Floyd v. I.R.S. U.S.
| Decision Date | 10 August 1998 |
| Docket Number | Nos. 96-3166,96-3215,s. 96-3166 |
| Citation | 151 F.3d 1295 |
| Parties | -5574, 98-2 USTC P 50,631, 98 CJ C.A.R. 4282 Gregory F. FLOYD and Denise D. Floyd, doing business as Medical Information Services; Harold Deakins, Lynne Deakins, doing business as K and L Computers; Rhonda Sippel, doing business as Statbilling; Jerry Nevonen, doing business as Network Facilities; William Muth, doing business as Electronic Billing Services; Jackie Ray, doing business as Medical Billing Service; Thomas Perry, doing business as TurboClaim, Plaintiffs-Appellants, v. INTERNAL REVENUE SERVICE of the UNITED STATES of America; State of Kansas ex rel. Carla Stovall, Attorney General; 12424 Aberdeen, Johnson County, Kansas, a certain piece of real estate, Defendants--Appellees. Gregory F. FLOYD, Denise D. Floyd, doing business as Medical Information Services; Harold Deakins, Lynne Deakins, doing business as K and L Computers; Rhonda Sippel, doing business as Statbilling; Jerry Nevonen, doing business as Network Facilities; William Muth, doing business as Electronic Billing Services; Jackie Ray, doing business as Medical Billing Service; Thomas Perry, doing business as TurboClaim, Plaintiffs--Appellees, and Internal Revenue Service of the United States of America, Defendant--Appellee, v. STATE OF KANSAS ex rel. Carla STOVALL, Attorney General, Defendant--Appellant, and 12424 Aberdeen, Johnson County, Kansas, a certain piece of real estate, Defendant. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Edward A. McConwell (Laura L. McConwell with him on the brief), McConwell Law Offices, Overland Park, KS, for Gregory F. and Denis D. Floyd, Harold and Lynne Deakins, Rhonda Sippel, Jerry Nevonen, William Muth, Jackie Ray and Thomas Perry.
Martin J. Peck, Special Assistant Attorney General, Wellington, KS, for the State of Kansas.
Theodore M. Doolittle (Kenneth L. Greene with him on the briefs), Department of Justice, Washington, DC, for the Internal Revenue Service.
Before HENRY, and LUCERO, Circuit Judges, and MILES-LaGRANGE, District Judge. *
Thomas Bridges and his associated companies are in debt to three parties: the Internal Revenue Service ("IRS"), the State of Kansas, and a group of private judgment-creditors, the "Floyd plaintiffs." These three parties sought judicial resolution of the priority of their claims to the assets of Bridges and his companies. Following a bench trial, the District Court for the District of Kansas held that the IRS claims primed those of the other two parties, and that, as to the remaining assets, Kansas took priority over the Floyd plaintiffs. The district court's holding was premised in part on the IRS's position that one of Bridges's companies was his alter ego. Because we find that the district court erred in accepting the IRS's alter ego argument, we reverse and remand.
In 1991, Thomas Bridges founded two corporations, Network Billing Centers, Inc. ("NBC") and Med-Net Technologies, Inc. ("Med-Net"), both in the business of licensing and developing computer software. Bridges, who was the sole shareholder and director of these companies, had complete control over them. Bridges's salary from NBC was paid into the account of Thomas Marketing, Inc. ("TMI"), another corporation founded and controlled by him and of which he was the sole shareholder and director.
The IRS's claims against Bridges and his associated companies date from Bridges's failure to pay personal income tax in 1984. The IRS first filed a Notice of Federal Tax lien against Bridges in 1990. In 1993, the IRS filed additional tax liens against Bridges as a result of his failure to pay personal income tax between 1988 and 1991. The following year, the IRS filed two tax liens against Med-Net for failing to pay employment taxes for the second and third quarters of 1993. Kansas's claims are based on a pre-judgment attachment of Med-Net, NBC, and TMI accounts following the filing of an action by the State against Bridges, Med-Net, and NBC under the Kansas Consumer Protection Act ("KCPA"). Kansas won this action in late March 1994, obtaining judgment for just under $1 million. The Floyd plaintiffs' claim is based on their successful suit against Bridges, NBC, and Med-Net for fraud and breach of contract. They secured judgment in early March 1994.
These three creditors dispute their priority to two groups of assets: first, some $179,000, which constitutes proceeds from the sale of a house in Lenexa, Kansas, held in the registry of the United States District Court for the District of Kansas pursuant to a settlement between the three creditors; second, some $84,000 from the Med-Net, NBC, and TMI accounts attached by Kansas, which is held in the registry of the District Court of Johnson County. 1
The Lenexa house was purchased using primarily Med-Net funds in 1992. Bridges's daughter, Brooke Bridges McBride, filed an affidavit of equitable interest in the property with the register of deeds in Johnson County; legal title was apparently to pass from the construction company to McBride pursuant upon full payment under a contract for deed. 2 Both Bridges and McBride lived in the house.
In April 1994, after obtaining judgment against Bridges, Med-Net, and NBC under the KCPA, Kansas filed another state court action, which was subsequently joined by the Floyd plaintiffs, alleging that McBride had received the house through a fraudulent conveyance from Med-Net and NBC. Shortly thereafter, the Floyd plaintiffs unsuccessfully attempted to collect on their judgment against Bridges, Med-Net, and NBC by garnishing McBride, arguing that Med-Net held its interest in her name. To resolve their claims to the house, Kansas, McBride, and the Floyd plaintiffs entered into a settlement whereby the house was to be sold, with the bulk of the proceeds to be contested among the competing creditors. After filing a lien against the house naming McBride as Bridges's nominee, the IRS subsequently joined this settlement, and the house was sold.
The district court accepted the IRS's arguments that Med-Net was Bridges's alter ego and that McBride held the house as Bridges's nominee. With one exception, therefore, the federal tax liens had been filed against Bridges and Med-Net before either of the other creditors had secured their judgments against Bridges and his associated companies. 3 Consequently, acting on the principle that "priority for purposes of federal law is governed by the common-law principle that 'the first in time is the first in right,' " United States v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 123 L.Ed.2d 128 (1993) (quoting United States v. New Britain, 347 U.S. 81, 85, 74 S.Ct. 367, 98 L.Ed. 520 (1954)), the district court held that the IRS's claims to the house proceeds primed the claims of both Kansas and the Floyd plaintiffs. Because the IRS's claims, which amounted to some $186,000, exhausted the sale proceeds entirely, the district court did not determine the relative priority of the other two creditors' claims to the house.
The district court further held that the remaining $7,000 still owing to the IRS should be satisfied from the seized bank accounts, of which it concluded some $136,000 was traceable to Bridges and his alter ego Med-Net. As to the remaining bank account funds, the district court found that the State perfected its attachment lien when it won a favorable judgment in its KCPA suit. Because the State perfected its interest in the funds before the Floyd plaintiffs executed their judgment liens against those same funds, the district court concluded that Kansas had priority over the Floyd plaintiffs to whatever funds remained. Kansas and the Floyd plaintiffs both appeal.
Federal tax liens only arise in property as to which the defaulting taxpayer has rights of ownership. See United States v. Wingfield, 822 F.2d 1466, 1472 (10th Cir.1987). State law determines such rights. See United States v. Central Bank of Denver, 843 F.2d 1300, 1303-04 (10th Cir.1988). Federal law then determines the priority of competing liens against a taxpayer's property. See Aquilino v. United States, 363 U.S. 509, 514, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960).
Both Kansas and the Floyd plaintiffs argue that Bridges had no rights to the Lenexa house, thus placing that property beyond the reach of the tax liens filed by the IRS against Bridges. More specifically, the Floyd plaintiffs argue that the house was properly owned by Med-Net, and because Med-Net was not Bridges's alter ego, the house is properly claimable only by Med-Net creditors. Kansas, for its part, argues that Bridges fraudulently conveyed the house to McBride, leaving him without a valid claim to the property under state law.
The district court determined that Med-Net was the alter ego of Bridges based on Pemco, Inc. v. Kansas Dep't of Revenue, 258 Kan. 717, 907 P.2d 863 (1995). If we accepted Pemco as the controlling authority in this case, we would review that determination deferentially. See G.M. Leasing Corp. v. United States, 514 F.2d 935, 939 (10th Cir.1975) (), rev'd in part on other grounds, 429 U.S. 338, 97 S.Ct. 619, 50 L.Ed.2d 530 (1977). And were we to do so, we would conclude that the evidence before the district court manifestly supported its conclusion that the "relationship" between Bridges and Med-Net was "so intimate," Bridges's "control" over Med-Net "so dominating," and "the business and assets of the two are so mingled that recognition of [Med-Net] as a distinct entity would result in an injustice to third parties." Pemco, 907 P.2d at 867 (quoting Doughty v. CSX Transp., Inc., 258 Kan. 493, 905 P.2d 106, 111 (Kan.1995)). We also would not find error in the district court's conclusion that crediting Med-Net with a separate corporate identity would sanction Bridges's unjust evasion of his...
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