Craft v. U.S.

• Decision Date: 30 March 1999
• Docket Number: No. 1:93-CV-306.,1:93-CV-306.
• Citation: 65 F.Supp.2d 651
• Parties: Sandra L. CRAFT, Plaintiff, v. The UNITED STATES of America, acting through the Internal Revenue Service, Defendant.
• Court: U.S. District Court — Western District of Michigan

Page 651

65 F.Supp.2d 651

Sandra L. CRAFT, Plaintiff, v. The UNITED STATES of America, acting through the Internal Revenue Service, Defendant.

No. 1:93-CV-306.

United States District Court, W.D. Michigan, Southern Division.

March 30, 1999.

Jeffrey Alan Moyer, Donovan, Love & Twinney, P.L.C., Grand Rapids, MI, for Sandra L. Craft, plaintiff.

Daniel M. LaVille, U.S. Attorney's Office, Grand Rapids, MI, John A. Lindquist, Trial Attorney, U.S. Dept. of Justice, Washington, DC, for Internal Revenue Service, defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

QUIST, District Judge.

Background

Plaintiff, Sandra L. Craft ("Sandra"), filed this action seeking to quiet title to the proceeds of the sale of certain real property located at 2656 Berwyck Road in Grand Rapids, Michigan (the "Berwyck Property"), which Plaintiff had owned with her husband, Don Craft ("Don") as tenants by the entireties. Specifically, Plaintiff alleged that a tax lien filed by the Internal Revenue Service ("IRS" or "Government") for taxes owed by Don did not attach to the Berwyck Property while Sandra and Don owned it as tenants by the entireties or when Don terminated the entireties estate by delivering a quitclaim deed to Sandra on August 28, 1989. Sandra filed a motion for summary judgment on September 10, 1993, in which she argued that the Government was precluded from maintaining a fraudulent conveyance action on the grounds that Don had been discharged from his debts in bankruptcy. The Government also moved for summary judgment on Sandra's claim, contending that its lien did attach to Don's interest in the Berwyck Property. On September 12, 1994, this Court issued an Opinion and Order denying Sandra's motion for summary judgment and granting the Government's motion for summary judgment on the basis that the IRS's lien attached in the interval of time between Don's termination of the entireties and his conveyance of his interest to Sandra.

On November 17, 1994, the Court issued another Opinion and Order which granted two and denied two of four motions filed by Sandra on September 22, 1994. In particular, the Court granted Sandra's motion to determine the value of Don's interest at the time of the termination of the joint tenancy and her motion for stay of execution of the judgment, and denied her motions to amend the judgment to include its findings supporting denial of her motion on the Government's fraudulent conveyance claim and to refer the case to the bankruptcy court for determination of the value of Don's interest. On October 26, 1995, the Court issued an Opinion and Final Judgment in which it found that the value of Don's interest in the property at the time of the conveyance was $50,293.94.

Sandra appealed the September 12, 1994, Order granting summary judgment in favor of the Government. The Sixth Circuit reversed the Order on the grounds that the lien could not have attached to the entireties interest under Michigan law and that the entireties estate was not "transformed into a tenancy in common as an intermediary step in the conveyance of the property" to which the lien could have attached. See Craft v. United States, 140 F.3d 638, 643-44 (6th Cir.1998). In addition, the Sixth Circuit held that Don did not possess a separate future interest in the Berwyck Property to which the lien could have attached. See id. at 644. Thus, the Sixth Circuit effectively held that Sandra prevailed on her complaint to quiet title. However, the court found that "[d]espite the fact that the tax lien did not attach to the Berwyck Property, there remains an issue of whether a fraudulent conveyance occurred in this case...." Id. Accordingly, the court remanded the case for determination of the fraudulent conveyance issue. On December 1, 1998, the Court conducted a bench trial on the fraudulent conveyance issue. The Court's findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a) are set forth below.

I. Findings of Fact¹

Sandra and Don purchased the Berwyck Property on May 26, 1972, as tenants by the entireties for $48,000. In connection with the purchase, Don and Sandra obtained a mortgage in the amount of $37,000. Don, a practicing attorney, failed to timely file federal income tax returns for his taxable years 1979 through 1987. As a result, the IRS filed substitute income tax returns for Don pursuant to 26 U.S.C. § 6020(b). In 1988, the IRS assessed Don's tax liabilities in the amount of $482,446.73. On March 30, 1989, the IRS filed a Notice of Federal Tax Lien against all of Don's property with the Register of Deeds for Kent County, Michigan.

As of April 15, 1980, the date on which the Government's claim for unpaid taxes first accrued, the fair market value of the Berwyck Property was $62,000 and the outstanding balance on the mortgage was $31,628.95, leaving Don and Sandra with net equity in the property of about $31,000. From 1979 to 1985, Don and Sandra made timely payments on their mortgage in the total amount of $19,692, which consisted of $12,999 in interest and $6,693 in principal. As a result, the mortgage balance was reduced to $25,301.05 by January 1, 1986. During the same period, Don and Sandra paid approximately $17,000 in real property taxes. After January 1, 1986, Sandra paid all of the mortgage and tax payments with her own money.

On July 28, 1988, the IRS assessed Don tax for the years 1979 through 1985 in the amount of $168,264.90. The final tax included deductions for all mortgage interest and property tax payments made by Don and Sandra from 1979 to 1985.² On March 30, 1989, the IRS filed a Notice of Federal Tax Lien against Don in the amount of $482,446. On August 28, 1989, Don conveyed his interest in the Berwyck Property to Sandra by quit claim deed for the sum of $1.00. During the period of April 15, 1980 through August 28, 1989, Don was insolvent.

Don filed a petition for relief under Chapter 7 of the Bankruptcy Code on January 30, 1992. The bankruptcy court entered an order of discharge on June 1, 1992, and the bankruptcy case was closed on June 11, 1992. In June 1992, the Berwyck Property was sold, yielding net proceeds of $119,888.20, after payment of the mortgage. Pursuant to an agreement between the parties, one-half of the net proceeds were distributed to Sandra, and the balance of the proceeds were deposited into an escrow pending a resolution of the dispute of the IRS lien. Don died on August 17, 1998.

II. Conclusions of Law³

The issue presented for determination by the Court is whether the conveyance from Don to Sandra on August 28, 1989, constituted a fraudulent conveyance under Michigan's Uniform Fraudulent Conveyance Act ("Fraudulent Conveyance Act"), M.C.L. §§ 566.11 to 566.23. Prior to trial, the Government also raised in its trial brief, for the first time, the issue of whether the conveyance was fraudulent to the extent that Don enhanced the entireties property by paying both the property tax and mortgage payments from 1979 to 1985 while he was insolvent. Apart from her arguments on the merits, Sandra asserts that the Government's claim is not properly before the Court for various reasons. The Court will address these arguments first.

A. Procedural and Limitations Issues

The Government raised its fraudulent conveyance argument as an affirmative defense in its answer to Sandra's complaint. Sandra contends that the Government cannot assert a fraudulent conveyance claim because it has not filed a complaint or a counterclaim. In addition, Sandra contends that the Government cannot now cure this omission by moving to amend its answer to file a counterclaim because the Government was required to assert any such counterclaim in its answer. Sandra also contends that any counterclaim would be barred by the statute of limitations.

Sandra has not cited any authority to support her proposition that when fraudulent conveyance is raised to defeat a quiet title claim it may only be asserted as a counterclaim and not as an affirmative defense. In fact, courts have allowed fraudulent conveyance to be raised as an affirmative defense to quiet title claims. See, e.g., Snyder v. United States, No. 88-CV-2136 (RR), 1995 WL 724529, at *13 (E.D.N.Y. July 26, 1995) (denying the plaintiff's motion to strike the Government's affirmative defense of fraudulent conveyance to the plaintiff's quiet title action); Buffalo Valley Golf Club Partnership v. United States, No. 2:93-CV-172, 1994 WL 574119, at *2 (E.D.Tenn. July 19, 1994) (finding "no reason why the United States cannot move to set aside a fraudulent conveyance as its affirmative defense to this quiet title action"). Because Sandra has not offered any persuasive reason why the Government cannot assert fraudulent conveyance as an affirmative defense, the Court finds that the Government has properly pled the issue as an affirmative defense. Consequently, the Government asserted its claim well within any limitations period cited by Sandra because its answer was filed on July 15, 1993.⁴

Even if a fraudulent conveyance argument could only be asserted as a counterclaim to a quiet title action, the Court would still find that the Government is not barred from asserting its claim. Rule 8(c) of the Federal Rules of Civil Procedure provides that "[w]hen a party has mistakenly designated a defense as a counterclaim or a counterclaim as a defense, the court on terms, if justice so requires, shall treat the pleading as if there had been a proper designation." Fed.R.Civ.P. 8(c). "The purpose of Rule 8(c) is to give the opposing party notice of the issue and opportunity to argue his position." Richmond Steel, Inc. v. Legal & Gen. Assurance Soc'y, Ltd., 821 F.Supp. 793, 797 (D.Puerto Rico 1993). In Richmond Steel, the court held that the plaintiff complied with Rule 8(c) by raising an affirmative defense to a defendant's counterclaim in its amended complaint, even though the affirmative defense should have been asserted by the plaintiff in its answer to the...