U.S. v. Moriarty

• Decision Date: 12 October 1993
• Docket Number: No. 92-4157,92-4157
• Citation: 8 F.3d 329
• Parties: , 31 Collier Bankr.Cas.2d 1691 UNITED STATES of America, Plaintiff-Appellant, v. Richard J. MORIARTY; and Gruber, Moriarty, Fricke & Jaros, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 329

8 F.3d 329

62 USLW 2245, 31 Collier Bankr.Cas.2d 1691

UNITED STATES of America, Plaintiff-Appellant, v. Richard J. MORIARTY; and Gruber, Moriarty, Fricke & Jaros Defendants-Appellees.

No. 92-4157.

United States Court of Appeals Sixth Circuit.

Argued Sept. 23, 1993.

Decided Oct. 12, 1993.

Arthur I. Harris, Asst. U.S. Atty., Cleveland, OH, Margaret S. Hewing (argued and briefed), and Mark B. Stern, U.S. Dept. of Justice, Civ. Div., Washington, DC, for plaintiff-appellant.

George W. Stuhldreher and Robert Eddy (argued and briefed), Gallagher, Sharp, Fulton & Norman, Cleveland, OH, for defendants-appellees.

Before: MILBURN and NELSON, Circuit Judges; and GILMORE, Senior District Judge. ^*

MILBURN, Circuit Judge.

In this case of first impression, plaintiff, the United States of America, appeals the judgment of the district court declaring its action against representatives of an entity indebted to the United States barred by a six year statute of limitations. On appeal, the issue is whether the United States brought a timely action against the debtor's representatives under the federal priority statute, 31 U.S.C. § 3713(b), when it filed its action within six years of the representatives' allegedly improper payments to other creditors, but more than six years after it declared the debtor in default and demanded payment. For the reasons that follow, we reverse and remand.

I.

A.

On December 27, 1983, the United States, acting through its agent, the Defense Construction Supply Center, awarded Contract DLA700-84-C-0219 to Clark International Security, Inc. ("Clark" or "debtor") for the delivery of 162,588 rolls of Barbed Tape Concertina wire. On April 19, 1985, the United States declared Clark in default of the contract and demanded payment of unliquidated progress payments made, which totalled $1,091,105.08. Sometime during April 1985, Clark ceased production and became insolvent.

In February 1986, defendant Richard J. Moriarty, an attorney acting on behalf of Clark, arranged for a settlement between Clark and Bataco Industries, Inc. ("Bataco"), resolving a lawsuit filed by Bataco and others against Clark in a Florida state court. Under the terms of the settlement, Clark sold certain equipment to Bataco for $411,500.00. Between February 21, 1986, and July 29, 1986, Moriarty, acting on behalf of Clark, used a portion of the proceeds from the settlement to pay creditors of Clark. Though at all times relevant Moriarty knew that Clark was indebted to the United States, he did not pay any of the proceeds to the United States.

B.

On December 17, 1991, the United States filed this action in the Northern District of Ohio against Moriarty, and defendant Gruber, Moriarty, Fricke & Jaros, an Ohio law firm in which Moriarty was a partner. The complaint alleged that under the federal priority statute, 31 U.S.C. § 3713(b), defendants were liable as representatives of Clark for payments they made to Clark's creditors other than the United States. The United States sought an award in the amount of $165,337.03, the amount of allegedly improper payments defendants made to Clark's creditors, plus interest, fees, and costs. Defendants moved for judgment on the pleadings or, in the alternative, for summary judgment, contending that the United States' action was barred by the applicable statute of limitations. The United States also moved for summary judgment.

The district court granted defendants' motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). The district court first concluded that the six year statute of limitations set forth in 28 U.S.C. § 2415 applied to a right of action under 31 U.S.C. § 3713(b). It then considered whether the starting date for the statute of limitations was April 19, 1985, the day the United States' right of action for breach of contract accrued against the debtor, or February 1986, the month in which the United States' right of action under 31 U.S.C. § 3713(b) accrued against defendants, noting that the United States' action was time-barred if the former date was used, but was timely if the latter applied. The district court concluded that the statute of limitations began to run on "the date the underlying claim against the debtor accrue[d]," in this case, April 19, 1985, reasoning that the United States' action under 31 U.S.C. § 3713(b) must be premised on the United States' having a valid claim against the debtor. Accordingly, the district court concluded that because the United States was time-barred from enforcing the amount it was owed by the debtor, the United States was likewise time-barred from bringing an action under 31 U.S.C. § 3713(b) against the defendants, who, while acting as representatives of the debtor, paid creditors of the debtor and failed to pay the United States anything at all. In light of its disposition of defendants' motion for judgment on the pleadings, the district court denied the United States' motion for summary judgment as moot. This timely appeal followed.

II.

We review de novo a district court's grant of a motion for judgment on the pleadings under Fed.R.Civ.P. 12(c). Lavado v. Keohane, 992 F.2d 601, 605 (6th Cir.1993). For purposes of the motion " 'all well-pleaded material allegations of the pleadings of the [non-movant] must be taken as true.' " Id. (quoting Southern Ohio Bank v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 479 F.2d 478, 480 (6th Cir.1973)). "The motion is granted when no material issue of fact exists and the party making the motion is entitled to judgment as a matter of law." Paskvan v. City of Cleveland Civil Serv. Comm'n, 946 F.2d 1233, 1235 (6th Cir.1991).

The federal priority statute, provides in relevant part as follows:

(a)(1) A claim of the United States Government shall be paid first when--

(A) a person indebted to the Government is insolvent and--

(i) the debtor without enough property to pay all debts makes a voluntary assignment of property;

(ii) property of the debtor, if absent, is attached; or

(iii) an act of bankruptcy is committed;

* * * * * *

(b) A representative of a person or an estate (except a trustee acting under title 11) paying any part of a debt of the person or estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government.

31 U.S.C. § 3713.

The parties apparently agree that the United States' cause of action against a debtor's representative under 31 U.S.C. § 3713(b) is barred unless the complaint is filed within six years after a right of action accrues. 28 U.S.C. § 2415. ¹ They disagree, however, as to which right of action of the United States is relevant in determining the commencement of the statute of limitations for a cause of action under 31 U.S.C. § 3713(b). Defendants argue that, as found by the district court, the relevant date is the time the United States' right of action accrues against the debtor, i.e., when debtor is declared in breach of a contract. On the other hand, the United States argues that the relevant date is the time the United States' right of action accrues against defendants, i.e., when defendants made payments to Clark's other creditors. In support of its argument, the United States argues that the time its right of action accrues against Clark, the debtor, is immaterial because its action here does not seek to recover for the debtor's breach of contract. Instead, it argues that the date its right of action accrues against defendants is the relevant date because its cause of action under 31 U.S.C. § 3713(b) seeks to redress the improper payments to creditors of Clark. The United States argues that had the district court computed the commencement of the statute of limitations at the time its right of action accrued against defendants, in this case February 1986, its action which was filed in December 1991 would not be time-barred by the six year statute of limitations.

We agree with the United States that the statute of limitations for a claim under 31 U.S.C. § 3713(b) begins on the date the right of action accrues against a debtor's representative. As originally enacted in 1789, the federal priority statute did not impose liability upon a debtor's representative. Price v. United States, 269 U.S. 492, 500, 46 S.Ct. 180, 181, 70 L.Ed. 373 (1926). However in 1799, Congress enacted the representative liability provision, which is now codified at 31 U.S.C. § 3713(b), giving "the priority teeth by making the administrator of any insolvent or decedent's estate personally liable for any amount not paid the United States because he gave another creditor preference." United States v. Moore, 423 U.S. 77, 81, 96 S.Ct. 310, 313, 46 L.Ed.2d 219 (1975). The current federal priority statute imposes liability on a debtor's representative only when the representative "pay[s] any part of a debt of the person or estate before paying a claim of the Government." 31 U.S.C. § 3713(b). Thus, the United States' cause of action against defendants is a wholly independent cause of action from the United States' cause of action against the debtor for the amount owed due to the breach of contract. Consequently, we conclude that once the acts which trigger the representative's liability occur, the United States' right of action accrues against the representative and the United States then has six years from that time to file an action.

To hold otherwise would create an absurd result. If the statute of limitations commenced at the time the United States' right of action accrued against the debtor as held by the district court, then a claim under 31 U.S.C. § 3713(b) might be time-barred against the representative before the representative ever improperly pays creditors other than the United States, as for example, where a debtor's representative pays creditors six years after the United States declared the debtor in default. Under the district court's holding, in order to ensure that it would have...