 5 of the
Bankruptcy Act . . . establishes on a firm basis the respective equities
of the individual and firm creditors. Hence the distinction between
individual and firm debts is a matter of substance . . .." See also
In re Hurley Mercantile Co., 56 F. 2d 1023, at 1025 (5th Cir.
We adopt the
ruling of Rochelle, at 846, that the tax "claim of the
against the estate of the [Bankrupts], based upon the partnership
obligation, is subordinated by §5g [§23(g)] to the claims of creditors
of the [Bankrupts in their individual capacities]."
Government's reliance upon Lewis v.
618 (1876), for the proposition that §23(g) "does not apply or
affect the rights of the
" is misplaced. The decision in Lewis was based upon a
predecessor statute to 31
C. §191 which has no applicability in a pure bankruptcy proceeding. See
United States v. Sampsell [46-1 USTC ¶9186], 153 F. 2d 731, 734
(9th Cir. 1946).
Court's order of
May 7, 1975
, reversing is vacated and the cause remanded for the affirmance of the
Bankruptcy Judge's order entered on
September 18, 1974
AND CAUSE REMANDED.
Honorable William G. East, Senior
District Judge for the District of Oregon, sitting by designation.
¶50,136] TMG II, et al., Plaintiffs v.
District Court, D.C., Civ. 85-2469-LFO,
, On remand from a CA-D.C. decision, 93-2
1 F3d 36.
[Code Sec. 6323 ]
Priority of lien: Partners and partnerships: Remanded cases: Summary
judgment.--A partnership did not establish equitable title to
proceeds from the sale of a former partner's home; therefore, IRS tax
liens had priority over the partnership's claim to the proceeds. The
partnership failed to trace the proceeds from the sale to partnership
funds. The commingling of bank statements by a Cayman bank of two
accounts did not generate a genuine issue of material fact. Partnership
records fully accounted for the commingled funds and precluded any
finding by a trier of fact that the proceeds originated with the
partnership. Therefore, the government's motion for summary judgment was
Mendelsohn, Marvin L. Szymkowicz, Mendelsohn & Szymkowicz, 1201
Pennsylvania Ave. N.W., 5th Floor, Washington, D.C. 20004, for (TMG II).
Michael J. Kears, Department of Justice,
, for (
partnerships, TMG II and TMG Associates, commenced this complex
litigation in order to establish priority for their claims against
Edward Markowitz, a former partner, for fraud and breach of fiduciary
duties. Plaintiffs sued Markowitz for failing to account for partnership
property before resigning as general partner and ultimately obtained a
judgment against Markowitz in August, 1985. However, in January, 1985,
the Internal Revenue Service ("IRS") filed liens to recover
tax deficiencies and penalties assessed against Markowitz, who has pled
guilty to various tax offenses committed in the course of a scheme to
provide fraudulent tax loss deductions to customers through sham,
nonexistent and fraudulent transactions. Plaintiffs asserted in this
action that their claims are superior to the IRS tax liens.
In 1991, I
granted defendant's motion for a summary judgment and dismissed
plaintiffs' claims, effectively recognizing the priority of the IRS
claims. TMG II v. United States [91-2
USTC ¶50,513 ], 778 F.Supp. 37 (D.D.C. 1991). Plaintiffs' arguments
for a constructive trust were rejected in large part because plaintiffs
failed to properly trace the assets seized by the IRS to property
misappropriated by Markowitz from the plaintiffs.
One of the
claims dismissed by the grant of defendant's summary judgment motion was
plaintiffs' assertion of priority in proceeds in the amount of
$552,846.23 realized by Markowitz from the sale of a home located at
2323 Porter Street
This claim was based on the fact that Markowitz had purchased the home
in 1981 with funds that had been deposited in a
bank account maintained by TMG Associates. Plaintiffs first made the
assertion in their
July 11, 1990
reply brief that they could trace the proceeds to TMG property. However,
after additional discovery was permitted, defendant established, without
contradiction, that an identifiable share of the funds deposited in TMG
Associate's name was actually transferred into the account by Monetary
Group, N.V., an entity wholly owned by Markowitz.
Late in the
summary judgment briefing, in a supplemental reply brief filed on
February 19, 1991, plaintiffs proffered new evidence that separate
statements of the Cayman bank which evidenced the share of Monetary
Group, N.V. in TMG's account were combined into a single statement on or
about December 6, 1982--before the February 15, 1983, purchase of the
Porter Street property. Because "TMG's proffer of this evidence
[was] so belated that it would be unfair to allow its submission," TMG
II v. U.S. [91-2
USTC ¶50,513 ], 778 F.Supp. at 53, I disregarded the proffer and
entered judgment for defendant on the
property issue, along with all of plaintiffs claims to other assets.
August 13, 1993
decision of our Court of Appeals affirmed the summary judgment as to all
claims except for that relating to the
property. TMG II v. United States [93-2
USTC ¶50,503 ], 1 F.3d 36 (D.C. Cir. 1993). The Court determined
that I had abused my discretion when I refused to consider the
plaintiffs' supplemental proffer and remanded the case for "full
discovery on the issue, and to determine whether TMG can trace the
proceeds from the sale of
2323 Porter Street
back to partnership funds."
counsel have filed additional briefs in support of, and in opposition
to, the pending cross-motions for summary judgment. Defendant has
supported its motion with documentary evidence and with the Fourth
Declaration of its principal witness, Revenue Agent Walter Strzegowski.
The declaration and the documents confirmed that from October 20 to
December 6, 1982, the Cayman bank issued two daily balance statements of
the TMG account: one for funds deposited earlier by TMG Associates as a
principal and the other for deposited funds which derived from an
account maintained by Monetary Group, N.V. at the National Savings and
Trust Company in Washington. Beginning on
December 6, 1982
, the Cayman bank began issuing one statement instead of two for reasons
that are unexplained. See Strzegowski Decl. ¶21; Ex. K. The
authority relied on by the Cayman bank for the change in reporting has
not been identified by the parties. However, the eleventh hour
production of the commingled Cayman bank statements does not establish
that, nor does it create a triable issue as to whether, plaintiffs are
entitled to the funds transferred to the Cayman bank in October from the
National Savings and Trust Company account of Monetary Group, N.V.
books and records, specifically its "Subsidiary Ledger," show
that its original pre-October 20 account with the Cayman bank was its
own "trading" account and that on and after that date it, in
effect, maintained a separate account at the Cayman bank as broker for
Monetary Group, N.V. See Strzegowski Decl. ¶¶16-19, Exs. H
& S. According to the documents and the uncontradicted declaration
of the Revenue Agent, on October 20, Monetary Group, N.V. (wholly owned
by Markowitz) transferred $850,000, and on
January 4, 1983
, it transferred $200,000, for a total of $1,050,000, from its account
with National Savings and Trust Company in
to the Cayman bank. See Strzegowski Decl. ¶¶41-42. The Revenue
Agent declares, without contradiction, that all but 2% of the deposits
to the National Savings and Trust Company account derived from
commissions paid to Monetary Group, N.V. for fraudulent trading
activity. See id. at ¶¶43-44.
bank statements, as well as the TMG books, trace the Cayman bank
Monetary Group, N.V. funds separately until December 6. See Def's
Stmt of Material Facts at ¶6. After the "commingling" on that
date, the separateness of the two funds is evidenced by the TMG books
and records. See Strzegowski Decl. ¶¶13-19; Exs. F, G, H &
S. They show that from
December 6, 1982
January 21, 1993
, the sum of the balances in the TMG Associates' own account and in the
account it maintained for Monetary Group, N.V. was equal to the total
commingled balance reflected on the books of the Cayman bank. See
id., Exs. H, K and S.
TMG records, as of
December 6, 1982
, TMG Associates' principal balance in the Cayman bank account was
$595,000. See id. at ¶31; Exs. F-H. The records also reflect
January 21, 1993
, TMG had transferred the entire principal balance of its own account at
the Cayman bank to the First American Bank from whence it originally
came. See id. at ¶37; Exs. F, G, H & T. TMG does not contend
that any of these funds were distributed to Monetary Group, N.V.
Thereafter, the only funds on deposit with the Cayman bank reflected in
the "commingled" account were those transferred there by and
for the account of Monetary Group, N.V. from its account at National
Savings and Trust, together with interest accrued on that balance. Those
funds and interest accounts were identified on TMG's books and records
variously as "Monetary Gr. NV," "customer," and
critical undisputed facts are that:
Group, N.V. made a down payment on the
property in the amount of $40,000 by check from its account at National
Savings and Trust Company dated
January 4, 1983
. See Joint Stipulation at ¶39.
February 14, 1983
(weeks after TMG Associates had reduced its share of the Cayman bank
balance to zero), the Cayman bank wired $450,000 to the Monetary Group,
N.V. account at National Savings & Trust Company. See
Strzegowski Decl. at ¶46.
February 15, 1983
, Markowitz and his sister and brother-in-law jointly acquired the
property for $496,171. See Joint Stipulation at ¶38.
February 15, 1983
, the balance due for the
property was paid with checks in the amount of $75,000 and $380,544.31,
drawn on Monetary Group, N.V.'s National Savings and Trust account.
the Federal Rules, summary judgment is proper when the record reflects
that "there is no genuine issue as to any material fact and that
moving party is entitled to a judgment as a matter of law."
F.R.C.P. 56(c). The Supreme Court has held that the rule "mandates
the entry of summary judgment" when a "nonmoving party has
failed to make a sufficient showing on an essential element of her case
with respect to which she has the burden of proof." Celotex
Corp. v. Catrett, 477
317, 322-23 (1986). " '[T]h[e] standard [for granting summary
judgment] mirrors the standard for a directed verdict under Federal
Rules of Civil Procedure 50(a). . . .' "
, quoting Anderson v. Liberty Lobby, Inc., 477
242, 250 (1986).
here, plaintiffs must establish that they have superior title to the
proceeds of the Porter Street Property. An essential element of
plaintiffs' burden of proof is to trace partnership property to the
proceeds in the hands of the IRS. See TMG II v. U.S. [93-2
USTC ¶50,503 ], 1 F.3d 36, 41 (D.C. Cir. 1993). Absent evidence
tracing funds of the plaintiffs to the acquisition of the
property, plaintiffs are not entitled to a constructive trust as to the
proceeds. See id. at 43.
Court has admonished us "that the mere existence of some
alleged factual dispute between the parties will not defeat an otherwise
properly supported motion for summary judgment; the requirement is that
there be no genuine issue of material fact." See
Anderson v. Liberty Lobby, Inc., 477
242, 247-48 (1986) (emphasis in original). Here, the fact that on
December 6, 1982
, and thereafter, the Cayman bank commingled the statements previously
maintained to delineate what was then the TMG trading account from the
TMG Monetary Group, N.V. account does not generate a material or genuine
dispute. Plaintiffs' attempts to create such a dispute fail in the face
of the uncontradicted documentary evidence and the necessary inferences
therefrom which trace inexorably the two discrete elements of that
briefly commingled account.
evidence and unavoidable inferences account fully for the so-called
commingled statements issued by the Cayman bank. That undisputed
evidence would preclude any reasonable trier of fact from finding that
TMG Associates originated or was at any time entitled to the funds which
travelled from Monetary Group, N.V. to its account at National Savings
and Trust Company, to the Cayman bank, back to National Savings and
Trust Company, and thence to the sellers of the Porter Street property.
There is, therefore, no "genuine" issue of fact which could
"reasonably be resolved in favor of" plaintiffs, TMG. See
Anderson, supra, at 250. Thus, defendant is entitled to a summary
judgment that TMG cannot trace proceeds from the sale of
2323 Porter Street
back to TMG property, and that the tax lien properly attaches to them.
¶50,503] TMG II, et al., Appellants v.
United States of America
Court of Appeals,
, 1 F3d 36. Remanding a District Court decision, 91-2
USTC ¶50,513 , 778 F.Supp. 37
[Code Secs. 6323 and
Jurisdiction: District courts: Validity of lien.--
A federal district court properly held that limited partnerships did not
hold equitable title to assets seized by the IRS from the general
partner for purposes of satisfying his federal tax liabilities. Also,
there was no basis for waiving the requirement that the partnerships
trace contested assets back to assets that were misappropriated from the
partnerships in order to establish a constructive trust. Further, the
partnerships failed to establish that there was a triable issue of fact
as to whether assets seized from the general partner could be traced
back to bank accounts. However, the lower court erred in refusing to
allow the partnerships to present evidence as to whether funds used by
the general partner to purchase a house could be traced to one of the
Mendelsohn, Marvin L. Szymkowicz,
1155 15th St., N.W.
, for appellants. Jay B. Stephens, United States Attorney, Joan I.
Oppenheimer, Gary R. Allen, Department of Justice, Washington, D.C.
20530, for appellees.
Chief Judge, WALD and BUCKLEY, Circuit Judges.
the Court filed by Chief Judge MIKVA.
concerns a dispute between the IRS and two partnerships over assets that
the IRS seized from Mr. Edward Markowitz, the partnerships' errant
former general partner. The partnerships claim that the seized assets
are rightfully partnership property, rather than personal property of
Markowitz, and are therefore not subject to seizure for purposes of
satisfying Markowitz's personal federal tax liabilities. They argue in
the alternative that their claims take priority over those of the
government under a theory of constructive trust.
court properly held that the partnerships did not hold equitable title
to the contested assets at the time of the IRS seizure. The district
court also correctly concluded that there was no basis for waiving the
requirement that the partnerships "trace" contested assets
back to assets that were misappropriated from the partnership in order
to establish a constructive trust. Finally, the district court was also
correct to find that the partnerships failed to establish that there was
a triable issue of fact as to whether assets seized from Markowitz could
be traced back to the "TMG Associates Bonus Account."
district court erred in concluding that the partnerships did not present
a triable issue as to whether the funds that Markowitz used to purchase
a house could be traced to one of the partnerships' Cayman Islands bank
accounts. The court abused its discretion by refusing to allow the
partnerships to submit critical rebuttal evidence before ruling on the
cross-motions for summary judgment. Thus, we remand to the district
court for further proceedings consistent with this opinion.
have been before this Court twice before in matters closely related to
the decision on appeal. See Weil v. Markowitz, 898 F.2d 198 (D.C.
Cir.) ("Weil I "), cert. denied, 498 U.S. 821
(1990); Weil v. Markowitz, 829 F.2d 166 (D.C. Cir. 1987) ("Weil
II "). The background of this dispute is discussed more fully
in these earlier decisions, and in the district court opinion under
review, TMG II v. United States [91-2
USTC ¶50,513 ], 778 F. Supp. 37 (D.D.C. 1991) ("TMG
"). We provide here a shorter version of the relevant facts to
provide the necessary context for our decision.
TMG II and TMG
Associates (collectively "TMG" or "the
limited partnerships purportedly formed as broker-dealers and
market-makers in the commodities and metal markets, but actually in the
business of providing fraudulent tax deductions through sham
transactions. Mr. Edward Markowitz was the managing general partner of
TMG II, and the sole shareholder of Monetary Group, Ltd.
("MGL"), which served as TMG Associates' general partner.
MGL resigned their general partner positions on
November 15, 1983
, without making a proper accounting and restoration of partnership
property. Shortly thereafter, TMG sued Markowitz, MGL and two additional
Markowitz corporations, and Ms. Debra Strahan (Markowitz's sister) for
an equity accounting, monetary repayment, injunctive relief, and money
damages based on allegations that Markowitz and Strahan had diverted
partnership property and business to themselves. See Weil v.
Markowitz, No. 83-3685 (D.D.C. December 12, 1983) (TMG II's
complaint); TMG Associates Custodial Committee v. Monetary Group,
Ltd, No. 83-3685 (D.D.C. May 31, 1984) (TMG Associates' complaint).
Based on an investigation and report by a court-appointed receiver, the
district court granted an injunction freezing the defendants' assets. Weil
v. Markowitz, No. 83-3685 (D.D.C. February 23, 1984).
IRS was conducting a parallel criminal investigation in which it
received substantial assistance from the partnerships. The government
eventually obtained stays of the TMG civil suits, successfully arguing
that further proceedings would endanger its criminal investigation. Weil
v. Markowitz, No. 83-3685 (D.D.C. June 6, 1984); TMG Associates
Custodial Committee v. Monetary Group, Ltd, No. 83-3685 (D.D.C.
August 1, 1984). This court upheld the stays in Weil I, 829 F.2d
delayed the civil suits long enough for the government to file federal
tax liens against Mr. Markowitz, and collect assets in satisfaction of
the liens, before TMG was able to obtain its judgments. The stays
expired by their own terms on
September 14, 1984
. See Weil I, 829 F.2d at 169. On
January 14, 1985
, the IRS made assessments against Markowitz and filed a notice of
federal tax liens. Some seven months later, on
August 30, 1985
, the district court entered a judgement in the TMG suits. The
partnerships were awarded a total of approximately $900,000, which the
court deemed to represent a full equity accounting for partnership
property entrusted to Markowitz. Weil v. Markowitz, No. 83-3685
(D.D.C. August 30, 1985). The district court subsequently rejected TMG's
contention that the judgment should be entered nunc pro tunc to
October 26, 1984
, the scheduled concluding date of the trial before the government
obtained the stay of proceedings. See Weil II, 898 F.2d at
199-200. This court affirmed that decision.
the present action to obtain a determination that its interest in
fourteen properties owned at one time by Markowitz primed the interest
had obtained via its tax lien. On competing motions for summary
judgment, the district court ruled in favor of the
and dismissed the action. TMG II v. United States [91-2 USTC ¶50,513],
778 F. Supp. 37 (D.D.C. 1991) ("TMG").
court's thorough and well-reasoned opinion properly resolved virtually
every issue. The district court appropriately rejected the partnerships'
claim that under
District of Columbia
law, an errant fiduciary is deemed to own no property until he makes an
accounting and reimbursement to the partnership. Thus, the court was
correct in holding that the partnerships did not hold equitable title to
the contested assets at the time of the IRS seizure. The district court
was also correct to decline TMG's invitation to waive the tracing
requirement necessary to establish a constructive trust. Finally, the
district court properly concluded that there was no triable issue of
fact as to whether assets seized from Markowitz could be traced back to
the "TMG Associates Bonus Account."
court did, however, err in one respect. The court abused its discretion
by refusing to allow the partnerships to submit critical rebuttal
evidence before ruling that the partnerships did not present a triable
issue as to whether Markowitz purchased a house using funds that could
be traced to one of the partnerships' Cayman Islands bank accounts.
Thus, we remand to the district court for further proceedings consistent
with this opinion.
The "Moyers" Issue
partnerships maintain that Mr. Markowitz had no valid property interest
in any of his personal property to which the IRS levy could attach.
Their position is based on the premise that under
District of Columbia
law, "an errant general partner, like Mr. Markowitz, is deemed to
own no property of his own until all property due and owing the
partnership has been accounted for and restored." TMG [91-2
USTC ¶50,513 ], 778 F. Supp. at 45 (internal quotations and
citation omitted). The district court properly rejected TMG's argument.
agree that a federal tax lien can only attach to "property . . .
belonging to [the taxpayer]."
at 44 (quoting 26 U.S.C. §6321
). "Thus, if the [p]artnerships can show that at the time the
[g]overnment filed its liens they, and not Markowitz, were the true
owners of the fourteen assets, they can establish their entitlement to
However, TMG's contention that Markowitz did not own the seized property
at the time of the IRS seizure is insupportable.
TMG relies on Moyers
v. Cummings, 17 App. D.C. 269 (1900), aff'd sub nom. Consul v.
Cummings, 222 U.S. 262 (1911), which involved a dispute between
Moyers and the estate of his former law partner,
's estate alleged that Moyers had collected about $26,000 in fees due to
the partnership and deposited them in a personal account, commingling
the partnership fees with his own funds.
at 270-71. The lower court appointed a receiver and eventually ordered
Moyers to disgorge some $9,000 determined to be due to the estate of his
former law partner.
Moyers did not
contest that he had deposited the fees in question into his personal
account, nor that he owed money to the partnership (although he
contested the amount). Rather, he challenged the trial court's authority
to order that funds be paid out of his bank account. He argued that the
funds in the account at the time of the court order were his own, and
that his liability to the estate was as a general debtor rather than a
trustee. Thus, Moyers contended, the estate could only satisfy its
judgment by filing a lien against him, not by demanding a specific asset
such as his personal bank account.
The D.C. Court
of Appeals rejected this argument. Because the partnership funds had
been placed into Moyers's personal account, and it would be
impracticable to determine that those precise funds (as opposed to the
commingled personal funds) were still in the account, the Moyers
court held that "in mingling the [partnership] fund with his own
and drawing thereon on his individual account, [Moyers] will be presumed
to have first drawn and used his own money."
at 279. In other words, any balance still in the account at the time of
the order (up to $9,000) would be presumed to be the $9,000 owed to the
partnership and held in constructive trust by Moyers. The court held
that Moyers had failed to present evidence to rebut the presumption that
he had depleted his personal assets from the account before reaching
court fittingly rejected TMG's broad interpretation of Moyers. As
the district court concluded, Moyers stands only for the narrow
proposition that once partnership funds are traced into a particular
personal account, subsequent withdrawals from the commingled account are
rebuttably presumed to be of the personal rather than the partnership
funds. See TMG [91-2
USTC ¶50,513 ], 778 F. Supp. at 45-46. TMG correctly maintains
before this Court, and the district court properly held, that "the
identity of the partnership fund is not lost by the act of
commingling." Moyers, 17 App. D.C. at 279. But the assertion
that all of the errant partner's property is therefore held in
trust for the partnership simply does not follow from this principle.
to assail the district court's conclusion by subtly misconstruing
passages in the opinion. TMG first argues that the district court
misunderstood references to "the fund" in Moyers to
refer to the personal bank account rather than the partnership money
deposited into that account. See TMG [91-2
USTC ¶50,513 ], 778 F. Supp. at 45-46; Moyers, 17 App. D.C.
at 279. The district court made no such error. When the district court
stated that Moyers refers "only to 'the fund,' not to all of
Moyers' property," TMG [91-2
USTC ¶50,513 ], 778 F. Supp. at 46, the court was merely pointing
out that only the account to which the partnership fund had been
traced was at issue, rather than all of Moyers assets. As we have
already stated, this is exactly correct.
remaining Moyers arguments are also fruitless. First, contrary to
TMG's claim, Moyers did not remove the tracing burden from the
partnership. Rather, because the parties agreed that partnership funds
had been placed into a particular personal account, the court held only
that the funds were presumed to remain in the account despite
commingling and some dissipation. Moyers, 17 App. D.C. at 279.
Again, the district court got it exactly right. Second, the temporary
restraining order in the lower court, freezing all of Moyers's
assets, is not enough to establish that Moyers stands for a broad
principle which the language of the opinion does not itself support. The
lower court did freeze all of Moyers's assets pending satisfaction of
the judgment. But this aspect of the remedy was arguably unwarranted in
light of the lower court's holding, probably prophylactic in nature, and
certainly never reviewed by the Moyers court. TMG cannot
convincingly argue that the holding in Moyers should be broadened
to justify or explain the lower court's remedy.
also argue over whether
or D.C. law should be used to determine the nature of Markowitz's
property interest. However, as the district court properly held, the
states' laws are not in conflict and the choice-of-law question is
therefore irrelevant. See TMG [91-2
USTC ¶50,513 ], 778 F.Supp. at 46.
Waiver of the Tracing Requirement
A breach of
fiduciary duty often gives rise to the creation of an equitable
constructive trust, whereby an errant fiduciary is deemed to hold in
trust property misappropriated from the partnership. In order to obtain
a constructive trust, a plaintiff must generally connect specific
property held by the fiduciary with the property misappropriated from
the partnership. Thus, only property traced from the fiduciary breach to
the fiduciary's current holdings will be deemed to be held in trust for
the partnership. See TMG [91-2
USTC ¶50,513 ], 778 F. Supp. at 47 (discussing legal foundations of
the constructive trust and relevant precedent).
court concluded that although a constructive trust may have been created
as to the partnership property that Markowitz misappropriated, the
constructive trust claim must fail in this case because the partnerships
failed to trace any of the assets seized by the IRS to the stolen
at 51-54. The district court acknowledged that "no recorded
District of Columbia
case turns upon the requirement of tracing," but held that
"there is no reason to think that the D.C. courts would depart from
these general and well-accepted principles."
at 48. We find the district court's discussion of existing D.C. law--and
of more clearly dispositive
law, which is "the source of the District's common law and an
especially persuasive authority when the District's common law is
silent," Napoleon v. Heard, 445 A.2d 901, 903 (D.C.
1983)--to be thoroughly convincing. See TMG [91-2
USTC ¶50,513 ], 778 F. Supp. at 48-49.
three arguments in response to the district court's conclusion that
tracing is generally required in the
District of Columbia
to establish a constructive trust. First, TMG argues that Moyers
eliminated the tracing requirement.
TMG maintains that the policy considerations requiring tracing do not
apply in this case. Finally, TMG contends that the preliminary
injunction freezing Markowitz's assets obviates the need for traditional
tracing analysis. The district court properly rejected each of these
As discussed supra
pp. 6-7, Moyers did impose a tracing requirement on the
plaintiff. It is TMG, and not the district court, that misreads Moyers.
The parties in Moyers agreed that the partnership funds were
placed in a particular personal account, and the court placed on Moyers
the burden to demonstrate that those funds withdrawn from the commingled
account were partnership funds. In the absence of such proof, the court
presumed that personal funds were withdrawn, and that the partnership
funds remained in the commingled account.
that the tracing requirement should not be imposed on several
alternative policy grounds. Specifically, the partnerships maintain that
tracing is unnecessary: (1) when a constructive trust beneficiary is
competing with a tax lien; (2) against victims of fiduciary misconduct
as opposed to general creditors; and (3) in light of the remarkable ease
with which assets can be repeatedly commingled by an errant fiduciary.
We address each point in turn.
argues that tracing should be dispensed with in the case of a competing
tax lien because "the tax collector not only steps into the
taxpayer's shoes but must go barefoot if the shoes wear out." United
States v. Rodgers [83-1
USTC ¶9374 ], 461 U.S. 677, 691 n.16 (1983) (quoting 4 B. Bittker,
Federal Taxation of Income, Estates, and Gifts ¶111.5.4 (1981)). The
district court did not quarrel with this concept; in fact, it is a
fundamental premise of the opinion. See TMG [91-2
USTC ¶50,513 ], 778 F.Supp. at 50 ("Bittker's metaphor
describes the doctrine, mentioned above, that state law determines
whether a taxpayer has a sufficient property interest for federal tax
liens to attach.") If TMG could establish a property right to
seized assets through tracing, their claim would undeniably
defeat the IRS lien.
the district court pointed out, the Rodgers principle applies
only in determining whether there is a property interest to which the
tax lien can attach. The principle does not address the priority of the
tax lien vis-a-vis other interests. Likewise, it does not support the
proposition that tracing should be dispensed with in tax lien cases. The
partnership must stand alongside all other creditors if it cannot trace
its assets, and have its priority determined by the same "first in
time, first in right" rule that applies to all creditors. See TMG
¶50,513 ], 778 F.Supp. at 49-50.
partnerships also argue that United States v. Baldwin, 575 F.2d
1079 (4th Cir. 1978), stands for the proposition that a victim of
fiduciary misconduct such as TMG should be given priority over a general
creditor such as the IRS. But
is completely inapposite. The
court held, via certification to the Maryland Court of Appeals, that
assets of an express trust cannot be taken to satisfy the settlor's
personal tax liabilities where the settlor has irrevocably transferred
the seized property to the trust. The case involves neither a
constructive trust, fiduciary misconduct, nor the tracing requirement.
argues in connection with its other points that the tracing requirement
is obsolete in light of the remarkable ease with which assets can be
repeatedly commingled in the modern financial world. This argument is
frivolous. The same automated financial system which allows assets to be
repeatedly commingled at blinding speed also enables transactions to be
more easily traced through quicker access to the records of the
transactions. The burgeoning information age does not present a basis
for jettisoning the long-standing tracing requirement.
The Preliminary Injunction
TMG relies on United
States v. Fontana [82-1
USTC ¶9237 ], 528 F.Supp. 137 (S.D.N.Y. 1981), and SEC v. Paige,
1985 WL 2335 (D.D.C. 1985), aff'd without opinion, 810 F.2d 307
(D.C. Cir. 1987), for the proposition that the preliminary injunction
freezing Markowitz's assets in February of 1984 obviated the need to
engage in traditional tracing analysis. TMG argues that these cases
support the claim that pre-judgment remedies such as attachment are
sufficient to bring all attached property into the constructive trust
without the need to trace. TMG argues that the district court erred by
concluding that neither
nor Paige disposed of the tracing requirement. See TMG [91-2
USTC ¶50,513 ], 778 F.Supp. at 50-51.
court correctly concluded that neither case supports TMG's position
because neither case disposed of the tracing requirement. See TMG
¶50,513 ], 778 F.Supp. at 50-51. The
court remanded, and did not decide, the question of whether a
constructive trust had been formed in that case. See
¶9237 ], 528 F.Supp. at 146. For the purpose of resolving the
subsidiary issues before it, the court accepted arguendo the
plaintiff's claim "that the fund in question is traceable to
wrongful acts by
in breach of his fiduciary obligations."
¶9237 ], 528 F.Supp. at 139. The
court in no way rejected the tracing requirement.
the misappropriated funds were explicitly traced from the errant
fiduciary's personal bank account to an escrow account later formed,
pursuant to a permanent injunction, to satisfy claims against the
fiduciary. See Paige, 1985 WL 2335 at *2 ("The escrow assets
were purchased by Paige with funds from the same general personal
checking accounts into which he had deposited the [embezzled
funds]."). The court therefore did not allow a federal tax lien to
defeat the claimants' rights to the funds. The case is on all fours with
the proper interpretation of Moyers, holding that commingled
funds are deemed to be held in constructive trust notwithstanding the
commingling and subsequent dissipation of the combined fund. In fact, Paige
law for the proposition that "when a trustee wrongfully commingles
trust funds with his own, equity will impress the trust on the entire
mass. . . ." Id. Paige reenforces the district court's
reading of Moyers, and imposes the same tracing requirement that
the district court imposed on TMG in the instant case.
Tracing of the Disputed Assets
(and only viable) argument is that some of the disputed assets can
indeed be traced to the property Markowitz misappropriated from the
partnerships, or at least that the tracing issue is in dispute and
therefore not amenable to summary judgment.
The "TMG Associates Bonus Account"
that it can trace $424,846.94 in assets seized or recovered from
Markowitz to the "TMG Associates Bonus Account" opened at a
local Washington bank for TMG Associates. The parties agree that the
account was opened with an initial deposit of $130,000 in partnership
money, and that Hillcrest commissions totalling $597,500 were later
deposited. TMG [91-2
USTC ¶50,513 ], 778 F.Supp. at 51. (Hillcrest is a securities firm
that initially "traded" with the partnerships, and later with
Markowitz-owned entities. The transactions were all bogus, with
Hillcrest paying "commissions" for fraudulent documentation
used to substantiate the illegitimate tax losses.
court found that the initial $130,000 deposit was either spent on behalf
of, or returned to, TMG Associates, and was therefore never
misappropriated by Markowitz.
at 51. The court declined to definitively decide who owned the Hillcrest
commissions, but it appears to have assumed that the commissions in
question were "earned" by Markowitz-owned entities rather than
the partnerships. See id. at 40, 51-52. Rather, finding that the
commissions were undoubtedly the fruit of sham transactions, the court
held that equity would not enforce TMG's constructive trust claim to the
property because they had unclean hands.
TMG does not
challenge the court's holding with respect to the Hillcrest commissions.
The partnerships do contend, however, that there is a genuine issue of
material fact as to what happened to the $130,000 initial deposit after
it was put into the Bonus Account. The district court credited
declarations by Markowitz and an IRS agent (supported by check stubs and
receipt journals) that $53,872.90 was used to pay bonuses to five TMG
Associates employees, and that the remaining $76,127.10 was returned to
TMG Associates in the form of two checks.
at 51. TMG argues that Markowitz's declaration was a recent fabrication
precipitated by his desire to cooperate with the government, pointing
out that Markowitz was unable to recall anything about the Bonus Account
at his deposition two years earlier in the civil suit between the
partnerships and Markowitz. TMG also uses the Markowitz deposition to
convincingly rebut the government argument that Markowitz could not
remember the details of the Bonus Account because he did not have
certain records available at the deposition.
the fact that Markowitz changed his tune between the TMG-Markowitz
deposition and his declaration to the IRS in this proceeding, the
district court did not, as TMG asserts, simply accept the Markowitz
declaration at face value. Markowitz's claims were incontrovertibly
supported by the check stubs and cash receipt journal. His claim in the
earlier deposition that he could not remember anything about the Bonus
Account, even in the face of cancelled checks and bank statements from
the account, did not create a triable issue of fact. In the first place,
the earlier statement that he could not remember is not inconsistent
with his later declaration. Markowitz's deposition statement that he
could not remember anything about the account does not cast any doubt on
the reliability of the check stubs and cash receipt journal.
Furthermore, TMG did not contest the authenticity or accuracy of the
documentation, or assert that the bonuses were improper.
government is correct that TMG failed to meet the burden of tracing
funds from Markowitz back to the Bonus Account. The uncontradicted
evidence demonstrates that the $130,000 was spent on behalf of, or
returned to, TMG Associates. TMG's claim that the Markowitz declaration
should not have been admitted at the summary judgment stage because it
was inconsistent with his earlier deposition, see Adelman-Tremblay v.
Jewel Companies, 859 F.2d 517 (7th Cir. 1988), is both incorrect and
beside the point. As we have already stated, the two statements are not
inconsistent. And in any case, even in the absence of the Markowitz
declaration, the government presented uncontested evidence that the
$130,000 was returned to TMG. The government need not rely on any
testimony from Markowitz to establish this fact.
2323 Porter Street
reach the single issue that the district court did not satisfactorily
resolve. The partnerships contend that they are the true owners of
$552,846.23 in net proceeds realized from the sale of Markowitz's house
2323 Porter Street
. They claim that the funds used to purchase the house came from a TMG
bank account in the
. We hold that the district court abused its discretion in refusing the
submission of critical rebuttal evidence, and therefore reverse the
district court's grant of summary judgment and remand for further
claimed that 2323 Porter was purchased with partnership funds in their
summary judgment reply brief, and the district court decided to allow
supplemental discovery and briefing on the issue. In their supplemental
brief, TMG asserted that Markowitz maintained a TMG account at the
Cayman Islands branch of a Swiss Bank, that he transferred money from
the Cayman Islands account to a personal account in the
District of Columbia
, and that he used the transferred funds to purchase his house. The
government offered evidence in their responsive brief that there were in
accounts with the same account number, and that the funds used to
purchase the house came from the second account--which was opened with
funds from another Markowitz-owned company that had no connection with
TMG. TMG [91-2
USTC ¶50,513 ], 778 F.Supp. at 52-53.
partnerships offered evidence in their supplemental reply brief that
"the two TMG Associates accounts in the
were combined before the money used to purchase the
2323 Porter Street
residence was transferred."
at 53. The district court did not suggest that this evidence was
insufficient to create a disputed issue of fact. Rather, the court
refused to accept the proffer on the following grounds:
has not, however, had a chance to respond to this new evidence, nor
indeed does it appear that the plaintiffs provided the Government with
notice of this evidence during the additional discovery period. . . .
TMG's proffer of this evidence is so belated that it would be unfair to
allow its submission.
¶50,513 ], 778 F.Supp. at 53.
partnerships argue that the court erred by refusing to accept the new
evidence. First, they point out the existence of two identically
numbered accounts was first brought out in a declaration filed with the
government's supplemental opposition brief. Thus, they argue, the
evidence that the two accounts had been commingled was perfectly proper
rebuttal. Second, TMG argues that the government could not have been
unfairly surprised because it had in its possession, at least since
1985, the documents revealing that there were two accounts, and that
they had been commingled. Third, TMG states that the submission was not
untimely because Fed.R.Civ.P. 56(b) allows the filing of evidentiary
affidavits until the day of the summary judgment hearing. We agree with
each of these contentions.
government's responses in defense of the district court ruling are not
convincing. The government begins by arguing that the district court did
not abuse its discretion in holding the proffer untimely because the
government did not have time to obtain evidence before the close of
discovery that would demonstrate that the second
account contained no TMG funds. However, TMG is correct that since the government
first raised the existence of two accounts, it would be unfair to TMG
to accept that evidence without allowing TMG to respond. The district
court was obligated to accept TMG's proper rebuttal once it accepted the
government's new evidence. The district court abused its discretion in
refusing to do so.
argues in the alternative that the documents submitted in support of the
supplemental reply brief could not be considered because they were not
accompanied by an affidavit or sworn to as required by Fed.R.Civ.P.
56(e). The government contends that although the district court did not
rely on this reasoning, this court can uphold the district court on any
available grounds. We decline to affirm the district court's decision on
these grounds. The record below does not suggest that there was a
dispute over the authenticity of the relevant documents, and TMG asserts
that many other documents submitted for consideration by both parties,
and accepted by the district court, were not accompanied by proper
We are not in
a position to assess the merits of TMG's claim to the proceeds from the
sale of the
residence. The record does not disclose whether the two Cayman Islands
accounts were in fact combined, as TMG alleges, nor whether any
commingled funds were subsequently segregated when Markowitz transferred
money from the Cayman Islands to his personal account in
. Thus, we remand to the district court to allow full discovery on the
issue, and to determine whether TMG can trace the proceeds from the sale
2323 Porter Street
back to partnership funds.