Blachy v. Butcher
| Decision Date | 09 March 2000 |
| Docket Number | Nos. 99-1185,99-1492,99-1523,s. 99-1185 |
| Citation | 221 F.3d 896 |
| Parties | (6th Cir. 2000) Jobst W.F. Blachy, et al., Plaintiffs-Appellees, v. Robert E. Butcher and Rosemary Butcher, co-personal representatives of the estate of Alexander Michael Butcher, deceased; Rosemary Butcher, individually; Little Traverse Development Company, a Michigan corporation; H.C. Development Company, a Michigan corporation, Defendants-Appellants (99-1185/1492), United States of America, on behalf of the Internal Revenue Service, Defendant-Appellant (99-1523). Argued: |
| Court | U.S. Court of Appeals — Sixth Circuit |
Appeal from the United States District Court for the Western District of Michigan at Grand Rapids. No. 91-00979--Gordon J. Quist, District Judge. [Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted] Robert E. Butcher, Trenton, Michigan, Joan I. Oppenheimer, UNITED STATES DEPARTMENT OF JUSTICE, APPELLATE SECTION TAX DIVISION, Washington, D.C., for Appellants.
Jeffrey G. Raphelson, BODMAN, LONGLEY & DAHLING LLP, Detroit, Michigan, for Appellees.
Alice L. Ronk, William S. Estabrook, UNITED STATES DEPARTMENT OF JUSTICE, APPELLATE SECTION TAX DIVISION, Washington, D.C., for Appellants.
Before: WELLFORD, SILER, and GILMAN, Circuit Judges.
GILMAN, J., delivered the opinion of the court, in which WELLFORD, J., joined. SILER, J. (pp. 912-13), delivered a separate opinion concurring in part and dissenting in part.
Even a diabolical bar examiner would be reluctant to impose this case's complex mixture of subject matter jurisdiction, fraud, real estate, marital property, bankruptcy, tax liens, contributory negligence, equitable remedies, and civil procedure upon hapless law school graduates. Because reality often marches in where creators of hypotheticals fear to tread, however, we are the "hapless" appellate court judges obliged to struggle with this twisted tale of true-life conflict.
The essence of this complicated case is that twelve condominium owners and their title insurance company, Lawyers Title Insurance Corporation, have filed suit against Rosemary C. Butcher, the representatives of the estate of her late husband Alexander M. Butcher, Little Traverse Development Company (LTDC), H.C. Development Company (HCDC), and the Internal Revenue Service (IRS), claiming that the condominium owners should be declared the legal titleholders of certain property previously owned by Alexander and Rosemary Butcher as tenants by the entirety. After eight years of proceedings in multiple courts, the United States District Court for the Western District of Michigan granted the plaintiffs' motion for summary judgment, imposing a constructive trust upon the disputed property owned by the Butchers and later purchased by the condominium owners. The Butchers, LTDC, and HCDC (collectively the Butcher defendants) have appealed, challenging the imposition of the constructive trust. Another key issue on appeal, brought by the United States on behalf of the IRS, challenges the portion of the district court's decision holding that a federal tax lien encumbering the Butchers' property is subordinate to the plaintiffs' constructive trust. For the reasons set forth below, we REVERSE the judgment of the district court regarding the status of the IRS's tax lien, but AFFIRM its judgment in all other respects.
Alexander and Rosemary Butcher sought to develop resort condominiums in northern Michigan through LTDC, a Michigan corporation owned solely by Alexander. On June 30, 1978, Cedar Cove, a Michigan limited partnership in which Alexander was a partner, conveyed four parcels of land, consisting of approximately 100 acres in Little Traverse Township, to Alexander and Rosemary for the price of $640,000. By warranty deed dated July 6, 1978, the Butchers conveyed two of these four parcels, consisting of 40.81 acres, to LTDC. Both the June 30 and July 6 deeds were recorded on July 12, 1978. That same day, Alexander signed a warranty deed in his capacity as president of LTDC, conveying the unmortgaged portion of the property, consisting of 17.83 acres, back to the Butchers as tenants by the entirety. This deed was recorded on July 14, 1978.
At Alexander's request, Lawyers Title issued a title commitment to LTDC for the full 40.81 acres on July 18, 1978. Lawyers Title failed to discover the 17.83 acre conveyance from LTDC back to the Butchers, presumably because the July 12, 1978 warranty deed had been recorded only four days earlier. Alexander also failed to inform Lawyers Title of its existence. As a result, the title commitment erroneously listed LTDC as the owner of all 40.81 acres, which included the 17.83 acres no longer in LTDC's name.
Thereafter, Alexander, on behalf of LTDC, executed a master deed dated November 1, 1978 that created Harbor Cove Phase II on the entire 40.81 acres. From 1981 to 1984, LTDC constructed and sold condominiums on portions of the acreage that included the 17.83 acres in dispute, nine of which were sold to the plaintiffs or their predecessors-in-interest.
On May 8, 1984, Alexander formed HCDC. He was the majority stockholder, president, and a director of this new corporation. In late October of 1984, Alexander signed a warranty deed on behalf of LTDC, purporting to convey 12.60 of the 17.83 acres to HCDC. Alexander, as president of HCDC, then signed a master deed creating Harbor Cove Phase III on the 12.60 acres. He also granted a mortgage to Northwestern Savings and Loan Association on this acreage in order to secure a construction loan. After Lawyers Title issued a title commitment for the transaction, HCDC constructed condominiums on the development. It began selling the condominiums in December of 1985, three of which were sold to the plaintiffs or their predecessors-in-interest.
In the deeds conveying the condominiums to the plaintiffs, Alexander, acting as president of both LTDC and HCDC, represented that one or the other of those entities held title to the particular condominium being sold. He also stated under oath on several occasions that LTDC was the owner of the Phase II property and that HCDC was the owner of the Phase III property.
In August of 1988, the IRS issued an assessment against the Butchers for approximately $61,000 in unpaid federal income taxes that arose from the taxable year 1986. On September 9, 1988, the United States, acting on behalf of the IRS, filed a tax lien against the Butchers' property, seeking to attach Rosemary's and Alexander's interest in the 17.83 acres. The unpaid balance of the tax liability now exceeds $150,000.
On March 1, 1991, Rosemary filed for bankruptcy. Soon thereafter, the condominium owners learned of the July 12, 1978 conveyance from LTDC to the Butchers. On September 17, 1991, Rosemary amended her bankruptcy schedules to claim ownership of the 17.83 acres. Prior to that date, the Butchers had taken no action to claim title to any portion of the property. In fact, it was the plaintiffs, not the Butchers, who have paid the property taxes on the 17.83 acres over the years. Alexander quitclaimed his interest in the 17.83 acres to Rosemary on October 31, 1991. He died in December of that year.
Rosemary filed her Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Michigan. Seven and a half months later, Lawyers Title and the condominium owners to whom Lawyers Title issued title insurance policies sued Alexander, LTDC, HCDC, and the IRS in Emmet County Circuit Court. The plaintiffs did not sue Rosemary because she was under the protection of the bankruptcy court.
After being served with the complaint, the IRS removed the state court action to the United States District Court for the Western District of Michigan on November 18, 1991. The district court entered an order staying the Western District action while the plaintiffs pursued an adversary proceeding in Rosemary's bankruptcy case. In both actions, the plaintiffs sought the imposition of a constructive trust.
Subsequent to Alexander's death in late 1991, the Butcher defendants moved to dismiss the district court action because Alexander's estate had not been substituted as a party following his death. The plaintiffs responded by moving to transfer venue to the bankruptcy court. On August 16, 1993, the district court denied the Butcher defendants' motion to dismiss, holding that the order staying the district court action pending the adversary proceeding in the bankruptcy court tolled the time limit for substituting the estate of Alexander into the suit under Rule 25(a)(1) of the Federal Rules of Civil Procedure. (This part of the district court's order is not being contested on appeal.) The district court also granted the plaintiffs' motion to transfer venue to the Bankruptcy Court for the Eastern District of Michigan in the same order.
Both the plaintiffs' Western District action and Rosemary's bankruptcy proceeding were consolidated on November 18, 1993 in the bankruptcy court. On February 11, 1994, the bankruptcy court issued an order substituting the representatives of Alexander's estate, being Rosemary and her brother-in-law Robert E. Butcher, for Alexander.
In late November of 1994, the bankruptcy court granted the plaintiffs' motion for summary judgment, imposing a constructive trust over the 17.83 acres for the benefit of the condominium owners. The bankruptcy court also concluded that the constructive trust related back to 1978, thus predating the IRS's tax lien that arose against the Butchers in 1988.
The defendants appealed the bankruptcy court's ruling to the United States District Court for the Eastern District of Michigan. On July 31, 1995, the bankruptcy court's award of summary judgment to the plaintiffs was reversed by the district court. The district court's decision...
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